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Summary:

Just because it works in the United States, doesn’t mean it will work in China. It’s a lesson some of our biggest tech brands have learned the hard way. And as Groupon attempts expands east, critics say its already making the same mistakes.

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From eBay to Google, some of America’s biggest tech brands have gone to China armed with exuberant optimism and global business plans only to retreat home with tails tucked between their legs.

With the mistakes of others well-documented, Groupon should have the benefit of insight as it moves into the world’s second-largest economy. But four months into its Chinese expansion, the deal has been riddled with missteps. And some experts say the soon-to-be-public daily deals site is making the same fundamental error as its predecessors: treating China just like home.

As illustrated in its recent S-1 filing with the SEC, international expansion is a big priority for Groupon as it tries to steer itself toward profitability. (The company reported a net loss of $414 million in 2010.) The company has already pushed well into Europe, and by the first quarter of 2011, non-U.S. business accounted for 53.8 percent of Groupon’s sales.

Competing in Asia and the Middle East in next on the agenda, and China represents a huge opportunity. Online retail sales in China nearly doubled last year to 513.1 billion yuan ($78 billion USD) and will probably reach 1 trillion yuan in the next two years, Xinhua News Agency reported in January. The birthplace of the group-buying movement, China had almost 19 million group-buying users at the end of 2010, according to government statistics. But those users are spread among a hyper-crowded market filled win an estimated 3,800 group buying sites. And recent reports show the group buying craze could be starting to fade.

Partnering with Chinese internet giant Tencent and the infamous Samwer brothers of Germany (who made a fortune cloning everything from Facebook to Groupon in Europe and Asia before striking deals with their namesakes), Groupon began offering deals in Beijing in March.

The company has been criticized for rushing the expansion, with some critics going as far to allege Groupon China, called GaoPeng, is nothing more than window dressing for the Groupon IPO. It was even lambasted by a Baidu  executive at the Global Mobile Internet Conference for bringing in a gaggle of foreign directors who don’t even “speak good Chinese.”

For venture capitalist Jack Jia of GSR Ventures, Groupon’s early mistakes are eerily reminiscent of another e-commerce bigwig: eBay. The company famously blew it in China after trying to shoehorn its existing strategy into the Chinese market.  The Silicon Valley giant sent a German manager and an American CTO to lead the China venture. The company stuck to a global platform that didn’t take into account local customer tastes.

“Groupon really needs to take this as a warning of things to come if it doesn’t re-direct,” Jia said.

Jia says Groupon has already made big mistakes in China, and is destined to become another flop unless it makes major changes to the model that’s brought it success in the United States and parts of Europe.

Groupon achieved scale across the U.S. by relying largely on a Chicago-based, centralized call center with different teams focused on different local markets. But while that might work in the United States, it fails to recognize a fundamental truth in China.

“China is not one  country. Someone in the north doesn’t eat the same food as in the south. And a restaurant owner in another province won’t even understand what a salesperson from a call center in Beijing is saying, the accents are so different. It would be the equivalent of having someone in Paris call.”

Jia said the company also needs to change the way it targets businesses. While the company built its initial U.S. and Western European base on young, educated  women (including many stay-at-home moms) who had the time and money to try new things, in China, the biggest consumers are “young white collar office workers in their 20s-30s  who love to eat lunch in packs in malls.”

Though Groupon goes into new markets and targets the top restaurants in each food category, categories are nearly irrelevant in China. Instead, there is a fierce competition between entire floors of  food  vendors in thousands of the country’s giant malls. But these are vendors you aren’t going to reach sitting in a call center.

Groupon is just beginning to expand beyond Beijing and it’s not too late to correct course. But for Jia, these missteps underscore the importance of a deep understanding the market and relying on the expertise of local leadership, something U.S. companies still fail to do time and time again. “These are things that you wouldn’t know and unless you are listening to people on the ground, you will miss,” Jia said.

Photo courtesy of Flickr user Stewart.

  1. Of course Jack Jia/GSR Ventures aka Mayfield China would bash on GroupOn China, GSR Ventures is an investor in their competitor, Lashou.com who just hired bankers. I guess he didn’t get the no publicity notice from their lawyers.

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  2. How the heck is Groupon losing money? They run a simple website and they take a very high percentage of all the purchases. They must be paying their sales people huge amounts.

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    1. How do they lose money? No business model, for starters, not to mention trial users disgusted with resulting economics.

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