Facebook To Open Sales Office In China, Why Is It Important?

Facebook (NASDAQ:FB) recently stated that it has initiated the process of opening up a sales office in China, the world’s second largest economy, in order to grow its presence in the local advertising market. ^[1] Chinese market hasn’t been very open and receptive to foreign companies traditionally, and Facebook will need to navigate through a host of challenges before it can materially tap the potential. Despite harboring majority of world’s population, Asia accounts for just 30% of Facebook’s monthly active users primarily due to the company’s limited presence in China. ^[2] Revenue figures tell a similar story as for the quarter ending December 2013, Facebook’s average revenue per user in Asia stood at $0.93 compared to global average of $2.14. ^[1] The online advertising market in Asia is still in its nascent stage as compared to the U.S. and other developed markets, but the growth is coming and Facebook needs to be ready for it. Establishing strong market position in China can give a material boost to the company’s business going forward.

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Why Is China So Critical?

China has the largest Internet user base in the world. The country’s population stands at around 1.3 billion, with approximately 618 million Internet users at the end of 2013. ^[3] The growth has been impressive as the figure has jumped nearly 61% in the last four years. To add to this, about 81% of these users are accessing the Internet on mobile. ^[3] Also, McKinsey states that China’s social media users have shown more activity than the users of any other country and tend to have multiple social media accounts. ^[4] These statistics bode well for Facebook as the company has established strong presence on mobile platform. The new office will help it expand its sales presence in the country where the presence of the U.S. Internet giants has traditionally been very limited. The average spending capacity of Chinese consumer has increased substantially over the last decade and the trend is likely to remain the same. The expected growth in consumer spending will directly translate into higher advertising sales which Facebook intends to tap.

What Challenges Will Facebook Face In China?

Besides battling censorship rules and regulatory requirements, Facebook will need to navigate extreme competition that exists in China’s social media space. Consulting firm McKinsey states that several companies use disguised and artificial writers to undermine their competitors through negative propaganda. ^[4] Therefore, it is imperative for Facebook to identify such sources and take effective steps to counter them. The added requirement to identify real competition and real consumers will take up more of company’s resources.

Furthermore, unlike the U.S., the social media space is fragmented in China and different players have different focus, strengths and geographical priority. ^[4] This makes it difficult for advertisers to allocate their ad spending and understand expected return on investments. The question is, what can Facebook offer differently to attract these marketers? The roadmap is unclear at this point and the social network’s limited presence doesn’t help. Making inroads into Chinese social media space is going to be difficult, but this is a market that Facebook can not ignore.

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1. Facebook Said to Take Steps to Open a Sales Office in China, Bloomberg, May 21 2014 [↩] [↩]
2. Facebook’s SEC Filings [↩]
3. China’s Internet population hit 618 million at the end of 2013, with 81% connecting via mobile, The Next Web [↩] [↩]
4. Understanding social media in China, McKinsey Quarterly [↩] [↩] [↩]