Groupon's struggle in China no surprise, say analysts

Groupon's venture in China is laying off hundreds of employees across more than 10 cities

Groupon's problems in China, including a recent round of staff layoffs, have come as no surprise to analysts, who hold that the company rushed its plans in the country and relied too much on foreign expertise.

"It's a disaster," said Bill Bishop, an independent analyst in Beijing. "It would be nice to see a foreign company succeed in China. But Groupon is clearly a pretty big mess."

Groupon's China venture, GaoPeng, is conducting mass layoffs at offices in more than 10 cities, according to a current employee. The sudden layoffs have angered workers, who are now looking for compensation from the company, she said.

GaoPeng said the cuts were needed as part of an organizational restructuring, according to the employee. Chinese media outlets report the number of layoffs reached 400. GaoPeng and Groupon did not comment, despite repeated attempts to contact the companies.

Groupon leads the group buying market in the U.S., and offered the first deals on its Chinese site GaoPeng in March. The site quickly expanded from Beijing and Shanghai to dozens of other Chinese cities. But GaoPeng is up against intense competition from more than 4,000 local group-buying sites, according to analysts.

GaoPeng failed to make the top ten group-buying sites by sales, according to Tuan800, which tracks the market and offers a deals aggregation portal for group buying. The recent layoffs show GaoPeng has been forced to shrink its operations as its revenues have failed to keep up, said Hu Chen, co-founder of Tuan800. GaoPeng will likely face more challenges as investors pour money into rival group-buying sites, he added.

Other experts like Bishop believe GaoPeng repeated "classic mistakes" some U.S. Internet companies previously made in China. He pointed to how the company recruited too many foreigners for management positions. GaoPeng also sacrificed quality for quantity, by hiring in a rush hundreds of Chinese employees in just a few months.

News of the layoffs is just the company's latest misstep, and threatens to repel potential job candidates. "It's been a thoroughly predictable train wreck," Bishop said.

U.S Internet companies have long struggled to succeed in China. Google had to contend with local competitor Baidu, and Chinese authorities that demanded the company censor its content in the country. Google eventually decided to shut down its China-based search engine.

EBay also tried to expand in China. But the company was beaten by local Internet firm Alibaba Group, which now dominates e-commerce in the country. Myspace had high hopes for the country, but only became a minor player in China's social networking market. Other social networking sites such as Twitter and Facebook are blocked in China because they may allow politically sensitive and anti-government content.

Groupon partnered with Chinese Internet firm Tencent to launch GaoPeng. Tencent operates popular social networking sites in the country, including QQ, China's most widely used instant messaging service. Even with Tencent as a partner, GaoPeng still relied on hiring foreigners to lead its business, said Duncan Clark, chairman of Beijing-based technology consultancy BDA.

"Why the heck didn't Tencent do more?" he said."The whole structure was quite bizarre."

Tencent declined to comment and referred all questions to GaoPeng.

The layoffs at GaoPeng could bring unwanted scrutiny to Groupon's business structure as the company moves to list on the U.S. stock market, Clark said. Earlier this month, Groupon revised its initial filing with the U.S. Securities and Exchange Commission after critics questioned the accounting metrics the company used to explain its finances.

"It's not over yet for GaoPeng. They maintain they are trimming," Clark said. But the company's previous attempts have failed to build a company that understands the local market, he added.

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