How Chinese tech giant Baidu conquered the world's largest internet market

Victor Liang plows his metallic beige BMW sedan through Beijing's traffic on a crisp February morning as he describes how he came to be the first general counsel at Baidu, China's leading internet search engine.

It was five years ago, and he was wrapping up an LLM at the University of New South Wales in Australia after having studied law at Peking University a decade before. "I wanted to do some work to combine Chinese local issues and some overseas issues," recalls Liang, who toiled for a few years as a Beijing bureaucrat before switching careers.

Going in-house at one of China's large state-owned enterprises (SOEs) seemed to be his best bet, since they were leading the way in expanding abroad and tapping international capital. "I thought I would be a lawyer for an SOE, or maybe work at a law firm," he says.

So when a headhunter asked him to interview with a relatively small and oddly named private company, Liang almost dismissed it out of hand. "I thought, 'What's Baidu?' I didn't know anything about search engines at that time," he recalls.

Today there are few in China who do not know Baidu, which has recently become an increasingly familiar name in the West, too. In March, Google announced that it was shutting down its Chinese site because it was no longer willing to comply with Government demands to censor its search results. As a result, Baidu – which does comply with the Government's restrictions – stands poised to increase its market share, which already stands at more than 60%.

That could mean even more good news for investors around the world who have long known and loved Baidu. At its blockbuster 2006 initial public offering (IPO) on Nasdaq, the company's stock immediately soared 350% from a $27 (£19) offer price. Aided by Google's China woes, Baidu has recently hit new heights, trading at over $600 (£418) a share in March-giving the company a market capitalisation of almost $22bn (£15bn).

And Liang, 37, has been there for all of it, having overcome his initial misgivings to become Baidu's general counsel just months before the IPO. Today, he leads a team of 15 young lawyers he seeks to imbue with not only top technical skills, but what he calls "global vision." It is a term he uses often, and not just with regard to Baidu's overseas expansion plans. Instead, Liang more typically defines global vision as a general ability to think strategically, along with open-mindedness and a commitment to international standards of excellence.

In the world of Chinese corporate counsel, that approach stands out. The country's large SOEs, like Petro-China Company, Bank of China and China Mobile, are by their nature hierarchical and bureaucratic. Meanwhile, private Chinese companies often either dispense with in-house lawyers altogether, or relegate them to minor tasks. But at Baidu, Liang encourages his staff to take on new projects, and rewards them when they do well. They research laws and decisions from around the world, to keep abreast of the legal challenges other tech companies are facing. And they bring the same scrutiny to bear in selecting outside counsel, carefully hiring top Western and Chinese firms as needed.

Liang's own passion shows no signs of waning. He regularly stays in the office until 4am, even though he could afford to take it easier. Like American tech companies, Baidu is well-known in China for the wealth it has created for its employees. Liang won't say whether he is one of the 200 or so Baidu millionaires reported in the Chinese press, but he acknowledges that he has done well.

Still, Liang says, "I don't work for money. I work because of my commitment to the company, and I enjoy the process of achieving success through hard work and cooperation with my staff and other colleagues."

Baidu's futuristic-looking headquarters on the outskirts of Beijing's university district has all the accoutrements one would expect of a similar building in Silicon Valley. There are the de rigueur open-plan work and break areas, and even pod-shaped nap rooms laid out to resemble the paw print in the company's logo. Liang himself works in a cubicle no bigger or grander than those of his staff.

The company's resemblance to an American tech company is deliberate. Baidu hails from that sector of the Chinese economy led by "sea turtles" – those who left China to study and work in the West but then returned, bringing expertise, contacts, and, sometimes, overseas investors back with them. Robin Li, Baidu's founder and chief executive officer, left China in 1991 to study computer science at the State University of New York at Buffalo. Li later participated in the great search engine wars of the late nineties as an engineer at Sunnyvale, California-based Infoseek Corporation.

After Li and partner Eric Xu hatched their plan for a Chinese search engine, they turned to Silicon Valley venture capital (VC) firms like Draper Fisher Jurvetson for financial backing. Baidu launched at the end of 1999, taking its name from a poem of the Song Dynasty (960-1279) in which the protagonist searches "hundreds of times" – baidu – for a lost love.

When Baidu went public, the early VCs made a killing, as did certain other pre-IPO investors. Google bought 2.6% of the Chinese company in 2004 for $5m (£3.5m), selling its stake two years later for over $60m (£42m). Though the names have changed, Baidu's biggest holders are still largely American. According to the company's Securities and Exchange Commission filings, top institutional investors include mutual fund giants Fidelity Investments and T Rowe Price Group. A Denver-based investment firm, Marsico Capital Management, has around a 9% stake. All three are also major holders of Google.

Baidu has additionally looked to Western companies for their executive expertise. Former chief financial officer Shawn Wang was previously a partner with PricewaterhouseCoopers. William Decker, another former PwC partner, is one of the five current directors on Baidu's board, which also includes Greg Penner from Madrone Capital Partners, a Menlo Park, California-based investment firm.

Though Baidu has undoubtedly been influenced by US search engines, it's built on a slightly different model, according to a number of media, financial, and academic reports. The company has gone from a few hundred employees in 2005 to almost 7,000 today, but as many as half are salespeople who aggressively pitch Baidu to businesses all over China. While Google also has a sales team, it has generally placed greater emphasis on its advertising technology to attract customers. Also, unlike Google, which segregates advertisers from natural search results, Baidu often mixes them together.

Baidu's different approach to advertising reflects the belief of its management that Chinese internet users – who are generally younger than their US counterparts – go online more for entertainment and socialising, and less for news and information. Indeed, while the minimalist design of Baidu's main search page physically resembles Google's, it puts a somewhat greater emphasis on ancillary community and social networking functions.

Like Google, Baidu's business model is based on advertising – customers pay to have their links prominently displayed when certain terms are searched. China is still a relatively small market in dollar terms; Baidu had 2009 profits of $218m (£152m) on revenue of $652m (£455m), compared to Google's $6.52bn (£4.55bn) in profits on $23.3bn (£16.3bn) in worldwide revenue. (Analysts estimate that Google's 2009 China revenues were around $300m (£209m). But China is already the world's largest internet market, with an estimated 400 million users, and most analysts expect even greater revenue growth in years to come.

Liang's decision to join Baidu seems like a smart move now, but when he first considered the general counsel post, it wasn't so obvious. The vast majority of private companies in China are small-scale, and frequently guided by dictatorial bosses. That's why many talented lawyers have been wary of going in-house, according to David Tully, a Hong Kong-based legal consultant and recruiter. "The history of [private] companies is that many have not had general counsel or legal departments," says Tully. "Many are very much driven by chairmen or chief executives who look at lawyers as getting in the way. In-house counsel at these companies might only be assigned very mundane tasks."

But Liang agreed to talk to Baidu as a courtesy to the headhunter, a friend of a friend. He arranged to have a call with then-CFO Wang. Liang expected to have a quick chat, thank Wang for his time, and put Baidu out of his mind. But the two spoke for an hour and a half. "We had strong chemistry," says Liang.

In later meetings with Li, Liang was struck by the CEO's global vision as well. "I still knew little about Baidu's business, but I knew Robin and Shawn were a good team," Liang recalls. He notes in particular the ease with which Li and Wang dealt with international investors, bankers, and lawyers. "Shawn already knew all of the big firms in New York," Liang remembers.

Wang, whom Liang regards as his mentor, died in a swimming accident while on vacation in December 2007. "Every year I go to his cemetery," says Liang. "It's a four-hour drive, but I go there and I just think, think, think. I learned so much from Shawn, from his commitment to excellence, from his passion."

Liang has a background that's a bit different than Li's or Wang's. A native of Ningxia Hui province in northwest China, he spent several years working for the Government. But Liang didn't have just any bureaucratic job. He was in the legislative office of China's State Council – roughly equivalent in stature to the US Cabinet, but with a staff of its own.

In his seven years at the council, Liang made frequent use of its large and frequently updated library of international books, spending almost every weekend reading to improve his English and broaden his understanding of the world. And he participated in many delegations to the US, where he admired the way lawmakers marshalled facts and gathered outside opinion in developing their positions.

When Liang ultimately quit his prestigious Government job – starting down the path that would lead to Australia and then Baidu – some of his friends were shocked. If he had stayed, he could have looked forward to a secure, lifelong career. But that wasn't his goal.

He realised that during a trip to America to meet prominent lawyers and firms at the invitation of The International Academy of Trial Lawyers. Part of the program called for the Chinese delegates to be houseguests of academy members for a few weeks. Liang stayed at the Los Angeles home of well-known plaintiffs lawyer Thomas Girardi. He was struck by the life Girardi led.

"I felt this was a totally different life," Liang recalls. "The most impressive thing wasn't fortune or money. It was that he was maybe 54 or 55 then, but he looked very energetic. He loved his job, and he got achievements from his job that cannot be achieved in traditional Chinese Government-type jobs."

Liang maintains that Baidu didn't pick him for his official connections – the company has a separate public affairs department that deals directly with the government. He also laughs off the idea, widely advanced in Western news reports, that Baidu has a competitive edge because of its close ties to the government. "The internet industry is maybe the most competitive in China, with both foreign and Chinese companies," says Liang. "If the government treated Baidu differently, everybody can see. We lose cases, and we have been punished by the authorities."

Liang's lawyers are extremely youthful – most are in their twenties, with a handful of senior lawyers in their thirties. They come from all over China. Most had around four years' experience before joining Baidu, typically at local law firms, but occasionally at other internet companies. Though some have studied abroad, previous international experience is a rarity in the group, and Baidu's global profile was a major attraction for them.

Liang impresses upon his staff that taking initiative and ownership will be rewarded with greater responsibility. Sue Wang is typical in that regard. She joined Baidu's legal department in an administrative capacity four years ago but was given opportunities to demonstrate her legal acumen. Starting with small matters like responding to link removal requests, she moved on to more complex matters. Recently she served as Baidu's point person in joint venture negotiations with Japanese e-commerce company Rakuten.

"We have no fixed territories," says Liang. "You are encouraged to do anything good for the department and the company, as long as you have the capability."

Baidu's lawyers handle a fair amount of domestic litigation in-house, but what more often keeps them working well into the wee hours of the morning is the anticipation of legal risk. Like US search engines, Baidu faces copyright and other challenges stemming from the results that its searches return. Music publishers in particular have aggressively pursued lawsuits over searches for MP3 music files that can be illegally downloaded. Though downloading music is popular worldwide, many analysts believe that it accounts for a disproportionate amount of internet activity in China. Indeed, Baidu's music search service is one of its most popular features.

The company has faced numerous legal actions in China over downloading. Sony Music Entertainment, Universal Music Group and Warner Music Group recently sued Baidu to remove links to thousands of songs, but a Beijing court ruled against them in January. Downloading claims in US courts are starting to pop up. In 2008 Chinese digital music publisher 5fad.com sued Baidu for copyright infringement in New York.

In addition, Baidu has been hit with a handful of claims by Chinese advertising clients, who allege that the company's dominant position violates the country's two-year-old antimonopoly law. The most publicised of these actions, brought by a Chinese company that runs a medical information website, was dismissed by a Beijing court in December. But if Google's reduced China presence leads to an increase in market share for Baidu, it could be looking at more antitrust actions.

Liang's lawyers spend a great deal of time researching cases around the world filed not just against their company, but against their competitors too. Baidu recognises that especially as it expands abroad, it's likely to face many of the same issues that confront its bigger and more litigious US rivals. Though music download suits have subsided somewhat against American companies, Google's expansion into video and books continues to draw litigation.

Selecting outside counsel is another task where Liang encourages his staff to take initiative. When the need arises, he holds a series of videoconferences with would-be outside counsel, during which his staff peppers partners with questions about recent decisions in various jurisdictions and their potential impact on Baidu.

Howard Zhang, a Beijing partner with Davis Polk & Wardwell, has been on the receiving end of Baidu's selection process. He came through successfully. "They really do their homework," he says. "They asked us some tough, very nuanced questions." The scrutiny isn't limited to substantive legal issues: "They are very rigorous in looking at bills," adds Zhang.

Though the company certainly watches cost, Liang says that Baidu is willing to pay for the best-quality legal work when necessary. Among US firms, the company has consistently turned to premium names. Much of Baidu's corporate work is handled by Skadden Arps Slate Meagher & Flom, while Kirkland & Ellis has advised it on intellectual property matters. Davis Polk is defending the company in the 5fad suit, and Paul Weiss Rifkind Wharton & Garrison is representing it in a New York suit against domain registry Register.com, Baidu claims that Iranian hackers were able to effectively take over its site for several hours in January because of errors by Register.com. Baidu also uses dozens of Chinese law firms, including leading names like Beijing's Haiwen & Partners.

Baidu expects to find itself working with more international counsel in the future. The company is making a major push into the Japanese search market, and Liang's staff now includes two lawyers in Tokyo. In comments reported in March in the official People's Daily, Li said he wanted to make Baidu a well-known brand in half of the global market. "We must wait for the opponents' mistakes," Li reportedly said, in apparent reference to Google's relatively late entrance into China. "Baidu took Google's mistake as a chance ten years ago, and will take similar chances in its process of internationalisation."

Is Google's departure from China another mistake that Baidu can exploit? Perhaps. The internet industry, however, is anything but predictable. The absence of a strong competitor could lead Baidu to grow complacent about innovation and expansion. Other companies could emerge as challengers to the company's crown.

But Liang is confident that the vision that's taken the company this far will take it still farther. "We are focused on the user," he says. "Being accepted and welcomed by more and more internet users is the ultimate standard for Baidu's success."

This article first appeared in Corporate Counsel, Legal Week's US sister title.