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PUBLISHED : Tuesday, 15 January, 2013, 9:48pm
UPDATED : Tuesday, 15 January, 2013, 9:48pm

Baidu sniffs Kingsoft, Xiaomi next?

BIO

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young’s China Business Blog (www.youngchinabiz.com), commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, “The Party Line: How the Media Dictates Public Opinion in Modern China.”
 

The headlines have been buzzing this week with word that Baidu (Nasdaq: BIDU) could soon form a tie-up with software maker Kingsoft (3888.HK), with many speculating the move by China's leading search engine would be a direct assault on recent Baidu nemesis Qihoo 360 (NYSE: QIHU). But a far more interesting possibility in this potential new tie-up would be a future related deal that would bring together Baidu with the up-and-coming young smartphone maker Xiaomi, whose co-founder Lei Jun has strong ties with Kingsoft.

Such a tie-up would provide a major boost for both companies, giving Baidu a popular new smartphone platform to promote its mobile search business. At the same time, such a pairing would provide Xiaomi with a major Internet partner as part of its drive to move beyond its current status as a niche smartphone player to become a mainstream brand.

Before we examine this kind of tie-up any further and discuss why it may happen, let's step back first and take a look at the latest news, which has media reporting that Baidu is in talks for a tie-up that  could include its purchase of a major stake in Kingsoft. The reports are saying a deal could be announced after Chinese New Year, and would be aimed at competing with Qihoo's core security software business.

Industry watchers will recall that Qihoo launched its own so.com online search site over the summer, in a bid to challenge Baidu's longtime dominance in the Chinese search market. So.com has risen rapidly since its debut, and now controls around 10 per cent of the market, according to the latest data.

While a Kingsoft-Baidu tie-up aimed at Qihoo's security software business certainly sounds logical and like a good tactical move, an eventual tie-up between Baidu and Xiaomi sounds even smarter and something that Baidu could and should pursue after it forms a Kingsoft tie-up. Baidu raised US$1.5 billion in cash through its first-ever bond offering in November, and has said it wanted to use the money partly to fund major new acquisitions. 

Meantime, Xiaomi has jumped to prominence over the last year and a half on the strength of its low-cost, high-performance smartphones and smart marketing campaigns engineered by co-founder Lei, who wants to build the company into a Chinese Apple (Nasdaq: AAPL). Xiaomi has also formed its own recent string of tie-ups, most recently paying US$1.8 million for 10 per cent of Kingsoft's cloud computing unit, Kingsoft Cloud Group, in December. 

Reports at the time said that tie-up was aimed at giving Xiaomi a strong platform for offering mobile services to users of its smartphones, again imitating an Apple business model. The reports also cited Lei's connections at both Kingsoft and Xiaomi as a major catalyst behind the tie-up.

So if Baidu really does buy a big stake in Kingsoft, in a deal that would likely be priced in the hundreds of millions of US dollars, I wouldn't be at all surprised to see Baidu move next to form another tie-up directly with Xiaomi. Such a pairing would mark a good move for both companies, giving Baidu a powerful new platform to help build out its presence on the mobile Internet that is likely to overtake the desktop in the next decade as the primary vehicle for personal computing.

Bottom line: Baidu's reported talks for a tie-up with Kingsoft could be followed by another pairing with Xiaomi, giving the search giant a powerful new alliance for its drive into mobile computing.

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