Revenue reveals its own story. According to a report of Shanghai-based Internet market analysis company iResearch on China’s major search engines, in 2005 Google was a remote third with revenue of 150 million yuan, way behind Yahoo’s 280 million yuan and Baidu’s 270 million yuan.

One month before Schmidt’s China trip, Li Yanhong, CEO of Baidu, made a defiant statement that in five years Baidu would be the dominant search engine in the Chinese market and Google’s market share would be nominal.

Ironically, it was in 2005, when Google began to flounder in China, that it made the decision to expand its operation on the mainland. The July 2005 announcement that it would open a product research and development center in China, and controversial hiring of former Microsoft Vice President Kai-Fu Lee to lead its Chinese operations, took the industry by surprise.

Hunting for revenue

In August 2005, Google authorized its first Chinese partner, a Beijing-based leading Internet marketing solutions provider for business, to sell Google AdWords services in China. Google AdWords is the only profit source of the award winning search engine and operates as a step-by-step system invented by Google, which allows users to create their own ads, choose keywords to help Google match the ads with the audience and pay only when someone clicks on an ad.

In the United States, potential advertisers learn how to use the system through a tutorial on Google’s website and pay Google directly for the service. But in China, with a far less web-savvy population, Google needs to hire agents to promote the service.

“The marketing model is where Google China’s major problem lies,” said Feng Yingjian, PhD. in e-commerce and expert search engine marketer. He explained that Chinese companies could access Google AdWords either by directly buying it from Google or through its seven Chinese agents. Though there is a user-friendly training course in Chinese under Google.com.cn, Google charges both categories of customers at the same rate. According to Feng, this means Chinese agents could only earn profits by charging advertising agencies extra fees, which removes the incentive to train and expand a more Google-aware customer base.

“I don’t think Google fails to realize this obvious dilemma; instead their management failed to make a thorough study of the problem,” Feng told Beijing Review.

Another problem Feng warns may handicap Google’s localization efforts is its choice of Chinese operation chiefs. Of the two co-presidents of Google China, Kai-Fu Lee is a Taiwan-born and U.S.-trained scientist-turned-executive and Johnny Chou had studied and worked exclusively in telecoms before joining Google.

“I don’t doubt Kai-Fu Lee’s technical expertise or management capacity, but I don’t think he is the right person to lead Google’s localization efforts,” Feng said.

He believes Google has to learn the lessons of Yahoo, which made zero progress in localization over 10 years before connecting with a local keyword service provider 3721.com and appointing its founder Zhou Hongyi as Yahoo China president in 2004.

Enormous potential

Like Feng, many business insiders have thoughts on where Google China is going wrong.