Recruiting in China

With more than 277 million users worldwide, LinkedIn (NYSE: LNKD ) is not only the largest professional social network, it is also one of the best-monetized websites ever created. Unlike Facebook (NASDAQ: FB ) or Google, which mainly rely on advertisements to generate revenue, LinkedIn obtains revenue from its users through advertising, premium memberships, and human resources solutions.

However, despite being one of the best-monetized websites, it is becoming increasingly difficult for LinkedIn to continue growing. In the fourth quarter of 2013, revenue came in at $447 million, up 47%. That being said, management predicted revenue of $455 million-$460 million for this quarter, well below the Street consensus. The company's projections raised worries that it may be starting to have trouble mining its audience for more revenue. At the same time, the company added only 18 million accounts in the fourth quarter, which barely matched the average of additional accounts that LinkedIn has gained in the previous quarters. To improve revenue and user metrics, the company recently announced the introduction of a Chinese-language website. Can LinkedIn succeed in China?

A great opportunity
LinkedIn will be offering a localized version of its website, after more than a decade of having an English-language site there. The company will also be establishing a joint venture with top private equity firms China Broadband Capital and Sequoia China, to attempt to connect more than 140 million Chinese professionals.

Without any doubt, China represents a huge business opportunity for LinkedIn, which already has more than 4 million members in the world's second-largest economy. With a labor force of more than 800 million people, China also has a huge population of active Internet users. Most companies in China still do not use LinkedIn or similar alternatives as recruiting tools, but this could change if LinkedIn succeeds in registering enough users.

Note that LinkedIn will become one of the few U.S. social networks with direct exposure to China. Facebook, the largest social network, recently reported revenue of $2.59 billion for the fourth quarter of 2013, an increase of 55%, year over year. However, it has no official presence in China. Eventually, this will become a big problem for the company, which already has more than 1 billion registered users.

Several challenges ahead
LinkedIn will have to compete against several social networks that are already present in the Chinese market. Tianji, a networking site owned by Viadeo, has more than 15 million users in China, where it has been in the market since 2005. Tianji is popular due to some highly social features, like the ability to invite friends and colleagues to evaluate themselves using a Myers-Briggs-type online personality test.

Ushi is an important competitor that released an invitation-only platform in 2010. The company raised $1.5 million in a first round of funding, and has several chief executives registered in its user base. Ushi, which monetizes its site by charging for some premium features, has a deep understanding of Chinese business customs. Before the release, the team spent months in face-to-face meetings with several top executives and business leaders in order to convince them to become early members. This allowed Ushi to become an exclusive hub for elite professionals at an early stage.

On top of competition, LinkedIn will have to comply with several local rules in order to remain online. Complex regulations in China are a reason for the absence of U.S. social media companies in the world's second-largest economy. Facebook has been blocked by firewalls since mid-2009.

Final Foolish takeaway
LinkedIn, the largest social network oriented to professionals, will release a localized version of its website for the Chinese market. This is a privilege, and LinkedIn will become one of the few U.S. social media companies with direct exposure to China. However, there are several challenges ahead, including fierce competition from local competitors like Tianji and Ushi. To succeed in this market, LinkedIn will need to adopt a growth strategy based on a deep understanding of Chinese business customs.

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