Source from: FT.com
By Kathrin Hille

Groupon’s joint venture in China is facing a cash crunch just months after its inception, due to breakneck expansion and management infighting triggering an acute cash crunch, managers at the company said.

The dramatic problems could raise doubts over the stability of Groupon’s overall international expansion just weeks ahead of its planned IPO.

E-Commerce King Ltd, the company that operates Gaopeng.com, the group’s coupon site in China, is laying off up to one-third of its staff and closing between half and four-fifths of its offices in China, people familiar with the situation said.

According to current and former managers, the company was forced into the drastic downsizing after Tencent, China’s largest internet company by revenues and Groupon’s joint venture partner, was slow to provide fresh funds.

Other American internet companies such as Ebay, Yahoo and Google have also seen their China ventures go sour. However, unlike those examples, Gaopeng staff say the root of their company’s problems is not a dispute between the joint venture partners or lack of understanding of the local market.

“We were pushed to create mind-boggling growth rates, but nobody ever asked about profit,” said one manager. “The company [has] severe operational problems,” he said.

In June, Ouyang Yun, chief operating officer of Gaopeng, told the FT the company had hired 3,000 employees and expanded to 50 cities. But last week, managers were told the headcount had to come down to 2,000, and between 20 and 41 offices would be closed because there was not enough cash.

People close to Gaopeng said Oliver Samwer, the German entrepreneur who heads up Groupon’s international operations, had pushed for the rapid expansion.

Mr Samwer works for Groupon International based on a consulting contract which was signed after Groupon bought CityDeal, the European Groupon clone founded by him, in May 2010, but which runs out in October. Mr Samwer could not be reached for comment.

Mr Ouyang, a former Tencent executive, runs the company together with four other managing directors hired by Mr Samwer. As part of their pay, the managing directors received bonuses based on how many staff they hired, people familiar with the situation said.

“Our average commission is 12 per cent, as compared with 50 per cent in the US,” said one Gaopeng executive.

Three of the managing directors, Mads Faurholt-Jorgensen, Raphael Strauch and Frederico Pericini, were put in charge of Gaopeng’s regional offices in Beijing, Shanghai and South China respectively, but the regional sales forces subsequently started competing with each other for large corporate accounts, driving down already slim margins.

Christian Macht, another managing director, is executing the drastic cost-cutting measures. Mr Faurholt-Jorgensen and Mr Pericini have now left, as has David Tang, the company’s chief marketing officer.

Mr Ouyang played down the company’s problems, saying “not a lot of employees were laid off”. He added: “Gaopeng is also undergoing some reorganisation of some departments, for example increasing centralisation of sales operations.”

Gaopeng said the decision to make the drastic cuts was driven by considerations of performance. “Gaopeng is optimising its business to meet the growing demands of the Chinese market. We are aligning our operations to focus more on middle- to large-sized cities where group-buying markets are more developed. Additionally, as a part of good business management, we are streamlining underperforming employees,” it said, adding that it was still hiring and that it was committed to the Chinese market for the long term.  Tencent declined to comment.

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