China is notorious for having one of the most protected borders in the digital world. Known as the "Great Firewall," this digital border divides China from the rest of the world. It is filled with designed inefficiencies and filters that cause Internet traffic to slow to a crawl as it travels in and out of China.

There is a new partnership between the American startup CloudFlare and the Chinese Internet search engine Baidu (NASDAQ: BIDU) that is working to speed up Web traffic as it crosses the Great Firewall. In the process of creating this partnership, the two companies are establishing a business model that can help other foreign companies do business in China's notoriously sensitive technology industry.

Basics of the Partnership and Service

The partnership between the two companies was signed in July 2014. CloudFlare, a tech security company based in San Francisco and Baidu, the Chinese equivalent of Google, are using a mix of CloudFlare's Web traffic technology and Baidu's Chinese data centers to speed up the load times of websites across China's borders. The speedy service is called Yunjiasu and was launched in December 2014. It is composed of a unified network that makes foreign sites more accessible in China and lets Chinese sites run in destinations outside the country.

Virtual Joint Venture

Even though the new service is doing a great job of making the Internet run more effectively inside and outside of China, the partnership has had to avoid Chinese red tape with a new type of structure. The joint venture between the two companies is known as a virtual joint venture. Under the arrangement, CloudFlare does not actually operate in China as foreign businesses are normally required to do; instead, it cooperates primarily from afar and Baidu runs the joint venture in China.

The virtual joint venture relies on trust between the American startup and the Chinese tech giant. Under the agreement, CloudFlare transferred the intellectual property (IP) used by Yunjiasu to manage and speed up Internet traffic to Baidu, and uses its own engineers to run that technology on Baidu’s Chinese network. The two have a revenue share put in place so they both profit from the service.

For CloudFlare, a company that manages Internet traffic for millions of websites and makes browsing quick and secure, transferring its intellectual property and giving up local control was worth the vast business opportunities in China. Still, to hedge any risk, Baidu and CloudFlare signed a contract that gives each company control over specific elements of the service and inflicts penalties if either withdraws from the partnership. Baidu controls customer information within China, and CloudFlare owns the Web address through which the entire operation works.

Virtual Joint Venture Is a Blueprint for Foreign Business in China

This type of joint venture may turn out to be a new model for foreign tech firms that want to do business in China’s tech industry. Companies such as Uber, LinkedIn and Airbnb are looking to expand in China by using political connections and the sway of Chinese investors to open up business opportunities. Instead, a virtual joint venture can be used to help these companies enter China.

However, because the Chinese government is concerned with how the Internet is run and controlled within its borders, it may be hard for other companies to successfully create a partnership similar to this one. CloudFlare understood this potential barrier and structured the deal so the burden of dealing with local Chinese laws falls on Baidu. The Chinese search engine has full control of data for the China service, which has appeased the Chinese government. CloudFlare stores its own customer data on servers outside of China, offering encryption options that enable secure cross-border payments so data is not crossed.

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