Google’s China Exit Strategy

It’s now four years since Google made a decision to censor search results in China. In 2006, Google decided to launch the censored Google.cn search engine after its global site Google.com was perpetually down 10% of the time. Now, after the attacks and disconnection between the quality of results of Google China site and non-censored Google results elsewhere, the new stance to remove the filter is a commendable move. But it does not mean it makes much difference. A search engine user may then be able to see results not found in the past. But it does not mean he can outright access the site.

After the wake of Google’s bold decision to put matters into its hands by removing censored information within its China search results, US politicians called on other American companies to follow the act, and conduct a review on how they conduct business in China.

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Flowers outside Google’s China office. Photo credit: hunxue-er

Reps. Nancy Pelosi and Frank Wolf were among members of the congress who urged American companies to follow Google’s lead. Executives of Yahoo!, Cisco and Microsoft were sought to engage in a similar action and verify if they find themselves victims of systematic intellectual property violations. It is no longer uncommon to find a western brand having its bootlegged version made in China.

However, the main issue is China’s issue on spying and cyber attacks targeted not only on Google, but also to a few dozen other companies operating in the country. Even the biggest search engine in China wasn’t spared; the day before Google’s announcement, Baidu was also a victim – albeit minor – of cyber attack.

Google’s bold action in China is reminiscent of the move by American companies deciding to pull out operations in South Africa during the Apartheid regime. Until the day Google announced its new approach, it was among the high-tech companies named as “chief violators” by cooperating with the Chinese government in restricting flow of information.

Maybe in the name of business, other companies are willing to take that label for the moment as Microsoft and HP invested 250 million dollars over the next three years to develop Internet-based cloud computing infrastructure in China. Google’s pullout, on the other hand, would have minimal impact on its financial standing “in the near term”, according to Deutsche Bank. Current estimates peg Google’s China operations only accounts for 1.1 per cent of its total revenue. Pre-market stock price declined only 1.4 per cent after the China announcement.

If Google proceeds with its exit plan, it will follow the steps made by other American companies Yahoo! Inc. (Sunnyvale, CA) and Ebay Inc. (San Jose, CA) and leave China without a foreign company operating independently to serve more than 330 million Internet users. Yahoo! sold its China unit in 2005 and paid $1 billion for a stake in Alibaba. In 2006, Ebay shut down its China operations and partnered with Tom Online of Hong Kong billionaire Li Ka-shing.

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Google tries to make its name known to mainstream Chinese population through billboard ads.
Photo credit: midiblog

Should other high-tech foreign firms and activist investors in companies doing business in China banded with Google, they could impact the social stability of the country, something its leaders would like to maintain at all costs. But as early responses indicate, these companies are unable or unwilling to give up a lucrative business in the mainland. After all, who would think that China’s central government would bow down to a foreign media company’s actions?

Should Google leave China as it hints on its blog, Baidu is widely expected to grab Google’s share in the market. But who else benefits? We could pinpoint Google’s competitors easily. But despite these seemingly no-brainer assumptions, it may not always be the case for Microsoft, Google’s rival in the search engine market, according to Peter Lu of China IntelliConsulting. “Google is still viewed as a more technologically sophisticated Chinese search engine than Baidu,” he said. He added that Google failed to take some of the market share enjoyed by Baidu is not because of its search technology, which is widely favored, but on lack of brand awareness through local advertising and promotion. He also believes that China is not a technology-driven market, and word of mouth marketing is not very effective.

Google’s pullout will definitely have repercussions beyond the search engine realm. Its Android phones may have been touted as iPhone killer by some. But if its maker exits China, Apple is happy to have one more competitor out of the market of over 700 million mobile phone users. Google’s phones have applications associated with its brand such as Gmail and Voice, but even without Google’s presence in China there are still several devices that are based on the Android structure.

According to comScore data, Microsoft sites held about a 5% share of the Chinese search market as of November, compared with Google’s 14% share and Baidu’s 62%. In 2003, Google led in China, followed by Yahoo! while Baidu was at distant third. Baidu then went public in the US and raised funds while operating in China with local staff who established local connections and offered services to suit the local market. Many young graduates opted to work for companies like Tencent and Sina, which offers Chinese-friendly services. So it may be the cultural disconnect that took down Google’s initial lead in the game. A US business model may still be applicable and work on many countries, but certainly in China, where competition is stiff from confident, cash-rich local investors. Partnering with local firms still doesn’t provide guarantee in improvement of business for US companies. Tencent’s QQ instant messaging service is still more popular than Microsoft’s MSN more than four years after the latter formed a venture with Shanghai Alliance Investment to operate MSN China online messaging service.

I am wondering that if Google were making more money that what it earns now, or has changed positions with Baidu as the most preferred search engine in China, would it make the same move as it did last Tuesday? Maybe not, if China is a target market for its future products and services so Google would defer the move despite the apparent cyber attacks and infamous censored results to comply with China’s laws. Maybe it will, as it continues to adhere to its basic mantra of “do no evil” assuming that it is evil to restrict freedom on the Web.

It would look embarrassing for Google to leave China and all its opportunities, so if it decides to so, at least it can use censorship and cyber-terrorism for everyone to know while taking its failures a bit out of the spotlight.