Google China

Update: This Week in Google had an excellent discussion on the Google-China story and I absolutely agree. The story here should really be about the security of Google’s cloud, but the company has brilliantly spun it into a PR win by turning it into a moral issue.

Last year, I wrote a paper for TechTrek examining Google’s failures in China and how it could improve its position in the search market there. I was hoping to update it this year with new information and data that has been released since then (such as the departure of rock-star executive Lee Kai Fu). Given the Google-China dispute that’s been making headlines though, it appears there may not be a Google China soon. So instead, I thought I would briefly weigh in on the situation (if you care to hear what a random college student has to say).

First of all, let’s make a few things clear: The U.S. government will not intervene. Even though the Obama administration and Google are pretty tight, the White House has been pretty reluctant to get too involved in human rights issues regarding China. Also, if Google does pull out, this will not cause some domino effect of American companies following suit. There are different factors and issues at stake for every company and they will respond according to their own positions. For most companies, they can hardly afford to lose a market like China under current economic conditions.

Now to the issue at hand. I don’t think Google will leave China, at least not permanently. I understand Google prides itself on not making decisions based purely on profit, but I think China is too big of a market to pass up even for them (but since this is Google, nothing’s ever completely out of the question). Some have tried to argue that China would not be losing much if it pulled out now. I beg to differ. It’s been reported that China earns $600 million in revenue a year for Google and that’s only with about 25% market share of the 25% of Chinese that are online  in a developing country of 1.3 billion. Speaking of market share, 20-25% may not be Google-esque domination, but it’s pretty good compared to how they’ve fared in other Asian markets. Despite its difficulties against Baidu, Google does have a strong following with white collar elites in China’s cities, and as the middle class continues to grow, that’s going to be the sweet spot for both Google and advertisers. And this doesn’t even take into account the possibilities with mobile search.

Instead, I think this whole episode is one big bluff on both sides. Google knows if it pulls out of China, that market will probably be lost to it for good, but it’s also frustrated by the wild west business climate there. China’s government wants to maintain its authority, especially over foreign firms, but it also doesn’t want to scare away direct foreign investment that it needs to keep growing. Therefore, I think what we have here is a classic standoff where each side is waiting for the other to fold. Google sent its employees home on vacation to show they’re serious. China quickly reassured the U.S. that it would not threaten diplomatic relations. Aside from that, both sides are relatively silent about their intentions and are clearly digging in for a long stalemate.

Barring a dramatic about face by the Chinese government on censorship rules, here are the outcomes I can foresee:

  • Google temporarily withdraws from China. Once the smoke from this incident blows over, they pick up where they left off. This will minimize damage to Google’s image while enabling it to maintain most of the foothold it has established in the market.
  • China makes a symbolic concession on some issue that positively affects Google. I’m not sure what this might be, but it won’t be an apology and it won’t be anything directly related to this issue (hacking, censorship). The last thing the Chinese government wants to do is to bow to an American corporation that is already seen in some circles as arrogant. This is good enough to give Google way to keep operating in China without appearing like a complete sellout. Given the fact that China doesn’t really need Google, especially when Chinese firms will most likely benefit from its departure, I think this scenario is less likely.

Of course, there is one other explanation for Google’s actions, and that involves looking at the big picture as opposed to Google China in isolation. Prior to this event, the biggest Google news stories were probably Android/Nexus One and Chrome OS. These are key products that could potentially change the direction of the company. Perhaps Google just wants to focus its attention and resources on developing these products instead of dealing with problems in China. Who knows, Android and Chrome may eventually become effective tools for penetrating the Chinese market.

As Google grows into all these areas, it also has to increasingly deal with the U.S. government, and this act of defiance may be a way to build ammunition for its run-ins with Washington, whether it’s questions about user privacy, the book scanning case, Google’s push for the FCC to enforce net neutrality, regulation of Google Voice, or anti-trust fears. The outcomes of these cases and disputes will likely affect Google’s core businesses. Maybe it’s just Google protecting home court.

Needless to say, I’m interested to see how all this will unfold.

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