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Reports broke earlier in the week that Google might exit the Chinese market.

Yesterday, Google turned the matter into a political drama with its official explanation. In a post entitled "A new approach to China" on the Official Google Blog, Google's Chief Legal Officer David Drummond details why his company is considering leaving: it stumbled onto and was the victim of a "highly sophisticated and targeted attack" that resulted in the theft of intellectual property.

Google believes that the attack's purpose was to access Gmail accounts of Chinese human rights activists. It claims that "twenty other large companies from a wide range of businesses" were targeted and says it is working with the United States government. While Drummond doesn't directly accuse the Chinese government of being behind the attacks, that accusation is pretty clear if you read between the lines.

The story reads like something out of a Hollywood political thriller and while Google deserves some respect for standing up to the Chinese government, as with any good political thriller, I think there's far more to the story than meets the eye. After all, up until this point Google willingly complied with the Chinese government to protect its interests in China. Now, however, it wants us to believe that a hacker attack with the "primary goal" of accessing Gmail accounts of human rights activists in China has led it to conclude that a Chinese business may be untenable. Right.

Plenty of people buy the story and are praising Google. But praise requires some form of amnesia. That's because no matter how much "discomfort" Google felt when it agreed to censor search results in China, it knew what the implications of that censorship were and it knew who the censorship would hurt (hint: the same people this attack reportedly targeted). There was plenty of outrage when Google made its censorship decision but clearly the Chinese market was more important to Google at the time than its "do no evil" mantra, and its decision to censor reflects that.

So what gives now? It's hard to buy that this attack, however disturbing, is driving Google to rethink censorship and stand up for human rights. No, it's my opinion that Google may be using the attack as an excuse to set the stage for an exit from the Chinese market that doesn't require admitting what amounts to defeat. While JPMorgan estimates that closing up shop in China could cost Google up to $600m/year in revenue, that's a drop in the bucket for Google overall. And when you look at Google market share in China, where it trails Baidu in paid search by a hefty margin, it's pretty clear that Google is far from the 800 pound gorilla that it's used to being elsewhere in the world.

The problem for Google, of course, is that this says more about Google than it does about the Chinese market. We're talking about what will eventually be the largest consumer market in the world here. Google may not yet dominate search in China and will probably never dominate it, but make no mistake about it: China is really important to Google, as it is to so many large global companies. As JPMorgan analyst Imran Khan has noted, "If Google is not allowed to operate in China this could potentially have a far-reaching impact on the company’s overall long-term growth rate".

That statement is spot on, but if Google management lacks confidence in the company's ability to make greater inroads in China, pulling out of the country on moral grounds might be an easier way to let shareholders down than "Sorry! We just can't compete in China." So far, Google shareholders don't seem concerned. Yesterday, Google stock dropped by a little more than half a percent. Baidu's stock, on the other hand, soared more than 13%. A clear reflection that Google's move is probably more important to Baidu than Google in the immediate term.

It would be unwise to assume, however, that Google is simply throwing in the towel on China so abruptly. It appears that by publicly revealing the information it has in the way it has, Google is hoping it can pressure the Chinese government to renegotiate the rules of the game. Indeed, Drummond writes in his post that "over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all". The question is whether Google is delusional or devilishly brilliant.

While it would be a major shocker if the Chinese government agreed to let it run an unfiltered search engine, that's probably not Google's real goal. Realistically, Google is probably hoping to win some concessions that can help it compete more effectively in the Chinese market. If the political fallout is strong enough, there's a long-shot chance that the Chinese government will give in some due to the scrutiny and pressure. Again, this is a long shot by any stretch of the imagination but if it happened, Google will have pulled off a real coup d’état. If the Chinese government stands firm, as it is likely to do, Google can follow through with its threat to leave China while saving face with shareholders and consumers who still believe "do no evil" holds some meaning. Win-win for Google management perhaps.

This will be an interesting story to watch on multiple levels. But don't be fooled by the political and moral overtones. Just as Google's original agreement to censor search results for the Chinese government was a calculated business decision, its decision to now turn on the Chinese government is a calculated business decision too. Whether it has calculated correctly remains to be seen.

Photo credit: peruisay via Flickr.

Patricio Robles

Published 14 January, 2010 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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George Rosier, Product Manager at Spark New Zealand

I'm inclined to believe it's a tactic, but one that (purely in my opinion) won't work: the Chinese government have managed to defend their use of censorship/firewall in the past, and will no doubt continue to do so against this particular approach.

Baidu's continued operations also mean it's not like the population can't search the web...it just happens to be filtered (whether they know/care or not).

Personally, I predict the Chinese government will stand firm, and Google will either need to rethink their stance or follow up on their threat and leave the market.

Definitely one to watch, as you say.

p.s: I don't mean to be picky, but the headline is spelt 'manoeuver'

over 6 years ago

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Akshay

Interesting analysis. I'm not sure whether Google is running a loss in China, but it's always good to hear differing points-of-view on any large news item like this.

@George Rosier: "Manoeuver" is British, "Maneuver" is American. They're both correct, I guess.

 

over 6 years ago

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alan p

Yes, came to similar conclusions yesterday:

http://broadstuff.com/archives/2029-Google,-China-and-RealEkonomik.html

However, I do think this will open a whole Pandora's boxof politico-economic tensions bet. US, CHina et al - had a short got at it today,

http://broadstuff.com/archives/2030-Google-and-the-RealPolitiks-of-Morality.html

Be interested on your take

over 6 years ago

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Jeff

A friend of mine in China tells me that Google.cn is still up and, yes, still censoring results.  She also told me that Google is a small player in China, and since all search engines are censored, Google's exit will not make any difference.  In fact, she said that those who want to circumvent the great firewall already do so via proxy servers.  

If what she said is true, and I have no reason to doubt her, then I wonder why Google chose to be so vocal about it.  Everybody knows that public confrontation like this with the Chinese government does not work (just ask Akmal Shaikh).  Moreover, why has Google all of a sudden developed a conscience?  I mean, Google did participate in the Chinese censorship by the virtue of operating in China for the past four years.  

I sure hope Google is not naively calling the Chinese government's bluff: google will lose.  There is no way for the Chinese to back down on this one.

over 6 years ago

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nxtgates

Google isn't going to pack up it's operations in china just because of censorship issues, which are there in many other countries like India, or hacking issues, which are there in all the countries.

This is just a threat to render a blow at China's censorship model, which I don't think is working.

There are enough smart people working at Google who realize that it isn't practical to quit the biggest internet market.

Checkout this article http://techguylabs.org/2010/01/24/google-china-fiasco-the-complete-picture/.

over 6 years ago

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dmtaylor

Has anyone read the Wasington post, if not do so. I think the decision to pull out soley based on censorship is not the case here, but Google is using it as an easy exit. The Chinese have been hacking the globes computers for the last 6 months, don't you think this is more of an issue? We don't know the full exent of what the Chinese Gov have actually been up to.

over 6 years ago

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