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 Chinaon 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.

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
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.