Wednesday, March 17, 2010

When Google departs China...

Google's likely departure may create a technological desert within China, reinforcing the belief that doing business in the country is too difficult and precipitate further Internet restrictions on its citizens. If Google leaves China the government may retaliate by blocking Google services, in whole or in part. It could mean that a lot of technological advancements such as maps on mobile phones could be in jeopardy. Free music services that the company helped set up to fight piracy could also flounder. In addition many Chinese websites may be forced to look for other mapping services and Internet search engine providers while companies and individuals may find themselves looking for other cloud-based services to replace Google Docs and GMail should they be blocked.

"If Google leaves, it's a lose-lose scenario, instead of Google loses and others gain," said Edward Yu, president of Analysis International, a Beijing research firm. While Google's leaving might deliver a windfall to local rival Baidu, China's major search engine, with 60% of the market, other technological companies could well suffer. Many rely on Google for search, maps and other services and might be forced to find alternatives. China Mobile Ltd, the world's biggest phone company by subscribers, with 527 million accounts, uses Google for mobile search and maps.

Baidu offers mobile search but China Mobile passed up a partnership with it earlier after they failed to agree on terms, according to industry analysts. Government blocks on Google might leave millions of mobile customers without access to Google's Chinese-language map service [PA].

"If Google leaves China, I think the impact of that is China gets a black eye," Stanford's Haim Mendelson, a professor of electronic business at the Stanford Graduate School of Business told the San Francisco Chronicle. "People will remember what happened to Google." Indeed, many start-up companies may think twice about setting up operations in China. If the world's largest Internet company couldn't make it, what hope would there be for others? [CBS]

With the writing on the wall, some of Google's partners in China have sent an impassioned plea to the Internet giant, saying their businesses are at risk if Google closes its Chinese search engine and demanding to know how they will be compensated. A letter, viewed by The Wall Street Journal, states Google hasn't given its advertising resellers in China guidance since its announcement in January that it may pull out of China. The letter says the companies, some 27 Google advertising resellers, have watched their business decline and worry they face bankruptcy if Google withdraws.

In fact there have already been strong signals sent from the government. According to a New York Times report on Sunday, the Chinese authorities warned Google business partners to prepare for a day when they can't use Google services such as a search bar on their Web sites. If Google did shut down those services or they were blocked by censors, business partners such as and that offer a Google-powered search box would have to either direct searchers to the main search page instead of the Chinese-specific page; find a different partner; or filter the search results themselves to comply with Chinese regulations.

As well as warnings to Chinese web portals, there were clear messages sent across Google's bows. On Friday, Li Yizhong, China's minister of industry and information technology, warned Google, "If you want to do something that disobeys Chinese law and regulations, you are unfriendly, you are irresponsible and you will have to bear the consequences." [Xinhua]

But he insisted Google's leaving would have little impact on China's Internet. "If it decides to quit, we will follow our procedures," he said, adding that their departure would have no major influence on China's Internet market, which will continue its fast expansion momentum. His statement was echoed by Foreign Ministry spokesman Qin Gang who said, "As to the impact of Google's possible retreat, it is only an individual business's action which will not affect the investment environment in China." He also warned others that they should follow China's laws. "We emphasize that any businesses operating in China, whether they are domestic ones or from overseas, shall abide by Chinese laws," Qin said [Xinhua].

Google's licence to operate in China is due for renewal in March, and as such a firm decision on whether Google will leave is expected soon. All Internet service providers in China, including Google, need to have their licenses reviewed by the Ministry of Industry and Information Technology. The disagreements between the two parties are unlikely to help matters. 

The uncertainty is not helping Google's stocks. Google shares fell $16.36, or 2.8%, to $563.18 Tuesday in New York on the Nasdaq Stock Market. The stock has lost 9.2% this year. Meanwhile Baidu's stock rose $26.60 to $576.84. This may only be a short term glitch. Confidence in the company may grow in the long term. Its stance is not just about censorship but also security, especially with regards its cloud-based services like GMail and Docs. China has been clearly cited in being responsible for attacks on such services. Google's attempts to shore up security and remove themselves from such threats may bring greater trust in the West [Business Week].

There are major risks for Google in remaining in China. The cyberattacks which targeted Google and more than 30 other western companies amounted to Intellectual Property theft. Some reports have suggested that even some of Google China's own employees may have been involved. Google's foundation is built on its technology. And China's meteoric rise in economic power, especially in the last 20 years, has been built on foreign technology and expertise that has been either bought or stolen from the West.

In addition there are huge bureaucratic hurdles to overcome in order to do business in China. Tech businesses have already raised particular concerns in recent weeks. And some, including Google have also suggested there are clear violations of WTO rules [RedTech].

China is supposedly a member of the WTO. As a member of the WTO, China has an obligation not to discriminate against foreign competition. According to a recent slashdot article "Google is asking the US government to petition the World Trade Organization to recognize China's censorship as an unfair barrier to trade. The US Trade Representative is reviewing their petition to see if they can prove that China's rules discriminate against foreign competition. At least it's something worthwhile for the US Trade Reps to do, rather than secretly negotiating ACTA" [Business Week].

In an uncomfortable irony for Beijing, Google might suffer little commercial loss from a pullout while China's own companies are hurt. The bulk of Google's estimated $300 million in 2009 revenues in China came from export-oriented companies that would need to keep advertising on its sites abroad even if closes, according to Edward Yu. At this month's National People's Congress, Premier Wen predicted that while "last year was the most difficult year for China's economic development…this year will be the most complicated." Indeed it will Mr Wen.

tvnewswatch, Beijing, China

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