Google’s Move Out of China: The Winners and Losers
Two days ago, Internet search engine giant Google announced that it has pulled its search engine operations out of China and now redirects all Chinese users to its Hong Kong site. The move is a risky one for Google and an embarrassment to the Chinese government. China’s failure to find an accommodation with Google is also part of an overall pattern of worsening trade relations between the U.S. and China.
In January, Google announced that its computers, along with the computers of over 20 American companies, had been aggressively compromised and sensitive information was stolen by hackers who were traced back to two Chinese universities. The hackers were almost certainly working for the Chinese government since American businesses–and even U.S. government agencies that work with China–have seen a consistent pattern of such hacking. At the time Google said it was evaluating whether it wanted to keep its search engine operations going in China, which has demanded that Google censor its search results for sensitive topics such as protests by Tibetans or Uighurs and the events at Tiananmen Square in 1989.
Google has spent the intervening time negotiating with the Chinese government to no avail. So it started shuttling its Chinese users to its Hong Kong site, which is not censored—a move that Google said was completely legal under Chinese law. Hong Kong, since it was under British control until 1997, enjoys a greater degree of freedom than the rest of China. Chinese officials reacted immediately by condemning Google’s move and actively blocking controversial topics from the Hong Kong site.
Since all of Google’s Chinese operations account for only $150 to $400 million of the company’s $24 billion in annual revenue, the company is unlikely to take a big financial hit. Analysts point out that Google was never able to move beyond a 33% market share of the search engine business in China—one source of frustration for the company. Long-term consequences, however, include Google’s losing access to one of the biggest and fastest-growing population of Internet users in the world. Google stock was down the day of the announcement, but only by $2.50, suggesting that investors remain confident in the company’s core business.
China experts suggest that China may retaliate by blocking access to Google’s other operations in China, such as its R&D, music, and mapping services – as well as ad sales for a Chinese-language version of its American search engine—with which Google hoped to retain a toe-hold in China. Hacking attempts against Google will probably rise as an expression of Chinese nationalism. The Chinese government could also make life more difficult for the company’s 700 employees in China. In the blog post announcing this decision Google clearly hoped to stave off such retribution, saying: “We would like to make clear that all these decisions have been driven and implemented by our executives in the United States, and that none of our employees in China can, or should, be held responsible for them.”
Google’s move is an embarrassment to the Chinese government and a stumbling block in their attempts to foster an appearance of technological innovation. Nonetheless the Chinese government was unwilling to budge in its negotiations with Google. In a statement on its blog, Google said, “The Chinese government has been crystal clear throughout our discussions that self-censorship is a non-negotiable legal requirement.” When Google entered the Chinese market four years ago, the company hoped to bring greater access of information to China despite the censorship, but instead the Chinese government has tightened its control of the Internet. It completely blocks access to Facebook, Twitter, YouTube, Google Docs and Blogger. Chinese supporters of Google have laid wreaths outside the company’s Beijing headquarters. Many Westerners hoped that the Internet would allow China to become a bigger part of the global community, but these recent actions will only further the country’s isolation.
The Google dispute will also likely have a ripple effect throughout U.S.-China relations. The Chinese government might also blame other U.S. businesses, deny them licenses to conduct commerce and thus block access to one of the fastest growing markets in the world – or it might blame the U.S. government. Although the Obama administration simply expressed regret that Google had been unable to come to an accommodation with China, Secretary of State Hillary Clinton and the State Department have been stalwart in their support of Google’s fight for freedom of speech. The government might register a protest by cancelling upcoming trade missions, such as Commerce Secretary Gary Locke’s visit scheduled in April to discuss renewable energy.
But Google’s inability to reach an agreement with China is also symptomatic of an overall pattern of a worsening business climate for Western businesses in China. The government has been actively promoting innovation in Chinese businesses through a policy it calls “Indigenous Innovation,” which requires Chinese ministries to favor companies producing goods using Chinese intellectual property over products using foreign intellectual property. The U.S. Chamber of Commerce has issued a statement expressing concern about this trend and American businesses are flooding the U.S. Department of Commerce with requests for help.
The U.S. government has also asked China to regulate its exchange rate with U.S. currency and has threatened to increase tariffs on Chinese imports if China does not comply. In a recent Washington Post interview, Chen Deming, China’s Commerce Minister, said “If the United States uses the exchange rate to start a new trade war, China will be hurt. But the American people and U.S. companies will be hurt even more.” This is a spurious argument, however, since the two countries are mutually dependent.
One of the biggest winners in the dispute will certainly be Baidu.com, a Chinese search engine company which was modeled after Google and currently holds a 63% share of the search engine market. Baidu’s American stock has risen 50% since Google’s January announcement — while Google’s has declined about 5%. Other American search engine companies such as Yahoo and MSN’s Bing have only a small slice of the Chinese market.
Baidu’s ascendancy will be additional bad news for American businesses. While Baidu is happy to take American businesses’ advertising money, it is one of the biggest promoters of piracy in the country. Although it may not pirate products itself, it provides what are called “deep links” directly to pirated movies, MP3 files, software, and many other products. Outside observers suspect Baidu is paid by the pirates to provide these links and derives much of its revenue from these sources.
The Chinese government has done little to stop Baidu’s piracy; in fact, a recent trial found that Baidu was not liable for a particular incidence of piracy because it did not know its links went to pirated material. On the other hand, the Chinese version of The Chinese government has done little to stop Baidu’s piracy; in fact, a recent trial found that Baidu was not liable for a particular incidence of piracy because it did not know its links went to pirated material. On the other hand, the Chinese version of Yahoo, which is only 25% American owned, recently lost a court case about piracy. Such different results from such similar cases makes many suspect discrimination against foreign companies. Baidu’s increasing dominance, therefore, will make it harder for U.S. companies to protect their intellectual property. With the prospect of a looming American/Chinese trade war and Google’s loss of future business, it looks as though Baidu may be the only guaranteed winner in this battle.