Marketplace Scratch Pad

Should Google bail on China?

Scott Jagow Jan 13, 2010

It wasn’t so long ago that American companies were scratching and clawing to get into China. Now, it seems, some of them can’t wait to get out. Google says it might have to skidaddle after a cyber-security invasion, and that’s prompting many questions about where the US-China business market is headed.

From Google’s blog:

In mid-December, we detected a highly sophisticated and targeted attack on our corporate infrastructure originating from China that resulted in the theft of intellectual property from Google. However, it soon became clear that what at first appeared to be solely a security incident–albeit a significant one–was something quite different.

Chief legal officer David Drummond says Google believes the goal of the attack was to access the Gmail accounts of Chinese human rights activists. He also says at least 20 other large companies were targeted. Congress plans to investigate the spying allegations. As for Google, it’s going directly to the Chinese government:

We have decided we are no longer willing to continue censoring our results on, and so 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. We recognize that this may well mean having to shut down, and potentially our offices in China.

Maybe it’s easy for Google to make this threat and follow through on it if it’s thinking in terms of revenue percentages. Google China provides something like 2% of Google’s worldwide revenue, only about $400 million of $20 billion. And Google’s still getting creamed by China’s domestic search engine Baidu, which has nearly two-thirds of the Chinese market. But China’s Internet business is still a baby, which makes one ask: Would exiting China now be a horrendous business decision? More from CNET:

… beyond next year, the business opportunity in China is only expected to grow. Google has not been able to dent Baidu’s advantage, but even maintaining 20 percent of a large, fast-growing market would provide Google with a healthy revenue stream away from the boom-and-bust U.S. economy, as well as the reams of data that Google covets on Internet usage habits.

China is also a big source of research and development labs for major technology companies, which would leave Google on the outside if it followed through on its threat to withdraw entirely.

And that could present an excellent business opportunity for Google’s rivals. But at what cost? Google might lose revenue by leaving, but it could certainly make up some of that in goodwill with customers for fighting the good fight.

At what point is the cost and frustration of doing business in China simply not worth it? And if the math doesn’t add up for foreign companies, how might China respond? More from the Wall Street Journal:

Government officials sitting in Beijing may not care about any of this in the short run. The Chinese economy is booming along very nicely despite, and in some cases because of, rampant copying of foreign companies’ business models or intellectual property. One could argue the fact that Google’s China business struggled so badly shows that China doesn’t need Google.

But is that really true over the long run? At China’s current level of development we may be a generation away from a definitive answer, though economic history suggests Beijing is on the wrong track. Meanwhile, foreign investors will continue questioning exactly how much they’re willing to put up with for a shot at 1.3 billion customers.

Kai Ryssdal said it well at our morning meeting today: Once upon a time, China played a weak economic hand strongly. Now, it seems to be playing a strong economic hand weakly.

Analyst Rob Enderle has this take on Google this:

“I think we would all appreciate it if companies more often drew lines in the sand protecting their customers even against large hostile governments,” said Enderle. “This is the way that the Obama administration would like all companies to behave — put doing what is right ahead of what is financially expedient. It would be nice if this was a trend but with executives focused on quarterly results and the bottom line that is doubtful.”

If you were running Google (or another company considering a move into China) what would you do?

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