Archive for January 21st, 2010

Google’s China Ultimatum Risky

Thursday, January 21st, 2010

Smeal’s Rajeev Sooreea says that Google’s threat to leave China is a risky move that could damage its ability to succeed in China if it ultimately decides to continue operating there:

Google’s threat to exit China is not only an economic decision but also a key strategic one.

J.P. Morgan has estimated that Google could potentially lose $600 million in revenue if it withdraws from the China market. And such market share could be a boon for companies like Microsoft, which is there to stay, and Baidu, which already has 63.9 percent of the market, compared to Google’s 31.3 percent.

Whether Google leaves or stays essentially comes down to how it prioritizes its goals: market presence versus market growth. If Google leaves, it could still have an indirect market presence by transferring its China businesses to local players in exchange for equity stakes. But then it would severely compromise its market growth. Microsoft has had bumpy times with the Chinese authorities but its focus is on growth. For Microsoft, the China market is too big to walk away from. Over the years it has learned its lessons and Google will have its own if it stays.

It is important for foreign firms to realize two things: First, successful longstanding multinational companies in China are those that contribute to the welfare of the economy. Second, the business-government relationship and culture in China are far more complex than what one could anticipate. One of the premises on which Google is founded is freedom of expression. But freedom of expression is molded to a large extent by culture, and what may be valued and promoted in the United States may not be admissible in some other cultures, including China. Besides, in some cultures, freedom of expression may not be a social or political priority.

Google’s threats to exit China could be viewed in several ways. It could be real or strategic. If it is real and Google exits, it will lose a big market (but it may be honorable in the sense that Google was already struggling against competitor Baidu and it has upheld its no censorship philosophy). If the threat is fictitious and used to strategically force information out of the government, then it may land itself in a worst-case scenario, making its future growth in China more politically difficult. This could well be the case, too, even if the threat is real and Google stays in China.

For the company’s sustainability in China, threats seem to be damaging because the stick component of the carrot and stick is seldom welcome there. Again, the parallel is with Microsoft which used to send threatening letters to the Chinese authorities in its early years but then it had to change its strategy and adopt a friendlier approach. Today it is more successful than ever before.

On the other hand, China has to proactively do its fair share of the trade. Google simply withdrawing from China will not make the attackers go away. All across Asia, China is renowned for giving red-carpet treatment to foreign multinationals. If it wants to maintain its leadership, it should realize that the playing field is flattening out, and reinforcing its intellectual property laws would be a key factor for its own long-term success. Hacking is a deliberate violation of privacy and this is an area where the Chinese authorities need to do something more concrete. Only collaboration between Google and the Chinese government could be welfare-enhancing for both.

Tags: China, Globalization, International Relations, Sooreea, Technology
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