Conventional wisdom has evolved that China's 1.3 billion consumers make up a market much too big to leave. But now, Google, the worldwide search-engine giant, may be testing that mind-set.
A week after threatening to quit China, Google reported a blockbuster net income of nearly $2 billion, or 30 percent of revenues, for the fourth quarter, suggesting the world's leading search-engine firm would remain a powerful, valuable, highly profitable media company even if it had to abandon China's burgeoning Internet market.
Google entered China in 2006, agreeing to enforce Chinese government censorship by filtering out material on the 1989 Tiananmen Square massacre, Human Rights Watch, the Dalai Lama and other topics deemed taboo by Beijing censors.
China's economy, expanding annually at double-digit rates, had made the Silicon Valley star, with its informal slogan of "Don't Be Evil," the latest in a century-long string of American businesses to see a profit bonanza there.
On Jan. 12, Google announced that it had suffered a "highly sophisticated and targeted attack on our corporate infrastructure originating from China" in December. The cyberassault resulted in "the theft of intellectual property," Google said. At least 20 other large companies were "similarly targeted."
Google bitterly complained that "the accounts of dozens of U.S.-, China- and Europe-based Gmail users who are advocates of human rights in China appear to have been routinely accessed by third parties."
That adds a new dimension to human rights activists and promoters of Internet freedom berating Google for capitulating to the demands of Beijing's authoritarian government.
"We have decided we are no longer willing to continue censoring our results" on Google's Chinese-language search engine, Google.cn, the company's chief legal officer, David Drummond, said, firing the opening gun. "We recognize this may well mean having to shut down Google.cn and, potentially, our offices in China."
After Google's change of heart, the Google.cn site generated uncensored stories about the Tiananmen Square massacre. The official site of the Dalai Lama could also be accessed.
"A transnational attack on privacy is chilling, and Google's response sets a great example," said Arvind Ganesan, director of Human Rights Watch's business and human rights program.
"China's Internet is open," Chinese Foreign Ministry spokeswoman Jiang Yu countered in response to a question about Google's threat to quit China. "China has tried creating a favorable environment for [the] Internet."
Secretary of State Hillary Rodham Clinton entered the fray Thursday. In a speech about Internet freedom, Mrs. Clinton accused the Chinese and other governments of "hijacking" technology "to crush dissent and deny human rights." She called on China to remove restrictions on the Internet.
The United States should "respect the facts" and stop making "groundless accusations against China," Foreign Ministry spokesman Ma Zhaoxu responded.
The Google-China blow-up has also taken on mammoth dimensions because it dramatizes growing U.S.-Chinese trade difficulties. In 2009, for the fifth year in a row, China's trade surplus with the United States exceeded $200 billion.
The Chinese market seemingly offers limitless opportunity over the long term. Today, it has more Internet users — nearly 400 million, or one-fifth of the global Internet population — than any other country. Moreover, the Middle Kingdom's Internet expansion appears almost limitless.
"Given the size of the prize/opportunity, foreign-based companies have to think twice about leaving China if they think they can make a profit," said Hal Sirkin, a senior partner at the Boston Consulting Group.
In the third quarter, total revenues for China's search-engine market reached nearly $300 million, up about 30 percent from a year ago. But Google's 31.3 percent market share was a distant second behind the 63.9 percent share controlled by Baidu, China's home-grown search-engine company, according to data by Analysys International.
Google's lagging position in China has prompted speculation that it is threatening to walk away because of its inferior competitive position in China.
By its own account, Google's revenues from China were "immaterial."
In 2009, four years after Google entered China, revenues there were estimated at about $300 million. That's a bit more than 1 percent of Google's $23.7 billion total revenue for 2009, when its net profit exceeded $6.5 billion. By comparison, Google's revenues from the United Kingdom during the fourth quarter alone totaled nearly $800 million.
Even if Google's Chinese profit margin were as high as 40 percent, which is unlikely, its Chinese net income would have contributed less than 2 percent to its total profit for last year.
When short-term gains are modest in China, there is always the prospect for substantial long-term profits. But a foreign company operating in China's state-controlled markets often faces a local competitor that eventually gains ironclad control of the sector and the bulk of the profits.
Other foreign high-tech firms, such as Yahoo and eBay, have had a history of major disappointments in China. Industry sources speculate that if Google weren't making a lot of money, and if it believed that Beijing would make certain that its home-grown search-engine firm, Baidu, was going to prevail over the long term, Google might decide to pick up its stakes.
James Lewis, a senior fellow at the Center for Strategic and International Studies, doesn't buy that argument.
"Google only has 30 percent of the market because of the way the Chinese government has been treating them by favoring Baidu," he said.
In most business sectors around the world, 30 percent of a market that seemingly has an unlimited upside is nothing to sneeze at, especially following the worldwide recession. Mr. Lewis, whose specialties include China's information-technology industries, noted that Google's share has been growing as other search engines have lost market share to both Google and Baidu.
Among educated, older, more prosperous users, he said, Google is a strong competitor with Baidu. As a result, he estimates that the cumulative income of Google's 30 percent share could exceed the total income of Baidu's much larger customer base.
When Google entered the Chinese market in January 2006, it made clear that "we will carefully monitor conditions in China, including new laws and other restrictions on our services."
"If we determine that we are unable to achieve the objectives outlined, we will not hesitate to reconsider our approach to China."
Initially, Google's censorship activities were not as extreme as Baidu's.
"Ever since Google.cn launched in 2006, I've occasionally run tests to see how it compares to its home-grown competitor, Baidu," said Rebecca MacKinnon, a fellow at the Open Society Institute. "Google.cn consistently censored less than Baidu did. This is how Google executives justified the ethics of their presence in China: Chinese users, they argued, were still better off with Google.cn than without it."
However much distance Google placed between itself and the regime at their figurative supper table, it is clear that China has been shortening Google's spoon.
"Things changed for Google in 2009," said Ms. MacKinnon. "Regulators demanded that it ramp its self-censorship up to Baidu's level."
Google may now have "buyer's remorse." When Google made a deal with Chinese authorities to censor topics considered offensive by the Chinese Communist Party, it did not expect to be the victim of massive, powerful cyberattacks.
The cyberattacks haven't been good for Google's business model. Google's Gmail global business is based on protecting its customers' privacy rights. The cyberwarfare sent a disturbing signal to Google's 30 million Gmail accounts in China and — more important — the nearly 150 million Gmail customers beyond Beijing's control.
Moreover, rising censorship — not only in China, but worldwide as well — is also hampering Google's global business model.
"The value it is providing to its users is the globally interconnected network," Ms. MacKinnon said. "Google's entire business model and its planning for the future are banking on an open and free Internet," she said. "And it will not succeed if the Internet becomes overly balkanized."
Google's recent actions were not just aimed at China, Ms. MacKinnon contends. "Google is making a stand about the global Internet," she said.
With its Gmail accounts invaded by hackers in China, Google may also fear implication in a Yahoo-type scandal. Shi Tao, a dissident Chinese journalist, was sentenced to 10 years in prison in 2005 after Yahoo provided Chinese police with information about him after he released a Communist Party document to a pro-democracy group.
The Google-China dispute also affects U.S.-China trade relations.
"Censorship can be understood as a trade barrier," said Tim Wu, a law professor at Columbia University who writes on the wider aspects of trade policy. Google essentially exports Internet services, one of America's most important high-tech products, Mr. Wu said. "If you can't reach Google.com, that is a trade barrier," he said.
Trading potshots back and forth with Beijing, Google said it hopes to negotiate a new arrangement over the next few weeks with the Chinese government that will allow it to operate an unfiltered search engine in China. However, having decided to discontinue censoring in China, Google recognizes the next steps could be shutting down Google.cn and its offices in China — or even Beijing closing the blinds.
"China is a very large market, and companies will always look at the profitability of doing business there," said Mr. Sirkin, of the Boston Consulting Group. "But being in China isn't an absolute necessity for all companies."
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