01:11 AM

Analysis: Could $GOOG Face Problems Outside Of China For Its Opposition To Chinese Government?

Google's [$GOOG] opposition to the Chinese government over censorship of the Internet is making life difficult for its partners in China. The New York Times reported Sunday, that Chinese officials have sent warnings to Google's Chinese partners that they must obey the law.

Chinese government information authorities warned some of Google's biggest Web partners on Friday that they should prepare backup plans in case Google ceases censoring the results of searches on its local Chinese-language search engine, said the expert, who did not want to be identified for fear of retaliation by the government.

China's most popular Web portal, www.sina.com.cn, features the Google's search box in the middle of its home page. Ganji.com, another highly popular Web site, displays Google's search box in its upper-left hand corner.

Even if Google's partners stop featuring the Google search engine, just being associated with Google, in any way, could be bad for business. The Chinese government has great powers over the commercial sector and because of Google's opposition to China's laws, it could consider Google's allies to be adversarial simply by association.

The Chinese authorities are not predisposed to negotiating with foreign organizations over changing their laws. There are bad historical precedents of foreigners forcing changes in Chinese laws that have led to massive disruptions in Chinese society. The British are notorious for forcing the Chinese to pass a law that legalized opium use.

Backlash against employees...

On Saturday, the Financial Times reported that Google is concerned about a government backlash and retaliation against its Chinese employees.

The retaliation could take the form of narrowed employment prospects for Google's Chinese staff. Having Google on a resume could be perceived negatively in China, where there is a strong sense of national identity and a long tradition of suspicion of foreign organizations.

Just a few months ago, Googlelost its head of Google China, Kai-Fu Lee. Did he see the writing on the wall as Google founders, Larry Page and Sergey Brin, grew increasingly concerned about Chinese censorship?

A government backlash could potentially be extend to Google's Western business partners . For example, in early February, Reuters reported that Google is part of a Disney-led consortium seeking to buy a $100 million stake in Bus Online, a Chinese digital advertising company. Such deals require Chinese government approval.

It will be interesting to see if Google's membership of this consortium sinks the deal, or if it is asked to leave.

Beyond China...

The Chinese government could potentially punish Western companies for simply being associated with Google in non-Chinese markets.

Even just a rumor of such discrimination could quickly affect Google. With the Chinese Internet market exploding, many foreign firms are trying to build a presence in China. If those corporations fail to win Chinese government approval for their business ventures, they will lose out on sharing in the world's largest and fastest growing Internet market.

Western companies have already given Google the cold shoulder. Earlier this year the search giant asked other companie to come forward and admit they had also been hacked by Chinese agents. Intel was one of more than 30 companies hacked about the same time as Google. Although Intel admitted to the hacker attack, it denied any Chinese connection.

It's clear that Western companies already see disadvantages in siding with Google.

What is Google leaving...

The McKinsey Quarterly just published an article titled: "China's Internet obsession" [free registration] looking at the Chinese Internet market that Google will leave behind.

Here are some extracts:

...by the end of 2009, the number of Internet users in China had touched 384 million, more than the entire population of the United States. That's an increase of around 50 percent over 2008. Moreover, 233 million Chinese--twice as many as in the previous year--accessed the Net on handheld devices, partly because China's cellular providers started offering 3G services widely last year.


People in the 60 largest cities in China spend around 70 percent of their leisure time on the Internet, according to a survey we conducted in 2009. In smaller towns, the corresponding number is 50 percent. The PC is fast replacing the TV set as an entertainment hub...


One in five consumers between the ages of 18 and 44 won't purchase a product or service without first researching it on the Internet. They shop online at auction Web sites such as Taobao, paying for products and services with prepaid Taobao cards that the post offices sell for a small commission. The volume of e-commerce in China more than doubled last year.


Seismic changes are likely to take place in the Chinese consumer market because of the Internet--and we aren't talking just about the fact that 50 million Chinese may soon have to stop using their favorite search engine, Google.

It is commendable that Google values a censorship-free Internet above the value of the Chinese Internet market. Even if Google has just a 30 per cent of the Chinese search market, it's still a very significant share of a highly prized market. The behavioral data alone could be used in other markets.

It remains to be seen if Google's principled stand in China has consequences for its business outside of China.