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Google in China: Taunting the Dragon

Google’s Internet strategy in China may be corporate suicide. Is it time for the search engine giant to tone it down?

Last month executives at Mountain View, California–based Google surprised the world by announcing that hackers tried to infiltrate its software coding and invade the e-mail accounts of Chinese human rights activists. In response the Internet darling vowed to pull the plug on its Chinese search engine unless officials in Beijing relaxed their censorship rules.

It was an open challenge to China’s rulers — a move rarely made by corporate giants jostling for a solid foothold in the world’s fastest-growing consumer market — and one Google may already be regretting. Shortly after the company’s official announcement that its China operations were being reevaluated, CEO Eric Schmidt said in an earnings call he is “quite committed to being in China.”

The flip-flop was apparent; just days earlier, Google spokesman Gabriel Stricker told Institutional Investor in an e-mail: “When we launched our service in China, we did so in the belief that the benefits of increased access to information for people in China and a more open Internet outweighed our discomfort in agreeing to censor some search results. These attacks and the surveillance they have uncovered — as well as recent attempts to limit free speech on the Web even further — have led us to conclude that we are no longer comfortable censoring results in China.”

Google’s public fight with Chinese authorities left some Asian business observers stunned. “You are talking about a company — and yes, it’s a big American company — fighting the Chinese government head-on on their home turf?” asks Albert Louie, managing partner of Beijing- and Hong Kong–based A. Louie & Associates, a firm that helps multinationals manage crisis and risk in China. “You’re out of your mind. You’re committing suicide.”

Challenging China’s brass publicly and issuing ultimatums are not the way to promote change in the country, Louie asserts — and he hasn’t been Google’s only critic. The Internet search firm’s strategy in China has also been hammered closer to home. Last month, Microsoft CEO Steve Ballmer called it an irrational business decision in an interview with Reuters. “I don’t understand how that helps us, and I don’t understand how that helps China,” he said.

Advises Louie: “The correct way is to keep quiet publicly and to bring in big guns like [President] Bill Clinton and [former U.S. secretary of State] Henry Kissinger, friends of China, to win over liberal elements in the Chinese leadership as you negotiate for a fair settlement.”

Google has been playing aggressive catch-up with its biggest rival, Beijing-based Baidu, which, according to Chinese research firm Analysys International, controls 58 percent of the Internet search market — well ahead of Google’s 36 percent.

Regulators in Beijing have been censoring the Internet for years. In 2006 they shut off access to YouTube (owned by Google), and last year they removed Facebook and Twitter, saying such sites were being used by political dissidents to foment rebellion. “Google represents American values of freedom of information,” says a former Chinese journalist who’s now an investment banker in Beijing. “Its battle with authorities represents a clash of civilization between China and the U.S., and China’s government isn’t going to back down. Google offers a great service, but it’s also risking its future by threatening to quit China.”

China offers Google and its rivals the world’s biggest Internet market, with 350 million users and a lucrative search engine market worth more than $1 billion a year, according to Analysys. Google will make about $600 million, some 2.7 percent of its annual $21 billion in global revenue, in China this year, according to JPMorgan Chase & Co. in New York.

“Google is taking a bold gamble, in that they believe China will change in the future and be more welcoming and permissive to them,” says Duncan Clark, an American and chairman of Beijing-based BDA China, an information technology research firm. But, cautions Louie, “Chinese authorities aren’t so forgiving.”

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