What does the Google-China fracas mean?

Google made a big splash earlier this week by announcing that it may shutter its operations in China after the search engine company’s Chinese digital infrastructure suffered a sophisticated cyberattack. The apparent object of the cyberattack was to infiltrate Google’s Gmail service and raid the email accounts of Chinese political activists, which points the blame squarely at the Chinese government.

It is not an isolated incident. This morning, Business Week published a report suggesting up to 20 companies, including Yahoo and Adobe, were similarly attacked, and the WSJ Law Blog has reported that the Los Angeles-based law firm of Gibson Hoffman & Pancione was attacked as well.


What do the attacks mean?

Primarily and most immediately, it means that the Chinese government has chosen to ramp up surveillance and enforcement of the country’s censorship laws. Why now? This is the $50,000 question…or more accurately, 840 million. That is the expected number of internet users in China by 2013. Today, only 30% of China’s population use the internet. I think this user adoption growth rate is important, because it might explain why the Chinese government would risk censure with overly aggressive enforcement of its censorship policy, particularly absent any clear and present cyber threat. If you are the Chinese government, why stir the pot and piss people off when it’s not necessary? Why chase off large multinational corporations and the jobs, wealth, and prestige they bring?

Mostly because the Chinese government has no intention of making internet search a “business” or a “market.” Like many things in China, things are not what they seem, and the Chinese companies that provide internet search, like Baidu, have little independence or prerogative in setting policy. These companies “compete,” but not so much on the quality of search and information. It is akin to the government decreeing that all carbonated drinks can only have one formula. The many companies that sell soda would still “compete,” but their ability to sell soda relies on secondary things – like the color of the can or the attractiveness of the pitchman – because the drinks all taste the same.

Finally, the message got through to Google that the Chinese web search business is a sham. After all, if Google can’t leverage its considerable competitive advantages in search – primarily via advertising and new product development – the rationale for being in China withers away; therefore, at the end of the day, Google is making a commercial, not a political, decision. To its credit, Google has spun the story of its departure as a grand Fuck You to China’s authorities, but let’s not forget that Google had adopted a “see-no-evil” approach to China for a long time and had acquiesced time and again to China’s multiple affronts to civil liberties.


Will Google’s departure from China have a cascading effect where other companies rethink their China businesses?

Not likely. First of all, you have to consider the nature of Google’s business: information. It is by suppressing and manipulating information that the Chinese government maintains its grip on power. It is hardly going to allow Google a place at the table. The situation is somewhat different for other companies, like, say, electronic component manufacturers or chemical makers. They can operate without a lot of fuss from the government. And if you have spent considerable capital over the last ten years making China a key part of your supply chain, you’re hardly going to abandon that investment because Google can’t make a go of things in China.

Ultimately, the cyberattacks tell us nothing we don’t already know about China. You do business there at your own risk, as the legal and regulatory systems are sketchy, and the rights we take for granted – commercial and otherwise – are not operable. The rationale behind doing business in China has always been the ability to make stuff on the cheap. Executives would direct their people there to keep their heads low and to keep pumping out cheap products and semi-products that could command high profits in America.

In a best-case scenario, maybe Google’s decision will get people to think more carefully about the full impact of any future investment in China. After all, Google’s approach to China has mirrored that of most folks in the U.S. business class. The thinking was that China’s political rough edges, like South Korea’s and Taiwan’s, would soften as the country grew wealthier. Google no doubt banked on this, thinking that, over time, if it played the game long enough, the restrictions placed upon it would subside. But in fact, the trend has moved in the opposite direction, as China’s demands have grown in number and degree. Google is a high-profile American company operating in what the Chinese deem to be a sensitive area, so most companies don’t have the same set of concerns…at least for now.

I do believe that Google has made the right decision, now and for the future. What good is the Chinese market if you are subject to such malign and capricious authorities?