The Google Syndrome: China's Corporate Woes

Rob Silverblatt

When Google moved to extricate itself from Chinese censorship laws, it set in motion what could easily have passed for a prearranged choreography.

In the opening salvo, Google's stock price took a hit, and its downward slide continued. Almost in tandem, Baidu, China's homegrown search engine, has shot up in value because of the prospect that it may no longer have to share its lucrative market.

And right on cue, a Chinese official issued a harshly worded rebuke. "Foreign companies operating in China must abide by Chinese laws. Google has violated the written promise it made on entering the Chinese market," the unnamed official said, according to state-run Xinhua News Agency. "We firmly oppose politicizing commercial issues and express our dissatisfaction and anger at Google Inc.'s unreasonable accusations and practices."

Meanwhile, the Chinese government, as expected, has begun restricting access to Google.com.hk, the Hong Kong-based service to which Google began routing all Chinese users yesterday in a bid to circumvent Beijing's censorship laws.

So far, then, all has gone according to script. What will happen next is far more difficult to predict. Notably, as business relations between the United States and China sour, many see Google's partial exit from the Chinese economy--the company still hopes to maintain a limited presence in mainland China--as a test case that other foreign firms will use to evaluate whether they can afford to ruffle Beijing's feathers.

"I think it can be seen as part of a broad deterioration in the business environment in China," says Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics. "It's part of a broader picture in which regulations and other things have moved in a direction that makes it more difficult for foreign firms to operate there."

But will other companies follow Google out the door? "That's the $64,000 question," Lardy says. "The pattern in the past has been the foreign firms complain--sometimes justifiably, sometimes not--whenever they see things moving in a direction that they don't like. But the number of significant firms that have ever withdrawn from the market is extremely small."

Still, Google's public hand-wringing is hardly the only incident to draw attention in recent months to the fraying ties between the Chinese government and foreign businesses. Notably, a rash of protectionism and the high-profile trial of four executives from the mining company Rio Tinto have catapulted the issue onto the international stage.

Even before Google's announcement, the Chinese government began taking steps to assuage the fears of foreign companies. "China welcomes multinational companies from around the world," Chinese Premier Wen Jiabao told a group of business leaders yesterday, just hours before Google released its decision. "We will create opportunities for you, and I hope you will not miss out on those opportunities."

And even as Chinese officials slam Google, they are taking a conciliatory approach toward the overall theme of the country's corporate climate. "The Google incident is just an individual action taken by a business company, and I can't see its impact on China-U.S. relations unless someone wants to politicize that," Qin Gang, a spokesperson for China's Foreign Ministry, said at a press briefing. Qin added that the Chinese government "encourages and promotes" Internet-related developments.

In the short run, it's unlikely that companies will mimic Google's stand. But in the long term, experts say, it could have some downstream impacts. "The [Chinese] government is less tolerant of criticism and increasing its focus on helping local companies and deterring foreign competition," says James Oberweis, comanager of the Oberweis China Opportunities mutual fund. "I'm sure other companies are thinking about those things."

Still, even if they are inclined to follow in Google's footsteps, other companies could find it much more difficult to leave the Chinese market. For starters, Google derives somewhere in the neighborhood of 1 to 2 percent of its revenue from China. While this represents a potentially painful loss, it's hardly enough to cripple the Internet giant. For companies that depend primarily on China for their earnings, it's a different story.

Another salient issue is that many U.S. companies that have offices in China are in manufacturing, meaning that they have invested substantially in machinery, warehouses, and other physical assets. "They have a lot more constraints than a technology company like Google," says Lardy.

Overall, then, it appears that most of the immediate fallout from Google's departure will be contained to the fringes of the global economy. But that's not to say that there won't be some reshuffling in the Chinese market. Notably, Baidu is expected to step in to fill the void left by Google.

According to the Beijing-based research firm Analysys International, Baidu already controls 58 percent of the Chinese Internet search market, compared with Google's 36 percent market share. Depending on how far the Chinese government goes to disrupt users' access to Google's Hong Kong site, Baidu's piece of the pie could balloon almost overnight. "In the short term, it's great [for] Baidu," says Oberweis. "Baidu will be the beneficiary of Google's loss in China."

At the same time, though, Oberweis says that if Baidu gains a stranglehold on China's Internet search market, users could be put off. "Clearly, Internet growth in China is on a tear right now, and irrespective of this situation, I think it will continue to grow," he says. "But it might grow a little bit less quickly if Baidu, with strong government influence, is the experience that Chinese consumers are forced to [accept]."