Seeking Alpha
Profile| Send Message| ()  

This column originally appeared in Forbes.

Google (GOOG) is so big and influential that its threat to shut its China offices if the Chinese government doesn't allow uncensored search is essentially an act of statecraft. Cutting off search and e-mail would be as serious as blockading oil to a nation. In today's global system it is easy to ignore a secretary of state, let alone an ambassador. Chief executives of big multinational corporations wield far more influence. If other foreign firms and activist investors in companies conducting business in China banded with Google, they could launch a serious threat to the stability of China, or of any country.

China's leaders fear instability more than anything else. Contrary to what most Americans think, most of China's leadership and their parents suffered terribly in the chaotic time of the Cultural Revolution. Leaders like Deng Xiaoping and Ye Jianying emerged to calm China after enduring great personal hardship at the hands of the Gang of Four. Deng's son had been thrown out a window by the Red Guards and paralyzed. Today he is a leader at pushing for rights for disabled people in China. Today's leaders were not the ones who led the chaos, and for them stability trumps everything. That is why they keep talking about internal affairs when mentioning Taiwan or Tibet. They experienced first hand the horrors instability can bring, and they will do anything to prevent a return of those horrible days. They have also seen how 30 years of economic growth brought happiness to the Chinese population. Let's not forget that the Pew Center has found that 86% of Chinese are happy with the direction the government is taking the country.

In this context, Google's actions are as irresponsible as they are brazen. Does anyone really think the Chinese government is going to bow down to the demands of a foreign media company? Google's move is similar to failed U.S. economic sanctions against Iran, Myanmar, Cuba and North Korea. Active engagement such as the U.S. has pursued with China ever since the Nixon years, not economic sanctions, is what helps bring people out of poverty and into a better life. Conversely, sanctions bolster regimes like Kim's and Khamenei's, while impoverishing ordinary Iranians and North Koreans. I fear that hardliners in the Chinese government may use Google as a pretext to crack down on more sites, just as Iran blocked Twitter and Facebook after they spread news of protests. Google's actions could do the opposite of opening up information flow.

Has Google really thought through the implications of its actions, beyond just giving up the world's fastest growing digital advertising market and the welfare of its employees and legal representatives in China? Or is this the impulsive move of an arrogant and immature leadership team used to getting its way?

Looking beyond the implications of what is, in effect, a new mode of statecraft, we should ask whether Google isn't using censorship and cyber terrorism as an excuse to get out of China because of business failings there. If Google were making more money in China, would it necessarily have taken this stand?

When China blocked Google's YouTube service a year ago, the company didn't utter a peep of complaint. Google didn't like the cost of all the bandwidth it needed to show video clips to Chinese who American advertisers weren't interested in. Then when Google's China president, Kai-Fu Lee, resigned last summer, no replacement was named. Google said it would consider servicing China from the U.S.

Which all makes it look as if Google is just using censorship and cyber terrorism as a face-saving mechanism to extract itself from its enormous failings in China. Its mistakes may have long-term effects on its bottom line. Beyond giving up search for China's 380 million netizens, the company may now find handset makers being pushed not to carry its Android operating system. That could mean a serious long-term loss of revenue in a country with 720 million mobile phone users.

Google's China experience also illustrates that anyone operating in China needs to empower local employees to make decisions early and fast. You also need a head of your business in China who has the credibility and headquarters support to champion such decisions.

People always seem to forget that by around 2003 Google had the dominant market position in search in China, followed by Yahoo!. Baidu was a distant third. Baidu became China's leading search engine only after it went public in the U.S. and raised the cash necessary to innovate with a wide range of services--while Google moved at the speed of a hippo on land.

Kai-Fu Lee, Google's hubristic former China president, failed to make Google more competitive. In our interviews with young Chinese graduates, they said they would rather work for Baidu than for Google, as I wrote in "Three Myths About Business in China." They want to be where there is no glass ceiling, and where services are tailored for the Chinese. Baidu and companies such as Sina and Tencent have been taking advantage of Google's slowness to create new China-friendly services.

Taking a business model from the U.S. and bringing it unchanged to China doesn't usually work. Google's way probably can prevail in, say, Zimbabwe, but not in China. There's too much competition there from aggressive, confident and cash-rich local operations.

eBay (EBAY) similarly got it wrong in China. It acquired Eachnet, the country's leading auction site. Customers left for Eachnet's competitor Taobao. That happened not because, as many think, Eachnet charged fees and Taobao didn't, but because eBay came in and forced its new China subsidiary to integrate with its global technology system hosted in the U.S., despite protests from the local team. That led to bandwidth problems that hurt access speeds (some people wrongly blamed the great firewall for the slowness). Shao Yibo, the founder of Eachnet, estimates that traffic to eBay's China site dropped 50% on the day eBay forced its China team to move to its global servers.

Google's actions in China not only imperil its own bottom line; they also threaten to start a slowing of Internet and media reform. Much as economic sanctions fail in statecraft, Google's actions will end up doing little good for either its investors, its partners or, perhaps most important, China's citizens.

Disclosure: none

Source: Google's Act of War on China