Google: How to Blow Business Opportunities in China

by: Diane Mermigas

Google’s (NASDAQ:GOOG) latest double dare to China kicks troubled US-China relations into purgatory. Now, any action China takes against a belligerent Google could tip the broader, delicate scales.

Google is rerouting its Internet search through its uncensored Hong Kong site to defiantly avoid repressive Chinese control. The Chinese government already is limiting some queries and access to the unfiltered site, which it can completely cut off at any time.

For now, Google maintains its advertising sales, research and Android operating system for mobile devices. Local partners such as China Mobile (NYSE:CHL) and China Unicom (NYSE:CHU) are considering or have already decided not to do business with Google under pressure from the Chinese government. A bug in the search engine’s code that temporarily played havoc with some of Google’s corporate information pages Wednesday heightened the intrigue about where Chinese retribution and hackers will strike next.

GoDaddy today said it no longer will register domain names in China because the government demanded identifications documents on clients.

Google co-founder Sergey Brin, who migrated from the Soviet Union as a child, has openly criticized Cisco (NASDAQ:CSCO), Microsoft (NASDAQ:MSFT) and other US firms that enable or comply with Chinese restrictions in exchange for business profits. Google officials testified before Congress this week, imploring action against governments that filter search results as a violation of individual rights. But Google has to know deep down that China is simply a place where companies abide by the rules or simply do not do business there.

The almighty Google doesn’t appear to have come to grips with the fact that it isn’t going to be in control everywhere, even though its share of global search advertising could go from nearly 74 percent to 90 percent in five years, according to Credit Suisse. Gradually withdrawing and being jettisoned from China does nothing to help Google’s business partners, shareholders, customers or employees. China’s Tencent (OTCPK:TCTZF) tramples Microsoft’s instant messaging service there and Yahoo has capitulated to the locally owned Alibaba — both of which will reposition behind China’s leading search engine, Baidu (NASDAQ:BIDU). Other US-based Internet giants have had to give up something to remain in China rather than just get out.

So by trying to find a way to stick it out in China, Google might not be doing something heroic as much as pragmatic. Google must be unimpeded in delivering search results in order to maximize its sale of advertising. Google has much more at stake in China than two percent of its total revenues today from search advertising.

Its future revenues of all kind in China (including its new Android-driven smart phones) could be far more substantial in a dominant global market so big that smaller competitors there means reap huge rewards.

With that in mind, here are some hefty long-term considerations as Google determines its next move in China:

  • Scuttling its own business fortunes in China, directly or indirectly, will prevent Google from benefiting from the eventual fallout from an inevitable showdown between the US and China. With Washington’s increasing anger over China’s currency manipulation and the Chinese regulators growing more aggressive, a damaging trade war could yield some positive considerations. Google has encouraged the US government to take a stronger stand against increasing Chinese surveillance and hacking of corporate websites.
  • China’s explosive growth in mobile Internet trumps every global opportunity. Google clearly does not want to turns its back on nearly 400 million Internet users in China, up 50 percent from 2008, more than one-third of the world and already more than entire U.S. population. About two-thirds of Chinese Internet access occurs on hand-held devices. Mobile subscribers are expected to nearly double to nearly $1.2 billion users by 2013, boosting penetration levels to 86 percent.
  • What McKinsey & Company refers to as the Chinese “obsession” with the Internet will generate close to $4 billion in online advertising revenue in 2010, growing at 36 percent and doubling to $8 billion by 2013, according to eMarketer.
  • Asian-Pacific e-commerce is growing at 23 percent annually to nearly $170 billion in 2011, a big chunk of which will be from China, according to e-Marketer. China’s estimated $43 billion in online retail and e-commerce revenues in 2010 will more than triple to $141 billion by 2013, according to iResearch. Retail sales were more than $1.6 trillion at the start of 2009.
  • China’s Internet users living in the 60 largest cities spend 70 percent of their leisure time on the Web. More than 70 percent of Internet users age 16 to 54 have created a social network profile.
  • As the dominant content aggregater, Google inability to participate in China’s Internet growth will be the loss of many US-based publishers and video producers, which want a piece of the action. Google CEO Eric Schmidt concedes that in five years, Chinese language content will exceed English language content on the Web. Google’s search engine, Android operating system and other endeavors will help to keep English language content in the game.
  • Other US multinationals such as IBM (NYSE:IBM), Dell (DELL), and Coca-Cola (NYSE:KO) succeed by embracing a more “one-world” approach by investing in and integrating their China footprint with the remainder of their global operations, according to Booz & Company’s strategy + business. Why bother? More than half of US-based company in China have report their operations there post higher margins than their worldwide averages.
  • As is evident with the meteoric rise of Baidu, the new China is adept at learning from western companies and matching them, with their authoritarian government’s blessing. “The next five to 10 years will see the emergence of a new generation of Chinese companies, bigger and leaner, and better able to compete, and prepared to operate on a global basis,” according to strategy + business author Edward Tse. That means Google’s China problems are just beginning.

Disclosure: No positions