JIN-516 -- Google's cloud versus the Great Wall of China

Thu Jan 21 19:27:51 JST 2010

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J at pan Inc Newsletter
The 'JIN' J at pan Inc Newsletter
A weekly opinion piece on social, economic and political trends in Japan.
Issue No. 516 Thursday, January 21, 2010, Tokyo

Last week Google released a statement on its company blog that may forever
change the way in which Western companies do business in China. According to
David Drummond, Google's Chief Legal Officer, a series of Internet attacks
on Google's Gmail service, many specifically targeted at China's dissident
human rights activists, has led the company to reconsider the continuation
of its business in China.

Drummond said, "These attacks and the surveillance they have
uncovered--combined with the attempts over the past year to further limit
free speech on the web--have led us to conclude that we should review the
feasibility of our business operations in China. We have decided we are no
longer willing to continue censoring our results on Google.cn, and so over
the next few weeks we will be discussing with the Chinese government the
basis on which we could operate an unfiltered search engine within the law,
if at all. We recognize that this may well mean having to shut down
Google.cn, and potentially our offices in China."

The reaction to Google's rather dramatic statement has ranged from the
cynical to the laudatory with some calling the move a direct reaction to the
company's inability to unseat the local dominant search player Baidu (whose
stock jumped 14 percent after the statement was released) while others seem
to feel that Google's decision to cease censoring its China operation is
something that has been long overdue.

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Further politicizing the matter, in response to Google's statement, the U.S.
Secretary of State, Hillary Rodham Clinton, released the following
statement: "We have been briefed by Google on these allegations, which raise
very serious concerns and questions. We look to the Chinese government for
an explanation…"

And while there are indeed political and human rights concerns attached to
this issue, there is one line in Google's original statement that
essentially defines the tenor of the company's threat to exit China. Buried
in the middle of the statement, Drummond wrote, "We have already used
information gained from this attack to make infrastructure and architectural
improvements that enhance security for Google and for our users." Although
the wording may sound like run-of-the-mill service language from a large
corporation, what this sentence points to is Google's chief concerns related
to cloud computing and the larger issue of possibly state-supported
industrial espionage.

In the days following the statement it was revealed that Adobe and a number
of other companies were included in the attacks, further buttressing the
belief within IT security circles that this issue is more about corporate
secrets and propriety code rather than West versus East political/cultural
concerns.

According to reports, Google’s China revenue, which is projected to reach
$600 million this year (last year it was approximately $300 million),
amounts to just 2 percent of the company's overall projected revenue of $26
billion. Nevertheless, the closing of Google's China office would mean
downsizing around 600 employees, and losing any foothold in one of the
fastest growing Internet markets on the planet.

Even considering the specter of corporate espionage, such a massive retreat
on Google's part might seem a bit heavy handed, until you think about the
business culture of China. On the streets of Beijing a common phrase, that
has no doubt permeated the upper echelons of Chinese business, states: "Neng
pian, jiu pian" (if you can trick them, then trick them). It's not a stretch
to assume that this Chinese business culture approach is the same brand of
thinking that has allowed nearly perfect bootleg versions of Western
products such as iPhones, film DVDs, clothing and even automobiles to be
sold openly on the streets of China with little to no legal repercussions.
What some are painting as a political issue may actually be a business
culture issue.

While Google's failure to unseat Baidu in China might lead some to compare
the situation to Google's inability to surpass Yahoo Japan, the two
situations are vastly different. In Japan, Google faces the cultural hurdles
common to all non-Japanese companies hoping to unlock the mind of a market
that thinks quite differently from the West. But beyond that admittedly
significant factor, the playing field is usually even due to a system with
enforced laws designed to protect intellectual property. The recent
statement from Google indicates that the playing field in China (at least in
the eyes of Google) is not quite even enough to warrant continued attention
and investment.

But optimists hoping that the recent string of events will somehow spur a
mass exodus from China on the part of Western companies following Google's
lead would do well to examine the entire picture. Despite issues of
corporate espionage and lax attention to IP law, China still services a
large portion of the Western world when it comes to cheap labor and the
manufacturing of hard goods. To this point, while the streets of Beijing are
littered with fake iPhones, the fact remains that China is where iPhones are
built, and that manufacturing relationship is vital not just to Apple, but
to a number of companies based in the West.

As the political and international market fallout from Google's grandstand
continues to play out, we'll make a couple predictions:
1. China will not back down, or change its policy on local Internet
censorship, thus calling Google's bluff—forcing the company to stand behind
its words or lose credibility.
2. The adoption of Google's Android mobile phone platform will not become a
major global standard and proliferate if Mountainview sticks to its guns
regarding China. In the short-term, this will greatly affect the fate of
Google's popular new Nexus One phone.
3. Baidu (number one in China, and the third largest search engine in the
world, just behind Yahoo) will, if they're clever, use this moment to
highlight what some feel is a sense of entitlement on Google's part and
aggressively enter new Western markets.

Adario Strange
Editor-in-Chief

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Entrepreneur Association of Tokyo - Seminar
- Tuesday, February 2nd

Speaker: Mark Peterson, Founder of Notting Hill Cakes

Start off the year with something sweet and join us to hear
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