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Should Google pull out of China?

February 3rd, 2010Uncategorized 8 Comments

(Google Headquarters in Beijing - Image provided by M Weitzel via Wikipedia)

Given the complexity of the moral, ethical and business-case considerations involved, there are no easy or straightforward answers to the dilemma confronting Google with regard to the future of its Chinese operations.

But given the recent security breaches, the pendulum has swung a long way, and the case for leaving China – from both ethical and business case viewpoints – has surely grown much stronger in recent weeks.

Google’s announcement to review it’s Chinese Operations
As most of you will already be aware, Google released an announcement on January 12 to the effect that the company’s operations in China are under review, following: (a) the discovery of a highly sophisticated and targeted cyber attack on the firm’s corporate infrastructure, with the primary goal of accessing the accounts of dozens of human rights activists in China and elsewhere; and (b) a decision that the company is no longer willing to censor search engine results in China.

Although not saying anything to pre-empt the outcome, the announcement does make it clear that partial or complete withdrawal from the country is a serious prospect.

Previously, the company’s operations in China were OK …
Prior to the discovery of the attacks, Google’s approach toward China appeared to be sensible and pragmatic.

To be sure, the censorship of search engine results to which the company agreed in 2006 did go against one of the basic fundamental principles of the online world (freedom of expression and information flow).

But it was necessary. Without agreeing to censorship, operating effectively in China would have been virtually impossible (prior to the agreement, Google’s uncensored engine, Google.com, had apparently been blocked by the Chinese government on an intermittent basis – refer article), and any stand made by the company regarding censorship would almost certainly have cost it the chance to properly exploit opportunities within the country – a price which surely would have been too high given the size and potential of China as a market.

And from the viewpoint of Chinese netcitizens, any Google service, albeit a censored one, was better than none at all prior to the censorship agreement when the service was so frequently blocked.

… but the security breaches change everything
But recent events have shifted the pendulum a long way, and both the ethical and business cases for leaving have become much stronger.

Even now, ethical considerations are a long way from clear cut. Any withdrawal on the grounds of censorship would hurt Google’s Chinese staff and customers much more than it would the Chinese government. And even despite the recent attacks, human rights activists in China would almost certainly be safer using online services from Google than those provided by domestic Chinese firms.

Still, the company does now have to think long and hard about whether or not it can be confident about the secure provision of some services, especially in light of the apparent sophistication of the attacks. Given this, along with ongoing reservations about censorship, the moral case for withdrawal has grown stronger.

So too has the business case. Most obvious is the risk of backlash in rich world markets. Already significant given the contention surrounding the censorship issue, the risk to Google of backlash associated with the continuance of operations in China is bound to intensify, especially if netcitizens remain unconvinced about its ability to provide Chinese services without jeapoardising the security of human rights activists.

This matters. China represents only a tiny portion of Google’s worldwide operations (see below), and the effect of the company’s strong moral pulse as a source of competitive advantage in western markets should not be underestimated.

(Google’s Chinese operations derive about $300 million in revenue, compared to an aggregate figure $22 billion for its global operations – refer article)

Besides, Google’s experience in China has always been problematic. The company’s market share in its core search business is languishing at fifteen percent (refer article), and outside of search, many of its other businesses continue to experience problems relating to government censorship (at present, You Tube, Picasa and Blogger are all blocked – refer article).

Add all this up and there might just be a fair case for withdrawal anyway – even if it weren’t for ethical considerations.

Conclusion
There are no straightforward answers to the questions facing Google over the future of its Chinese operations.

But for now, the pendulum has swung in favor of an exit – whether partial or complete.

8 Responses to “Should Google pull out of China?”

Brad Shorr Says:
February 3rd, 2010 at 10:12 pm
Andrew, What an amazing predicament. China is THE business ethics story of our times. I don’t know whether it will be this issue or something else, but sooner or later, the clash between ethics and profits will come to a head on a massive scale. So far, all parties have been more or less content to turn a blind eye to serious human abuse and heavy handed government tactics in the pursuit of enormous business growth opportunities. But sooner or later something has to give. But it’s a precarious balance. Sooner or later, the Chinese government is going to become more oppressive, or more open. I am continuously amazed that here in the U.S., companies are pilloried for investing in Iraq and Saudi Arabia in pursuit of oil profits, but by and large, people either don’t care about or encourage a strong business presence in China.
Andrew Says:
February 4th, 2010 at 8:40 pm
Brad,

That’s an interesting observation.

I suppose one of the reasons why oil companies in particular who operate in the middle east and elsewhere cop so much criticism relative to firms with substantial operations in China may boil down to the nature of oil and mining activities and the extent to which they directly impact local communities.

Exploratory and production related activities do tend to have a very large impact in themselves upon local areas in which they operate, not only from a strictly environmental perspective but also in terms of the effect on local agriculture and potential displacement where land grabs occur in order to make way for drilling. Also, most of the output is consumed by the rich world, with local communities seeing very little in terms of direct benefit of usage for the finished product.

I’m sure there are land grabs etc. in China too, but from what I understand (correct me if I’m wrong), a lot of the investment taking place there is going into manufacturing and assembly of final products, activities which, by their nature, are not as disruptive to local communities as oil drilling and exploration. And with many companies now manufacturing in China for the domestic Chinese market as well as export, ordinary Chinese citizens are starting to benefit from their output as consumers.

(I am, of course, over-generalizing quite a bit)

Obviously given the flagrant disregard of human rights shown by the Chinese government in recent years, the operations there of multi-nationals deserve should be placed under some scrutiny. But as long as manufacturing and other activities in China are more directly beneficial/less directly harmful than the exploratory activities in the Middle East, I guess they will continue to receive less criticism.

I personally would not criticize any company for choosing to invest in China per se. It’s a huge market and companies which observe basic human dignity in their own operations should not, I don’t think, feel any guilt about exploiting their opportunities in the country. After all, companies can only control what they do. They are not responsible for government misbehavior.
Brad Shorr Says:
February 4th, 2010 at 9:02 pm
Hi Andrew, Good points, and I agree with much of what you say. In terms of environmental disruption, I don’t know enough about either the Mideast or China to reach a conclusion, but I’ve heard that air pollution and other types of pollution are rampant in the industrialized sections of China. In terms of distribution of wealth, I believe the problems in the Mideast have much more to do with the host governments than the companies investing there. The enormous disparity in wealth between rich and poor is a massive problem in that area of the world, to be sure. At the end of the day, I’m with you in thinking that investment in China is better than investment in the Mideast, although my reasons are somewhat different. In addition to the reasons you offer, which I agree with, I think if we engage with China, there’s hope for political and social change. In the Mideast, history tells us there is little hope for change, at least positive change. In my lifetime, conditions there have mainly deteriorated in every respect. In addition, our investments in the Mideast contribute to strengthening extremist political forces that are intent on destroying us. This is not what I would call a wise investment. Better for us to become self sufficient in energy.
Andrew Says:
February 6th, 2010 at 7:34 am
Brad,

There is certainly hope for China and there is precedent in the area as well – South Korea.

After the Korean War, South Korea had a poverty level equivalent to that of some of the worst African countries. Then, around about the 1970′s the country underwent massive economic development under a visionary but still dictatorial military leader. So the South Korea of around 1980 was roughly equivalent to the China of today – becoming economically developed but still suffering from lack of political freedom, with the crushing of any form of dissent.

But things changed again throughout the 90s and today, the country enjoys full and proper freedom in virtually all aspects of life: political freedom, economic freedom, religious freedom and freedom of expression. Better yet, freedom and economic development have not come at the expense of their core values, like Confucianism (a philosophy on how individuals should behave and act as part of a society) and social harmony.

So the Koreans have found a way blend in freedom and economic development without compromising the core values which define them as a society. The Chinese have a wonderful example from a close neighbor. Let’s hope their story follows a script along similar lines.
Fred H Schlegel Says:
February 7th, 2010 at 7:01 am
It will be interesting to see how the Google/China conflict unfolds. I tend to be more on the side of engagement over sanctions because it gives both sides time to come together. While I’m not a fan of how China operates it is more open today than it was 30 years ago. Compare that to what has happened in Cuba or even Iran, both countries that have lived without US support for decades. The thing that backfires when we turn our backs is that it almost always strengthens support for a government. No government exists without at least some complicit acceptance by the population – that acceptance may be strengthened when they see their country under attack.

China explains most of it’s censorship as trying to protect citizens from porn. In the more free world we know that it is difficult to censor one form of speech without stepping on the toes of another. In China I assume that the porn issue is a handy way to censor political speech – but that doesn’t mean the majority of their population understand this. Free speech is something we have come to live with – but it’s only been 50 or so years since the post office in the U.S. was actively searching for porn and prosecuting folks who mailed it across state lines. Pin-up magazines like Playboy and Hustler regularly walked a line that the majority accepted.

So when Google leaves all that is left is the Chinese search company, leaving no one to provide the pressure for more openness that our culture believes is right and good.
Andrew Says:
February 9th, 2010 at 7:19 am
Fred,

I guess it is hard for western companies to have a positive influence within China unless they have a presence in the country.

Still, the company should only stay if it feels that: (a) there is a strong business case for staying (most important); and (b) it can play a more constructive role (in terms of benefiting users, employees and Chinese society as a whole) through maintaining a continued presence in China than it could through any moral stand which caused it to leave the country.

Difficult decision.
Mark Says:
February 11th, 2010 at 6:24 am
Andrew,
You have presented this situation very well. It is a complex issue that has up and downsides no matter what the final decision is. Interesting!
Andrew Says:
February 11th, 2010 at 12:17 pm
Thanks Mark.