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Google’s China retreat resets expansion plans

SAN FRANCISCO - Google Inc delighted free-speech advocates as it threatened to pull out of China over censorship and cyber attacks, but the move upends one of the company’s most important growth initiatives.

Analysts said Google’s decision is tantamount to exiting the world’s largest Internet market, with more than 360 million users, since it is highly unlikely the Chinese government would allow Google to operate an unfiltered search engine.

But the decision does not necessarily mean Google will abandon China entirely, as it could follow the footsteps of other U.S. Internet companies that have chosen to partner with local companies instead of maintaining their own sites.

“China is in our view one of the most attractive consumer Internet markets. We think it (Google) is generating $200 million in annual revenue from China,” said Sandeep Aggarwal, analyst at Collins Stewart.

“But this kind of attack they cannot afford to have as a global player. That’s why I think they’re evaluating whether they should basically withdraw from the country.”

Google controls about 31.3 percent of the Chinese search market, versus 63.9 percent for local search powerhouse, Baidu Inc, according to Analysys International.

Annual search revenue in China is estimated to be more than $1 billion.

Google’s second-place standing in China means it won’t feel an immediate sting if it does close shop there. Analysts estimate revenue from China to be a fraction of the roughly $22 billion in annual revenue Google generated in 2008.

Google said on Tuesday it may pull out of China after uncovering a sophisticated cyber attack on the email accounts of human rights activists. The company said the attack originated from China, but would not speculate on whether the Chinese authorities were involved.

However, with growth slowing in mature markets such as the United States, Google needs all the sources of growth it can find and China is a strategic market for most technology companies.

“Just about every earnings call recently has been that they are focused on the long term growth opportunities for China and that they are committed,” said RBC Capital Markets analyst Stephen Ju, describing Google’s move as a “complete 180.”

“Others have pulled out already, so I guess Google pulling out would not be model breaking,” he said, but nonetheless described Google’s move as very surprising.

In 2005, Yahoo Inc handed over exclusive rights to the “Yahoo China” brand and folded its Chinese mail, messaging and other operations into the Alibaba Group, in a $1 billion deal that gave Yahoo a 40 percent stake in Alibaba.

In 2006, eBay Inc folded its Chinese operations into a new venture controlled by a local partner as it switched tack in a fast-growing market where it has struggled.

The U.S.-based Web auction giant put its China business, acquired when it bought local auction site EachNet for $180 million, into a joint venture with Tom Online, a Beijing-based Internet portal and wireless services firm that is partly owned by Hong Kong tycoon Li Ka-shing.

Filtered Vs Unfiltered Site

Google launched its Chinese-language search engine google.cn in 2006, and the site complies with local laws requiring censorship of certain items such as pornography and “vulgar comment”.

“There were a lot of problems that hamstrung Google, but not all of them had to do with Google being picked on by the Chinese government,” said Kaiser Kuo, China Internet commentator and former director of digital strategy at Ogilvy China.

Analysts have said that working with a local partner in China could help Google get a better competitive footing in a foreign market with different languages and customs.

But it could also expose Google to some criticism after having taken the stand it would not countenance Chinese censorship.

While Google could stop operating the filtered Google.cn site, one analyst said some Chinese users might still use the company’s flagship English-language site, Google.com.

“If they do pull out of China and shut down their offices, it shows that they are not that committed to this giant Internet market,” said JP Morgan analyst Dick Wei.

“Before 2006 and before Google.cn came to China, I think market share for Google was over 20 percent, I don’t think if they pull out of China it will go down to zero. It will still be a substantial (market) share from Google.com, about 20 percent,” he said.