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

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J@pan Inc Newsletter
The 'JIN' J@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
Mark Peterson, Founder of Notting Hill Cakes.
Established in Japan in 2006, Notting Hill is Japan's most
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Wholesale and corporate customers include Dean & Deluca,
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Date/Time: Tuesday, February 2nd
- Doors open at 6:30pm, Seminar starts at 7:00pm

Location: The Foreign Correspondents' Club of Japan
Language: English
Website: http://www.ea-tokyo.com

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