Google's China Threat Upends Business Norms
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By IAN JOHNSON And JASON DEAN
BEIJING—Google's threat to withdraw from China over censorship and cyberspying is a sign of a growing willingness among foreign companies and governments to overturn the conventional wisdom that has defined decades of engagement by the West: that China is so big that it must be accommodated.
While the U.S. Internet giant's move isn't likely to be emulated by other big foreign companies, its unexpected defiance is certain to fuel debate over business relations with China. For years, Western companies have accepted that business is done a certain way in China—agreeing to government interference that wouldn't be tolerated elsewhere, from stifling free speech to setting up Communist Party cells. And over the past generation, outside political leaders have drawn a similar conclusion, choosing to play down human rights in the hopes of effecting change.
This has been driven by China's rapidly increasing importance. Already the largest market for everything from cellphones to a range of commodities, China surpassed the U.S. last year as the biggest market for cars. It supplanted Germany as the world's top exporter, and is on pace to pass Japan this year as the second-biggest economy after the U.S.
But as Google's move shows, China's rise is being accompanied by growing tension with the outside world over policies and practices that defy international norms and that many in the West are finding more unpalatable. On the economic front, Beijing has frustrated many trading partners by keeping its currency low and subsidizing exports, policies that undercut other countries by making China's goods artificially cheap.
Politically, countries have been alienated by a string of human rights issues, from an Australian mining executive arrested and held incommunicado for seven months to a British man widely regarded in the West as mentally ill being executed for drug trafficking. Even climate change is being laid at China's door, with foreign diplomats taking the rare step of saying China watered down the recent Copenhagen accord.
"Everybody feels that it's not related to my business," says Jörg Wuttke, head of the European Chamber of Commerce in China. "But when one after the other happens, you wonder what the heck is going on here."
One reason for the reassessment is that Google claims that China-based hackers breached its security—and that of many other foreign companies in a variety of sectors, including finance, technology, media and chemicals. Google said it was contacting the companies involved but so far no names have surfaced.
"It's a worry because companies already feel they are vulnerable in China to having their proprietary technology stolen," said an executive at a finance company.
The allegations have already caused a high-level political reaction, with U.S. Secretary of State Hillary Clinton called on China "for an explanation" of Google's allegations. "The ability to operate with confidence in cyberspace is critical in a modern society and economy."
The Google syndrome caps growing complaints by foreign businesses over a deteriorating business environment. Both the European Chamber and the U.S. Chamber of Commerce in China have issued reports sharply critical of China's business environment. During the 1980s and '90s, foreign businesses were assiduously courted by China's leaders and responded by bringing to China technology, training and international best practices.
In recent years, however, foreign businesses have complained that the official line has shifted. Younger bureaucrats are more nationalistic and skeptical of the value of letting in foreign companies, Mr. Wuttke says. Last year, for example, foreign executives said bidding practices for wind energy were rigged to exclude foreign companies.
"There's a general attitude in the foreign business community that it's getting tougher to do business here," said James McGregor, a senior counselor at APCO Worldwide and author of a book on doing business in China. "This could be a bellwether."
Even in the business world, where open conflicts with the government are extremely rare because companies fear angering regulators, last year saw two major confrontations between authorities and foreign businesses over government initiatives. When the Chinese government in June tried to force personal computer makers to include Web-filtering software known as "Green Dam" with all new PCs in China, foreign business groups representing scores of major technology companies publicly criticized the move and called on China's leadership to reconsider. Authorities announced an indefinite delay to the plan on the eve of its July 1 start date.
Then, late in the year, a similar group of companies and business groups banded together to decry—again publicly—government rules that state agencies buy technology products containing domestic intellectual property. The companies said the measure was discriminatory and protectionist. That issue remains unresolved.
Companies say these problems are endemic to doing business in China. "In order to cultivate local companies, the government has been loose on local companies' illegal practices, such as not issuing tax invoices," said Vito Lin, vice president of China operations for D-link Corp., a wireless and broadband devices developer from Taiwan.
Some analysts caution, however, that Google's troubles with China might also be connected to business concerns. Google enjoys a 35% market share in China, a figure that is growing, but its profitability is open to question, says Tom Doctoroff, managing director of J. Walter Thompson. Chinese Internet users engage in relatively little e-commerce, which stymies the ability of companies like Google to make money. "We should not ignore the operational difficulties that Google has had in penetrating this market," Mr. Doctoroff said.
Other skeptics of Google's explanation noted that the company accepted censorship in 2006 as a pre-condition for entering the China market. It also deferred to government anger over its plan to digitalize books and apologized to a Chinese author for scanning parts of her book—a step it hasn't taken in other countries, where it routinely scans books without paying copyright fees.
Google would have an easier time quitting China than other companies. Although its business there has been growing, it is estimated to be only a few percentage points of its total revenues. That's a sharp contrast to companies like General Motors Corp., for which China is a crucial market.
Even before Google's entry into China in 2005, the company was agonizing over its strategy. Google co-founder Sergey Brin, whose family left the Soviet Union when he was a child, expressed caution over China. "We felt that perhaps we could compromise our principles but provide ultimately more information for the Chinese and be a more-effective service and perhaps make more of a difference," Mr. Brin told reporters in June 2006. But, he added at the time, "It's perfectly reasonable to do something different, to say, 'Look, we're going to stand by the principle against censorship and we won't actually operate there.'"
A senior Microsoft Corp. executive said that "Google would do disservice to Chinese people" by leaving China because Google censors its Chinese search results less aggressively than Chinese local competitor Baidu and other Chinese portal companies. A pullout by Google would strip Chinese Internet users of a good alternative, the executive said.
Inside China, some Internet activists were elated by the news. "I think this is a big challenge to the Chinese government now," said Isaac Mao, a blogging pioneer in China. He said removing itself from the Chinese market would enable Google to use its superior technology to create tools for users to circumvent Internet censorship. Google has "enough computing power to do that," he said.
Mr. Mao says that any government action against Google for discontinuing its content filtering will, like the Green Dam incident, "cause more people to be aware of the censorship problem." "I have seen lots of responses from Internet users today, in blogs and forums," he said. "It's definitely a good move from Google. I applaud that."
—Ting-I Tsai in Taipei and Loretta Chao in Beijing contributed to this article.
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