The China v. Google standoff: An end to the Chinese consumer myth?

Google has received much media attention ever since the company announced its plans to stop censoring its search results on google.cn. Until now, because Google is operating its Chinese search site from data centers outside the “Great Firewall of China”, the company has only been allowed to offer search services in China if it agrees to censor the search results according to the Chinese governments’ directions.  Even so, access to Google’s China site has been blocked in the past – most recently, under the pretext of Google not properly blocking pornography on its Google.cn site. Recent hacking attacks on the Gmail accounts of Chinese human rights activists, attacks that allegedly originated from China, seem to have been the last straw for the company, and prompted it to review its business operations in China. In what appears to be an ultimatum to the Chinese government, Google announced that it would no longer censor its search results, although the company would seek to discuss how it “could operate an unfiltered search engine within the law, if at all”.

Clearly, the Chinese government does not take kindly to ultimatums, and consequently, the only possible outcome appears to be for Google to exit the Chinese market. This is certainly a surprise move by Google, seeing that the company has fought hard and long to establish itself in the China Internet search market. It has clearly not been easy for Google since it started its China operations in 2005, although it has managed to steadily gain market share against other domestic search engines. By the end of 2009, Google had captured approximately 30% of the market, with leading search engine Baidu at about 65%. Although Google is not used to being second in many markets, the position appeared promising.  So the decision to pull out of China is certainly surprising. It defies conventional wisdom that has been telling us for the last five years that China is a market that every large brand must be in, a market that will fuel growth as mature markets stagnate, and a market that will outspend all of us by 2020. But the numbers seem pretty clear: despite all of Google’s investments, hard work and determination in China, 30% market share only translated into perhaps as little as US$200 million revenue in 2009 (this is what most analysts estimate as Google does not specify the revenue in its annual results). Comparing this to the company’s overall annual revenue of US$23,650 million gives a sense of perspective – less than a percent of the overall revenue appears to be attributable to the Chinese market.

The problem for Google is that, the allure of the Chinese market may have been true if you’re a luxury consumer goods brand, a premium Cognac or, if you’re producing cars. But for many other non-Chinese brands and services, China remains elusive – especially when it comes to Internet and media. China undoubtedly has been, and probably will remain for some time, a major driver of growth and a major accumulator of wealth. But, unlike the U.S., it's just not consumer-driven growth. While China may be an economic tiger, the country's consumer market is still a cub, relatively speaking.  And it’s a cub that still appears out of reach for most foreign companies.

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