Googles Decision to Withdraw From China

By Henrique Schneider

``Remember: first, you have to be in China. Second, if you are in China, you play by their rules, otherwise you will be shown to the door." These are the two main assumptions made by American and Europeans companies on doing business in China.

As everyone, from the multimillion steel corporation to the handcraft pottery manufacturer, wants to enter the Chinese market, the recent decision made by Google raises some doubts on both assumptions.

Some might say that the China-business accounted just for 1 percent of Google's gross revenue and that the company was becoming frustrated by being No. 2 in the market.

On the other hand, Hyundai is in many markets the second or the third biggest company and still very profitable. Google's business in China was small compared to the firm's other engagements but successful in comparison to overall entrepreneurships in the country. In particular, Google's business in China had growth-potential.

Challenging the ``must be in China'' religion is one thing ― many unsuccessful companies did so whereas Google is the first major, successful firm to act likewise. Something completely different is questioning the assumption that publicly demanding policies is the ultimate homebound ticket out of the country.

Playing by Chinese rules often meant accepting suboptimal standards in legal protection, problematic terms of trade and production and a disadvantageous position when dealing with the government.

Naturally, these rules and thereof arising complications, apply to outside investors as well as to inland entrepreneurs other than policy-backed companies. Basically, everyone was expecting the government to show Google the door ― without its best wishes.

This did not happen! Indeed, Chinese officials were very cautious in their reactions, openly saying that there still are ideas to negotiate or even taking articles criticizing Google's decision from the Renmin Ribao or other media.

Of course, trouble increased as Sino-American politics got involved, but even to this stance, the Chinese reaction has been rather moderate.

The government does not want to raise issues that have the potential to create trouble.

First, through technological development, Chinese censorship is becoming more effective and second, officials do the math and know that some actors and investors are sympathetic to Google's position. There is no point in risking losing them by making a fuss about the decision of only one company.

How can Google's call be read for the future of business relations with the Middle Kingdom? There is a positive and a negative interpretation and by now, no one knows which the correct one is.

The negative reading is critically questioning whether engagement actually has positive consequences for the Chinese public.

Until now, most firms defended themselves by claiming that by providing their services, for example blogging technology, in the Chinese market, they will wake the hunger for more of the same and also draw attention to the officially blocked sites or aspects of a technology. Thus, they would be contributing to China's opening.

Basically, this call relies on a claim made by development economics postulating that the more economically developed a nation is, the freer it becomes.

Google tried this for a year; it did not succeed in opening China, it was the aim of an alleged attack and knows that it will not free the country; with its walking away from China, the development thesis can be doubted.

On the other hand, there is a positive view on the consequences of Google's actions. If government officials are really willing to negotiate with the company, if a company can show another way to go, then perhaps there is a different style of communication and negotiation accessible to the private players in China.

If this is the case, why not try something new and treat Chinese business partners as every other, demanding even from government-backed companies to fulfill their part of the contract and not accepting disadvantageous trades just for the sake of being there?

As the negative spin seems too defeatist, the positive interpretation itself cannot be entirely true. Without a doubt, however, the frenzy of some Sino-American politics is a downside to Google's decision.

By turning it into an (un-)diplomatic problem between two states, we will never be able to see the consequences of the influence private businesses can have on China if they make public demands. All the potential goods of Google's walk-off are already being censored ― not by China but by predatory politics.

Henrique Schneider is a traveler in Asia as well as political analyst. He works as a consultant and analyst in Vienna, Austria, and publishes regularly in German and English on economic and security issues related to China and other Asian countries. He can be reached at hschneider@gmx.ch.