Wednesday, January 13, 2010

Google Take On China

It is the company that is going to take over the world takes on the country that is conquering the world, at least it seems to be.
Google announced in its official blog that it may have to close its operations in China due to a “highly sophisticated and targeted attack” on Google’s corporate infrastructure, and resulted in the loss of intellectual property from Google. In this announcement, Google is accusing the Chinese government, without clearly pointing the fingers though, that it was the Chinese government who orchestrated the attack. Dig further, however, the announcement is far more than a simple reaction to an attack.

Google has never learned how to do business in China, even with the help from former Mr. Chinas such as Kaifu Li and Shaoning Zhou. Both Mr. Li and Mr. Zhou are highly recognized and respected businessmen in the market. Google even went on the court with Microsoft for Mr. Li’s resignation from Microsoft to take a job at Google. Interference and strong positions from Mountain View heavily affected the local decision-making process, mistakes and lack of knowledge about Chinese internet users shadowed Google’s development in China for years. Mr. Zhou and Mr. Li finally resigned from Google largely because they need to spend their time more effectively with the people who are matured enough, and who are not so “smart” but are humble and cautious enough to help with their own careers. What left in Google China now are basically those who are pure corporate ladder climbers, local technology specialists who care nothing but their own computer screens, and or those “Google believers” who are yet to learn how to become a more matured and responsible person. Google wanted to copy its graduate school like atmosphere in their Beijing office, but it never did.

Google has been adopting what they found successful in other markets to China – more technology less artificial interference, more on building a sustainable business ecosystem less competing on price and surrendering quality of service, and more emphasis on the value for internet users and less on short term revenue and profits. All these are good, but enforcement has never been achieved. Careful steps and measurements have to be taken, but obviously in Google’s own China history, the company has little to tell. This is probably why when Google launched its own Chinese input product, it ran into a legal argument with, when Google launched its automatic Chinese words recommendation in Google Toolbar, it ran into pornographic problems, and when Google is dealing with the Chinese books, Google is sued for copyright infringement in China. Among all these problems, the most important one, however, might be Google’s management of the distributor system.

The majority of Chinese internet advertisers are not as skillful and sophisticated as their American or international peers. They need someone to help them to mingle through Google’s highly complicated backend system to design their key word ads, manage their budget and ad plan, and monitor the results. In China, many internet distributors act between companies and customers to provide both such value added services, and retailing of internet advertisements. Google, however, has never treated such distributors as real business partners. The strict rules posted by Google for its distributors post high demand on the cashflow of those companies. But, a more severe problem is the Google officially authorized distributors actually do not enjoy such a premium status.

To become a Google distributor in China is a hard earned process. The company has to provide proof that it satisfies certain cash requirement, it must have certain number of people to manage both the customer service and sales, it has to provide timely reporting to Google so that Google can have the most up to date information about each distributor. When a company goes through all such processes and earn the Google Distributor status, it suddenly found out that, anyone in China who has an internationally recognized credit card can open a Google account, and start to sell Google services to Chinese customers. These individuals compete with those Google distributors in China, offering lower prices and better services, without Google’s authorization, and cut through the territory of those Google distributors.

When Mr. Zhou Shaoning joined the Google China operation in 2005, Mr. Zhou helped set up the current sales network in China. But since then and up till now, the problem occurred and complained by many Chinese distributors. Google’s attitude was, not so surprisingly, leave it open. Google officially recognized the problem, but has never taken serious steps to shut those “black distributors” down. The only reason for that was the resistance from the managers in Mountain View, not the demand from the China market.

These are a brief look at some of the management problems Google China faced. Due to all such problems and not knowing what to do properly from the headquarters, Google is facing declined market shares and more competition from Chinese companies. And Google does not know what to do exactly.

Come back to Google current standoff with the Chinese government, it was originated from the government’s censorship and filtering policy, which runs against Google’s corporate principles. Google is not alone, Facebook’s services have not been available in China for more than 6 months already. Government blocked Facebook’s service mainly because it links to some Chinese human rights activists and other anti-government organizations such as Falun sect. Government censorship here, has two levels. A few years ago, I (not with Google) personally have received phone call from someone telling me to block the news concerning the party chief of a Chinese province having a unusual close relationship with some young girls from the movie industry, the person who called threatened to use his personal connections to shut down the service if we don’t cooperate. This kind of political blackmail was very common, and sometimes ran together with the central government propaganda bureau. It is very annoying, and you can say “no” if you feel that you are on the right side. Other times such as the anti Chinese government organizations, that’s the bottom line from the government and you can not touch it. And here Google again has no clear strategy, and sometimes it just got really annoyed when all small issues added up together.

And so, here comes the great statement: A New Approach to China. It is very fair to say that if Google decides to exit China, it became a lose-lose case, not a win-win situation and happy ending. Even Google and the Chinese government somehow find a solution to stay together, the damage has already been made. This is exactly the kind of decision a matured business and manager will never make. But I would reasonably assume, even if Mr. Li Kaifu and Mr. Zhou Shaoning are still with Google, they have little say in the final decision making. Google’s headquarters are so arrogant that they will never tolerate for any such deeds, even if it is a very small thing. Probably the senior managers in Mountain View and the glorious trio are thinking that, facing a declining market share and tough competition in China, it is better for the company to leave and take a moral victory.

Google is jeopardizing its future for the current gain. China’s internet market for Google is not significant, at least from a revenue standpoint. Google has been investing in China to cultivate the business, with the cooperation with China Mobile, acquisitions of XunLei and other companies. All such investments have not seen any significant returns. The most successful investment, and probably it is what is keeping Google’s operation in China now, is Google’s investment, and the following exit of Baidu, China’s biggest search engine. Google invested in Baidu with US$ 5 million to take a 5% strategic stake in the company, and exited in 2006 with more than US$ 60 million return so that, as Google announced, the company can focus its own efforts in China without any conflicts of interests. Baidu’s investment has helped Google not losing money in China. But besides that, Google has not been successful in any of the company’s operations in China. And this might be the major cause that Google’s top management is trying to figure out what the company could do more.

China’s internet market is of high significance for Google’s future development though, not from a market size point of view, but more for Google to achieve its mission. China already has the most internet users, and the local market has developed features and trends that are different from any other markets in the world. Without China, Google’s network and information will never be complete. Google will lose its faith and royalty from Chinese employees and talents. Chinese software engineers have always been a significant contribution power in the software industry. Especially under the leadership of Mr. Li Kaifu, who previously managed the Microsoft Research Center. The local employees in Google’s Beijing office were not aware of the decision from Mountain View until they read the news by themselves. They were left behind. Google may think that with a proper settlement with each of the local employees, they will still be loyal to the company. Never. Even Google stays in China and keeps everyone, some of them will still feel abandoned, and the damage is hard to recover.

Well, when I am thinking about what other damages this incident could cause, obviously Chinese customers and distributors are not on Google’s list. The revenue is not significant for the company, and the distributors are those who are using Google to make money anyway, so why do they care for now? And thus the long term damage is there then, if Google exits, don’t come back because people will remember.

Or, on the other hand, maybe the people from Mountain View are indeed that smart that, with such an event, Google will surely increase its popularity and brand awareness among the Chinese internet users. Just like a few months ago, when a Chinese interest user found out that Google provides links to many pornographic sites, it helped Google increased its traffic many times. This time Google will leverage on the Chinese government’s action to increase its traffic again. But whether this kind of traffic increase is what the company has desired is another question.

While other people may praise Google for standing on the right side of history, I would argue that Google has made a mistake due to its own complacency, lack of knowledge and experience in China, and the company’s unwillingness to learn from a different culture and market.

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