Principles versus profits

The saying that ‘the past is a foreign country, where things are done differently’, explains much in the dynamic internet world, where new ideas grab hold at breathtaking speed and reset business priorities.

When WiC first reported on Google’s retreat from the internet search business in China (see WiC54) behemoth brands like Uber, WhatsApp and Airbnb were in their infancy and Instagram and Snapchat weren’t even around.

Over in China WeChat wouldn’t make its debut until a year later, while the unicorns currently stampeding their way through the Chinese tech sector couldn’t even be imagined.

Google gave up on web searches in China eight years ago after refusing to give way on local censorship rules. In keeping with its corporate motto ‘Don’t be evil’ it looked like the Mountain View-based firm was putting its principles before profits. So there was quite a stir this month when it was reported that the Californian giant has been developing a search engine app for Chinese smartphones that will respect local sensitivities after all.

The People’s Daily tried to sound magnanimous about welcoming Google back, although it made clear that “it must comply with the requirements of the law” to restart its search business.

Nor could it resist a dig at Google’s previous departure, describing it as a “huge blunder that resulted in the company missing golden chances in the mainland’s internet development”.

Talk that Google’s new search engine would filter out content disliked by the Chinese government soon drew flak from a bipartisan group of senators in Washington. They wrote to the company’s boss Sundar Pichai asking for more information on his plans.

“It is a coup for the Chinese government and Communist Party to force Google – the biggest search engine in the world – to comply with their onerous censorship requirements, and sets a worrying precedent for other companies seeking to do business in China without compromising their core values,” the authors warned, demanding detail on how Google planned to toe Beijing’s line.

Google accounts for 90% of web search traffic in North America and Europe, but Baidu rules the roost in China with about three quarters of the market. News of Google’s new app subsequently triggered a sharp fall in Baidu’s share price, and even forced its boss Robin Li to take to his WeChat account, the popular messaging app owned by rival tech giant Tencent, to insist that the American firm wouldn’t be able to make up the lost ground.

Baidu may have dropped out of favour with investors after a series of scandals (see WiC324) – and fallen far behind Tencent and Alibaba in market value – but Li argued that he had little to fear from Google’s return. “If Google wants to come back, we are confident to take them on and win again,” he claimed.

Certainly Google’s search team will have to forge a new following after years of absence from the Chinese market and there’s the longstanding question of whether the US firm can develop a search product that is dramatically better than Baidu’s this time around.

As Robin Li also noted, Google was never dominant in China before it made its exit and a generation has grown up since then with no real interest in global brands like Google, Facebook or Twitter.

“Taking a step back, even if there are no political problems, can any internet business coming into the Chinese market do well?” asked DoNews, an influential zimeiti quoted on Sina. “From Ebay to Groupon to LinkedIn and Evernote, there haven’t been any victories over the local players. It is very simple: Chinese companies have a better understanding of their businesses and their customers, they are more flexible in local combat, and more familiar with the regulations and unspoken rules of their home market.”

Even if Google can get the approvals from Beijing to relaunch its search business, there is the question of whether the returns will be worth the reputational damage at home, especially at a time when Washington is taking a more confrontational line with the Chinese.

On the other hand, while Google’s core offerings in areas such as search, Gmail and YouTube have been off-limits, the company didn’t disappeared from the Chinese market as completely as many seem to think.

For a start, the new proposal for a censor-friendly search is underpinned by a local search directory called 265.com that Google purchased in 2008 and kept running in China even after its core search engine exited. It is the years of data derived from this platform that is likely to provide the technical foundations for the search app that Google is said to have developed.

Google has plenty of other business lines that operate in China too. Exhibit one is Android, the dominant operating system in the Chinese smartphone market. At least 450 million of the smartphones that Chinese manufacturers sell internationally every year run on Android, pre-installed with Google’s suite of products. Counterpoint Research estimates that Google generates up to $10 billion a year by taking a cut of ad and app sales from these Android phones.

It also profits from sales of ads that draw international shoppers to e-commerce sites in China, making it an indispensible partner to Chinese brands trying to establish themselves as global players. Inside China it also releases apps in areas like translation. Last December it announced it was setting up an artificial intelligence lab in Beijing and it also has ambitions in cloud computing, where Bloomberg reports more than a year of talks have been ongoing about selling software and hosting services to local partners.

Tencent is one of the main candidates for a cloud services deal and there are signs that the two firms are getting closer, including a patent pact in January that was said to “pave the way for collaboration on technology in the future”.

The wider rationale is that while Google introduces Tencent to a broader international market, Tencent helps Google boost its presence in China.

It helps that the two tech giants are a good strategic fit: Google hasn’t had much success in social media, while Tencent would like to make more headway in searches.

Among the other signals of closer ties is that Google has opened offices in Shenzhen – Tencent’s hometown – and invested $550 million in online retailer JD.com, in which Tencent is also a shareholder (see WiC415). It is also said to be developing a news app for the Chinese market, where its know-how in content recommendation and news aggregation could help in Tencent’s battle with Toutiao (owned by Bytedance, now a sworn enemy; see WiC416).

Bigger-picture, there’s speculation that Google’s new search tool could even be embedded into Tencent’s killer social media app WeChat, in what would be the clearest evidence yet of the duo’s willingness to work closer together in grabbing a greater share of the online ecosystem.

“It would be entirely conceivable for many in China to go through their whole digital day without ever leaving the WeChat app, making it effectively its own mobile operating system, overlaid on top of Android or iOS,” posits Technode, one of China’s leading tech news providers.

 

 

Keeping track, Aug 18, 2018: The Wall Street Journal reports that Google’s CEO Sundar Pichai told a staff meeting last Thursday that the company was “not close to launching a search product in China”. The move came after employees expressed concern over a censored product being created for China. Google has not officially denied that work on such a search engine is ongoing. Pichai’s qualified denial was attributed by the Wall Street Journal to “a person briefed on the comments”.

Keeping track, Oct 19, 2018: Google has confirmed that it is building a search engine that meets the requirements of China’s censorship regime, the Washington Post reported. Code-named Dragonfly, it could help the company to resume online searches in China after a long period of absence. “If Google were to operate in China, what would it look like? What queries will we be able to serve?” its chief executive Sundar Pichai told an event hosted by Wired magazine on October 15. “It turns out we’ll be able to serve well over 99% of the queries,” he said. The initiative, however, has sparked an internal debate over Google’s corporate values. A leaked letter signed by more than 1,400 employees decried Dragonfly as unethical and at least five employees have resigned because of the controversial project.

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