Google Wars:The Empire Strikes Back!

Following Google’s threats to China in January, the giant has finally come to a decision regarding their stance within the country. As of Tuesday, China’s censored google.cn was pulled, instead redirecting traffic to their Hong Kong website google.com.hk where they operate under different laws.

For those who are not aware, while Hong Kong is part of china, it was granted a degree of autonomy when it was returned to Chinese rule by the U.K. in 1997. In fact, its legal and political freedoms were largely preserved hence allowing Google to make this detour around the Chinese censorship issue.

Whilst the move is claimed to provide more information to users in China I suspect it won't be long before the whole search engine in blocked by the Chinese government. For now, it is still live, and Google have created this page to update their service availability in mainland China.

The big question here, however, is who wins - Google or China?

In financial terms, China currently makes up less than 2 percent of Google's overall global revenues. However, in business terms, it might be seen as a strategic faux-pas; an ill-advised retreat from a market with huge potential. According to Aaron Kessler, senior analyst at Kaufman Bros., the Search Engine market in China was estimated to be worth $1 Billion in 2009. This is made even more staggering considering that only 23 percent of a 1.3 billion population actually have access to the internet. In the next three to five years this is expected to grow to 40 percent. In relative terms that is 10 percent more than the entire population of the United States - Google has pulled out of a highly promising market.

The other ramifications of this retreat are closely linked to Google's commercial partnerships, some of which have since come under pressure from the Chinese Government to cease relations. China Mobile, the biggest cellular communications company in China, has just cancelled a potential multi-million dollar deal that would have seen Google's browser become the default on the mobile web home page. This month, Motorola replaced Google's search on Android phones in China with Bing, Microsoft's rival service, because of the uncertainty surrounding Google’s fate in the country. Whilst the revenues in China are not of great substance considering Google's $24 billion annual sales figure, investors were counting on the potential of the market to grow rapidly. Even Microsoft, who only has a very small share of the Chinese search engine market, considers China to be the most important strategic Market today.

For China, aside from sourcing new partners for those who recently abandoned Google, the initial financial stakes are minuscule. Unlike in the rest of the world, Google does not have the market lead in China. Instead, Chinese-run Baidu dominates. In fact, having Baidu and other Chinese search companies take over Google's 30 percent market share could be a major benefit for the domestic market. However, there are question marks over what impact the soured relations will have on other international knowledge-based companies. The symbolic implications may well leave a far bigger dent.

Will the Google upset affect how other companies do business with China? Perhaps other companies such as Yahoo and Microsoft will lose credibility by continuing to operate in China? In terms of the emphasis on corporate and social responsibility, things might really shift now to reflect Google's attitude. Entering into China was always going to be a challenge. By pulling out, the risk is just as big. Google has put financial gains aside and stuck to their guns; a show of strength that at the end of the day, you've got to stick to the core values you built your business upon. For both parties, only time will tell who is going to be the biggest loser, and it could be months or even years before any real repercussions are felt.