by Merlin Hernandez

Google’s entry into China was characterized by the tensions resulting from that country’s government surveillance, censorship, and IP violations. It is a classic clash of cultural values – China’s history of government control up against the western free market system. Market intelligence before entry would have told Google what to expect. The real stake is the vast benefits to be derived from the world’s largest market. China wants to reap the full harvest of an increasingly consumer-driven population by importing and controlling the technological advances of the west. China’s tools of control are protectionist policies which include censorship, trade restrictions, tariffs, and standardization based on China’s own formula – and outside of WTO international protocols. Western business wants in but is hoping not to cede control of the profit potential of this expansive market to the host government. Good luck with that…

For an internet giant like Google, censorship would mean that the government will determine what people can see, with implications for advertising revenue and other commercial applications. Security protocols will also be controlled leaving the door wide open for wanton surveillance and internet spying, which could compromise sensitive information like new technologies, and trade secrets, leading to IP violations. Yet even with a 20 % share in the Chinese search market Google preferred to remain in China. But IP infringements would threaten more than just the China operations; it could impact the entire global interests of the company.

Google’s confrontation with China in 2011, with the threat to pull out of the market if China continued its censorship, was a veering away from what China has come to expect from the large technology companies. It would appear that China’s violations of international laws regarding intellectual property rights and fair trade is strategic to further an agenda of economic development based on the transfer of technology. The Microsoft compromise was to invest in the growth of the Chinese technology industry because a reported 90% of the PC’s in China run on pirated copies of Windows anyway. Yahoo sold its China operations to the local enterprise, Alibaba, retaining a 39% share. It was the formula Google was supposed to follow instead of attempting to beat local competitors out of the market.

The confrontation placed the Chinese government in the untenable position of having to ‘save face’ by taking a hard line. In the process Google lost lucrative cell phone related deals with two large companies who were reportedly pressured by the government. With 1.2 billion people, China needs Google technology, but wants to teach international business a lesson on how to survive in China. Meanwhile Google has already returned to China in a new spirit of conciliation which is really the only way to do business in that culture. According to Google CFO, as reported on Fox News at the time, the clash with China over the IP issues was merely a roadblock. Google will take what it can get for now – a limited Internet Content Provider (ICP) license, and currently provides search engine services to Chinese browser, Qihoo 360. As per China’s script for technology transfer, Qihoo has recently launched its own search engine as its default, effectively sidelining Google.

But China is too big a pot to walk away from and Google remains the leader in mobile marketing in the world’s largest smart phone market. Layoffs in Google’s new Motorola acquisition may not be endearing to the Chinese authorities given the rocky relationship but Google’s capacity for innovation keeps that relationship viable for the time being. The primary ERM strategy emerging from the Google experience is building and managing relationships with the Chinese authorities, and it begins with company executives having an understanding of Chinese culture and an appreciation of the Chinese economic agenda. It would also be wise to keep all cutting-edge technology out of that market until IP infringement issues are resolved. The question is whether the Chinese government is likely to depart from its protectionist posture in advancing its technological revolution and the interests of its new commercial class. I don’t see it happening until China determines that it can beat the West at its own game.