08 Feb 2010  HBS Cases

Looking Behind Google’s Stand in China

Google's threat to pull out of China is either a blow for Internet freedom or cover for a failed business strategy, depending on with whom you talk. Professor John A. Quelch looks behind the headlines in a new case. Key concepts include:

  • China has become more emboldened and self-confident as a result of its increasing economic significance.
  • Google acted precipitously without giving due consideration to the impact of its announcement on stakeholders.
  • The Google issue has become a cause célèbre that exacerbates the already fragile and festering U.S.-China relationship.

 

Google, the "do no evil" company, gained entry into the Chinese search engine market last decade by agreeing to ban search results on topics deemed sensitive by the Chinese government. To Google's way of thinking, it could do more good for Internet freedom and the cause of human rights by working inside the country to create value for its Chinese users, employees, and business partners. To critics, Google was selling out its core principles to play in the world's second largest economy.

"Google shot themselves in the foot without gaining the moral high ground."

So it was a shocking turn of events on January 12 when Google announced it would pull up stakes in China unless the country agreed to stop censoring search. The precipitating event: an unsuccessful cyber attack from inside China attempting to burrow into the Gmail accounts of Chinese dissidents. Since the announcement, little has transpired publicly; the two sides are presumably negotiating.

Who are the winners and losers here? Has China been taught a lesson? Has Google been outfoxed? What can other companies learn from this collision of cultures?

Harvard Business School professor John A. Quelch and research associate Katherine E. Jocz have just published a case study, titled Google in China (Case 9-510-071), based on public sources, that delves into some of these issues. We talked with Quelch last week.

Sean Silverthorne: Some see this as a heroic effort by Google to live up to its "do no evil" pillar. But others note the company is turning its back on its Chinese employees, users, partners, and an incredibly large market opportunity that would benefit Google shareholders. What's your view?

John A. Quelch: Google acted precipitously without giving due consideration to the impact of the announcement on stakeholders, including their Chinese employees, consumers, and business partners.

Google's justification is that they are putting a stake in the ground on behalf of human rights. If Google is forced out of China, this could become a rallying cry for Internet freedom worldwide, to the benefit of the Google brand. And eventually, the Chinese regime might change to a more democratic form of government, in which case Google's stand might go down in history as one of seminal moments on China's road to democracy.

But this upside for Google is relatively speculative. The immediate downside consequences are more certain. Google has some 700 employees in China, the best of whom are already finding alternative employment. So de facto, Google is going to be a much smaller entity in China. It seems unlikely to me that many talented Chinese will be lining up for jobs at Google in China going forward.

Google's announcement has also disrupted the plans of a number of important business partners such as Samsung and Motorola, who were all set to launch Android-platform handsets in China. I doubt those partners were notified ahead of time.

Q: OK then, why did Google take this course of action?

A: The hacking incident was probably the last straw in a rather long line of issues.

Sooner or later, Google had to stand up for its principles. They have always been at odds internally as to whether or not being in China, operating a self-censorship approach, is consistent with their "do no evil" philosophy.

Add to this the business fact that only 1 percent of their revenues come from China. There is no reason to suppose that they were going to do any better by being cooperative with the Chinese government.

Interestingly, a resolution had been reached in the prior week on a separate matter involving the China Written Works Copyright Society, which accused Google of failure to inform or pay authors of books it was digitizing. Google issued an apology. My suspicion is there was thought to be a quid pro quo due from the Chinese that failed to materialize.

Q: One point made by your case, perhaps missed by Google, is that companies doing business abroad must be able to see the world through the eyes of the host government.

A: The Chinese government was taken aback by the Google announcement. True to form, they responded very cautiously initially, while they deliberated what to do. The initial Chinese response came from a mid-level spokesperson at the Foreign Ministry, while the initial response from the United States government came from the secretary of state herself—and that perhaps elevated the conflict.

"China certainly is not going to change its ways because of a threat from Google."

Now the Google issue has become a cause célèbre that encapsulates and exacerbates the already fragile and festering U.S.-China relationship. On the other hand, the concern over human rights in China is a big deal for many in the Western world.

The Chinese argue that they allow and support free information flow over the Internet with some restrictions. They contend that the United States doesn't feel any discomfort hacking into the Internet traffic of U.S. citizens who are suspected terrorists in the United States. Rightly or wrongly, the Chinese view the political dissidents and Falun Gong activists whom they attempt to track as equivalent.

Q: It was interesting that no other companies backed Google in this dispute. Microsoft CEO Steve Ballmer called it "Google's problem."

A: Google's announcement was self-confident and unilateral, but they have the market capitalization to back it up.

Among multinationals doing business in China, many others have endured cyber attacks on their private networks, although it is unlikely those attacks had the same human rights implications as the attacks on Google.

Multinationals doing business in China have been almost universal in their unwillingness to publicly support Google. Their view is that Google has needlessly upset the apple cart for everybody else. For many of these multinationals, China is or will soon be their second most important market in the world. That is not true of Google.

Q: If Google is forced to exit China, will it be a blow financially?

A: I don't think so, although they were looking to make progress in China with other lines of business, such as the Android mobile phone platform.

Q: Do you think Google has at least won the PR war here, and raised the flag of human rights in China?

A: Not yet. Today Google is still self-censoring content exactly the same way as they were on January the eleventh. So Google has shot itself in the foot without gaining the moral high ground.

How can you impress your customers and supporters around the world through this announcement if you don't actually follow through?

Q: Best guess: Will this dispute be resolved, or will Google be forced to keep its word and abandon China? Does China need Google more than Google needs China?

A: The Chinese cannot permit Google's public challenge to go unpunished. However, they need not do anything, as the leading employees of Google China are jumping ship to take jobs with Baidu and other competitors. Google will soon be down to a skeleton shift in China and, if they are permitted to stay, they will have a tough time recruiting new employees.

Q: Are there lessons here for other multinationals doing business in emerging economies?

A: Government relations are critical to business effectiveness in developed as well as in emerging economies. But, in emerging economies, where the public sector and government-controlled enterprises are usually a higher percentage of GDP, managing government relations at the national, provincial, and local levels is even more important.

You have to know what you are getting into. You have to know whom you are dealing with, what their expectations are, what their rules are. And you either have to operate on a "when in Rome do as the Romans do" policy, or, if you have a clear set of global values that cannot be compromised, you have to decide which countries are off limits.

The Foreign Corrupt Practices Act helps U.S. multinationals protect their employees from being compromised. But we have no rules of engagement that bear upon the defense of human rights of citizens in host countries in which our multinationals operate.

Q: What do you make of China's assertiveness of late, not only in the business sphere but in the political world as well?

A: China has become more emboldened and self-confident as a result of its increasing economic significance. China is reluctant to be badgered by Western companies or Western governments into changing its rules and regulations.

The Chinese do not yet understand international public relations and have perhaps too short-term a view. If they have power and are in the driver's seat today, they act very confident. If, on the other hand, they take a hit or two economically, they become more flexible. There is a very short-term transactional aspect to their diplomacy, which is reflected in their unwillingness to bend on these issues. They certainly are not going to change their ways because of a threat from Google.

About the author

Sean Silverthorne is Editor-in-Chief of HBS Working Knowledge.