The push and pull of China

Sarah Lacy, on Techcrunch, wrote that the Google move today was more about business than about ethics. I am torn by her article, but to explain why I need to go into the push and pull of China and how it rips the heart out of US companies.

I’ve visited China twice, once in 1995 to work at a computer show there, and again last year to visit entrepreneurs in Shanghai, get a tour of Seagate’s factory, and see inside PCH, which is one of the supply chains that many of your favorite technology companies use, and visit a blogger conference.

As an American I saw two opposite poles: one of unending opportunity and one of unending frustration of dealing with the government.

First, the pull. The opportunity was in my face. When I visited Shanghai I met up with Gary Rieschel, one of the top VCs in the world (he helped start Softbank). There he showed me a nicely profitable taxi screen company and we had to wait for nine taxis before we found one with his screen. I could have copied his business plan and made many millions of dollars a month all without coming up with an original idea and all without really causing his company much new competition. In China there’s a gold rush underway and there’s gold lying in the streets for entrepreneurs.

Everywhere you looked you saw similar opportunity. In fact, if you are Chinese, it’s even easier. Just look to what’s getting popular in the west, copy it (there were tons of copies of Facebook and Twitter, at least one of which has a billion-dollar valuation) and go on your way. You don’t need to come up with an original idea, because what sells in San Francisco usually sells pretty damn well in China. All the American brands on the streets there were testimony to that fact. GM has a pretty good market share here, for instance, and there are more than 100 Kentucky Fried Chicken outlets in Shanghai alone.

I met with quite a few entrepreneurs and they told me they see nothing but unending opportunity for China and its digital future.

But now the push. Everyone I met with told me stories of how they need to play games with the government to stay in business. We all know that the government censors things, makes things tough for entrepreneurs, and forces complicity from them. How if the government asks for access to their servers you must give it. One entrepreneur told me his biggest expense was hiring censors to watch his Twitter clone and make sure nothing the government didn’t want up got up.

One thing, though, the government can do is reward companies that play the game.

Let’s say you have a Web service like Foursquare. It’s getting hot in America. Foursquare would love to expand into the huge China market, too, wouldn’t it? Of course it would. Ask any of the people running the big companies in Silicon Valley or Redmond and they spend years and billions of dollars to get access to the Chinese market. Money isn’t enough, because the Chinese market works on relationships and on playing the game with the government, both of which are hard to break into with just sheer economic power.

Anyway, my friends showed me how China will keep sites working for quite a while, which lets entrepreneurs hire hundreds of developers (remember, a great developer gets paid about $25,000 per year, a decent one about $15,000, and a new one even less) and they’ll just clone the site.

So, now Foursquare will have a Chinese copy of it. That’s not fair is it? No, but it gets worse. Eventually the Chinese government blocks Foursquare, which will eviscerate its business. Think this doesn’t happen? A couple of years ago the Chinese government blocked Google and let Baidu stay up.

Why? Relationships and willingness to play games with the government.

So, now, Baidu is the #1 search engine in China and Google is #2.

The government rewarded Baidu for playing the government’s censoring games and punished Google for not playing the games (or not playing them very well).

The small little Foursquare can’t fight back, either. (Have you ever heard of Facebook complaining about this? I have, behind closed doors, but not in public). Why can’t Foursquare fight back? Because it will guarantee that it won’t have access anymore. It will give up access to a market that’s much bigger than the US market (potentially). Since businesses are supposed to serve their investors this is a move not made easily. Even if Google were in second place its investors would want it involved in the Chinese market because that market is so large. Pulling out of China would be anti-investor. This is why Microsoft continues to invest in search even though Microsoft was #3.

But, if that Foursquare or other company would play the government games, it would get a huge black eye back home in the US. Remember how Yahoo was pulled in front of Congress and told that it was evil for turning over information to the Chinese government?

So, if you are an executive inside a large tech company you are always being pushed and pulled. I’m glad I don’t need to make that choice. Even in Google’s letter you can see the push and pull. They didn’t just say “we’re out.” Why not? Because of the pull.

Why doesn’t the US government do anything? Well, because the Chinese have loaned us tons of money because of our deficit. The government isn’t willing to put any penalties on Chinese products to force the door open for Google or Facebook. And it gets worse over time.

So, now that Google found out that it was getting attacked by hackers paid by the government it said enough is enough.

Look at the wording from Google’s post:

First, this attack was not just on Google. As part of our investigation we have discovered that at least twenty other large companies from a wide range of businesses–including the Internet, finance, technology, media and chemical sectors–have been similarly targeted….

Second, we have evidence to suggest that a primary goal of the attackers was accessing the Gmail accounts of Chinese human rights activists

This is the reality of dealing inside China. That’s why it was brave for Google to stand up to the Chinese government. Might have been a very stupid business decision (even being #2 in China means sizable profits and business over time).

Anyway, that was a long way of saying that I am torn by Sarah’s article. I both disagree with it and agree with it. Why? Because I’m feeling the push and pull of China.

Is Google doing this because of business or because of ethics? Probably a little bit of both. Or, maybe, just sheer frustration from the push and the pull of China.

Comments

  1. Baidu won in China not because of government help, but because their entertainment search results (esp. pirated games and mp3's) is much better. The Chinese Internet is all about entertainment, so if Google does not have those entertainment search results they can never compete here.

    If you want to win in China you have to adapt your product. Foursquare is doing quite okay in China actually, so that's not a good example. But I think eventually a Chinese clone will win because Foursquare does not localize (how difficult is it to translate the service into Chinese?). It's not all about government relations, although that is certainly important, but it's much more about how you adapt to the Chinese market.

  2. Someone tell me if I'm missing something here but . . .

    Sarah's article is entitled: Google’s China Stance: More about Business than Thwarting Evil

    But in the third paragraph she says, “I’m not saying human rights didn’t play into the decision, but this was as much about business.”

    So was it “more about business” or “about as much”? Am I being a grammar Nazi here or is she a few McNuggets short?

  3. I work for a reasonable-sized industrial machinery company. After one experience in China, our management decided to abandon the market completely, and I’m convinced that they made the right choice:

    As Scoble and others have pointed out, if you want to do business there, you have to ‘deal’ with the government. And because there is such a big market, the greed of foreign companies gives the government the upper hand, and they impose conditions that seem ok in the short term, but are all win for China in the long term. For instance, the machinery has to be built in China, you have to transfer knowledge to local workers, etc. And they have zero qualms about intellectual property.

    As one of our managers says, “the Chinese approach to business ethics is… different”.

    China as a market is classic selling your soul territory. You get the money now, they steal your business later.

    So I think that both sides in this debate are partly right. Pulling out probably is about business, but it is not about Google doing badly now, it is about Google not wanting to get screwed in the future.

  4. Agree, Google was on the right track with their top100.cn deal. I use it regularly actually, but most of my Chinese colleagues prefer to use Baidu and find the track there (more out of a habit I suppose).

  5. “Foursquare does not localize”

    They don't? Really? That seems odd, given the global push.

    Now I have to go see if Gowalla does any localization…kids these days, think they can go running into France waving English around, I swear.

  6. TechCrunch has great editors, but they don't seem to have a lot of power, nor do they seem to have an actual editorial staff. I don't think they've got a rudimentary proofreading system in place that'd catch gaffes like that, never mind full-on copy editing services. Not contradicting your headline, never mind in the first few paragraphs, is pretty basic. But TC's like that – you see a lot of full-on typos and dropped words and phrases that say, loudly, “Nobody but a machine looked me over before I went live.”

    Which reminds me of my entry for the next TechCrunch 50. It's called Raise Money to Get Tech Crunch Some Damn Proofreaders and Copy Editors dot com.

  7. this isn't about business or ethics.

    China tried hacking into skynet. they phished “a lot” of gmail accounts.

    Now I see Google just happened to turn on HTTPS for gmail by default.

    This really doesn't have anything to do with human rights or business . Whatever Google saw not only scared them, it pissed them off. Whatever China did while attempting to bust into Skynet, it scared them. And they are going scorched earth tactics.

  8. Thanks for breaking it down for us. Now i get a better picture about the downfalls of doing business in China.

    Is this the case in India as well (the government supporting local companies) ?

  9. Thanks for breaking it down for us. Now i get a better picture about the downfalls of doing business in China.

    Is this the case in India as well (the government supporting local companies) ?

  10. I live in Greece and we are in many ways the same as the Chinese web market. Because our language is unique (and better) we have the advantage of having our very own web bubble. We have clones of almost every successful SV project (With Digg it was a nightmare). The reasons are obvious. We don't know english and we don't want to. So Twitter may the next best thing since sliced bread, but when I visit it I understand as much as if the letter where written in Klingon language. So I would much rather prefer a Greek twitter with Greek content.
    Obviously we are a small bubble compared to China, but a bubble nonetheless.

    The eternal truth that I can “report” from here is that Silicon Valley never really adapts well to our bubbles. Almost no company does localization in their software properly. Even Google translate in Greek sucks, google search in Greek has typo errors (that's how much they care) and in China they were No2. Google! No2.
    This, no matter how good of a clone Baidu is, cannot be solely based on the Chinese government playing tricks. It HAS to be some kind of disconnect with the search results, the UI or smt else. And one of the reasons why they are saying s^%&w you to China is because of that. They are No2 and they can afford to.
    At the end of the day I think that the Chinese gv. will execute 100 people of the chinese-CIA and Google will be satisfied and return. The problem is though, that their market share will propbably not grow. And that's because just changing the strings of the UI from one language to another almost always doesn't work.

    1. Nobody is going to get executed over this. And certainly not members of the “chinese-CIA.” Maybe they’ll get a salary increase. Or a medal.

      But you make an excellent point about localization. Nobody localizes very well. You can notice a very distinctive difference between a web site designed in your native language, and one designed in English and translated to your native language.

  11. Guess we see what happens when governments get too involved in economics and business. The questions now are: Will Google follow through? and Will it really have any impact?

  12. If it was driven by ethics, Google would have pulled out of China a long time ago – they've had 4 years to do it, after all. Additionally, they only took action after a cyber attack on them. So, had this not happened, I'm guessing Google would still be happily ensconced in China and its Internet policies?

    I'm all for companies making ethical stands, but do it properly – either from the start, or as soon as you feel something is wrong. Google had 4 years to decide…

  13. However, I wonder what featuring “pirate search” would do to Google's image, not to mention relations to media companies, outside planet China. :)

  14. I grew up in the states, a white boy from the midwest, but lived, worked and went to college in China and studied the language for 8 years. I am married to a ethnically Chinese woman and originally intended to live and work in China, but have settled in LA instead. Many of the reasons why I did not stay in the country RS outlined above.

    When i was living in China, it was still the upcoming place to be, and every major company was moving in full force, often without much of a plan. A great example of companies that got screwed that we saw every day was AUDI. Many of the local Cabs were dead ringers for the Audi A4 of the time, but interestingly enough had the branding of the Shanghai Motor Company on them. Open the hood, and the engine was stamped AUDI…Basically, I did business with the guys that lead the JV between Audi and Chinese govt, and they told me many times how the Gov't invited them in, took their tech, then kicked them out of the deal, but had so much disregard for Audi they did not even bother to hide the fact that they were still using their factory to make the cars.

    There are a million stories like this, but I for one think that in the end, it is the Chinese that stand to lose the most from this behavior. I found that even local entrepreneurs won't take much risk to start a new business and found little incentive to creatively solve problems in the face of almost immediate and devastating piracy. Further, as egregious as the double dealing with foreign companies is, compared to the resources available to the local population in their own battles with the massive govt corruption, foursquare looks like Google.

    As a country, we need to get our deficit in order so we are not in a position of weakness, ramp up our counter business espionage efforts, and most importantly, learn to play by the Chinese rules. As outdated as it may seem to many foreigners, the ideas of losing face and Confucian ideals of respect, still play a major role in life and business in Chinese culture.

  15. Google probably has been wanting out of China for some time. Like many companies it had felt pressure to be in the 'largest market of the world'. The problem is that it really isn't equipped to compete with the likes of Baidu even if the playing field was level, which it isn't. As a poster upthread noted the Chinese Internet is entertainment dominated and not information/search dominated like in the USA. Just look at Baidu and you'll see videos, music, shopping and celebrity news where Baidu makes much of their revenue. Google doesn't have this content and more importantly Google is bound by western business ethics that prohibit the violation of copyright that the Chinese content companies engage in.

    Secondly, the deck is stacked. There are no real opportunities to sell to the wider Chinese Internet audience for foreign companies. The Chinese government considers information distribution and the Internet key to its rather tenuous hold on 1.5 billion people. It will not let any foreign company participate in a significant way in this area. Period. On top of this is a system of corruption that foreign companies can't possible engage in. Google indeed realizes this, that even if they could compete the rule of law doesn't protect them and their business will be given to their competitors. One needs only look at the Youtube experience in China and the rise of Tudou as a result.

    Thirdly, even if Google was able to compete and the rule of law applied the market opportunity really isn't that big. Of course you may sputter about this seemingly absurd statement given your week in China, however the facts don't add up. Baidu is projecting about some $800M of revenue in 2010, assuming you trust that figure (you shouldn't trust any number coming out of China). It seems around half of Baidu's revenue is from search where Google could participate. Google has 17% of the Chinese search market in the latest figures I could see (significantly down, they're losing due to the first two points I've made above). Doing the math this equates to some potential $73M in revenue for 2010. Probably equivalent to what they get from Northern Ireland.

    There is no upside for Google in China.

    Adding to that depressing bottom line is the fact of the continuous attacks on the infrastructure, the probable infiltration of Google by Chinese spies (see Wikileaks for more), the demands by the Chinese government for access to Google's logs and the beating that Google's reputation is taking in its important markets it's pretty obvious that the Google exec is fed up. Leave China to the Chinese and return when there's rule of law is their likely strategy.

    My background is as an Internet entrepreneur that worked on a startup in Beijing for the past couple of years, having recently returned to Canada after falling prey to many of these issues, though at a much smaller scale than Google of course.

  16. I think the hole Google shutting down Google China is just some type of a thret and they wont really do it. I feel that Google will work out something ware they may still have to censor results but it wont be as much censoring as it is now. if that makes any sense at all.

  17. I think there is a third aspect here besides ethics and business that Google wants the world to become aware of – and it is directly addressing and dealing with the dire and imminent threat of a full scale cyber attack and cyber warfare from China. This incident is proof that the Chinese are getting closer to achieving their stated objectives of electronic world domination using all possible means – ethical or not. More about this at my blog : http://arunshroff.com/2010/01/13/googles-stance

  18. You think China will say: Google, you're banned from China? No way. The backslash will be huge. No country on it's own merits can do such a thing. (Only the EU.)
    I am guessing that right now, orders are being given in Chinese: how did that mess even happen? Mark my words. Some guys go to the wall for shooting, Google resumes operations.

    If Google really had an ethical problem they would leave China years ago. They are just pissed off that some over confident beaurocrat thinks he can attack GMail from the offices of the Chinese government…

  19. Thanks for the post! I am so confused with this Google and China thing that I have been hearing this morning. I now understand it. I hope what they did would make sense.

  20. Why are companies expected to have ethics, but people not? If you think it's that important to send a signal to the chinese government, stop buying product produced in china. Oops, very hard, almost everything is created in china. We are all closing our eyes to what is hapening in china. Very hypocritical to only expect companies to improve their act.

  21. Interesting how you call China a “gold rush,” because it certainly seems like a lot of these circumstances will make its appeal and profitability (same thing, really) go much the same way of the California Gold Rush.

    Or, to put it in more recent terms, the China bubble will inevitably burst when we least expect it.

  22. As if it's that easy to do from a corporate standpoint. You can't just say to your investors, “We should leave China because they're unethical.” You can, however, say “Let's leave China because they're attacking our crap” and expect that to have some weight.

  23. And that's exactly the reason I don't do business with companies that put profits over ethics. We all have a choice who we do business with, and if money takes precedence over principal and beliefs – I know what side I choose.

  24. I'm a Chinese enterpriser on the internet, but I registered my company in Hong Kong. China is more and more dangerous for internet enterprisers, because the internet gives people freedom of speech, but that violate the Gov's profit.

  25. Perfectly reasonable. It makes me feel sorry for the individuals at Google who are there because they want to do good, but have to answer to the entity that is Google as a corporation with its investors' interests.

  26. Agreed, mate – it's always the way, unfortunately, the average Joe becomes the fall-out guy. Interesting to see what (if anything) comes from it, but I'm guessing China won't be too flustered.

  27. hehe i don't know how to Evaluation this Article , in this article something i agree but something i disagree!
    i'm a chinese, but i also like google ! i think Different country have different Culture ! i think if the google want to win it must to Change to Fit the chinese people's Habits!

    (http://www.doitstyle.com)

  28. A great post. I also would add that China's new brand of hybrid communOcapitalism (where Govt heavily supervises but also encourages entrepreneurial capitalism) is so unique that it's very hard to know where all this will lead.

    The stakes couldn't be any higher and it's going to be very interesting to watch how Google navigates the competitive disadvantages they'll have if they cede this territory to Microsoft, who from a business-only perspective should be talking to the Chinese about making Bing the search of choice for China.

    I'm convinced both by analysis and history that the Govt in China has far less sinister motivations than many believe. Obviously they are in this for the win as are all countries, but also obviously they understand the power of free market capitalism and the challenges of trying to impose thought control on the population. Thought control is so … 1950s … and it won't last much longer in any but the most totalitarian countries. China's future is now so entangled with that of the USA that we both need to be looking into the future for the infinite number of “win win” scenarios that will maintain high living standards for us while continuing to raise the average living standards for a billion Chinese.

  29. I visited China 3 times in the last 8 months. Scoble, I friended you on Flickr, and you can view the pictures from my 2nd trip in early December.
    I really don't care what Google does in China, as don't most Chinese people. I saw plenty of help wanted signs for Baidu when I was there.

    QQ, Tencent, Baidu and others are the big players in China. Wendi Deng, Rupert Murdoch's wife is the CEO of MySpace China. You get what I'm saying?
    People there largely don't give a crap about what happens online.

  30. Well, any action has both a positive and negative side. China is a strategic partner, so games on the world arena plays stronger role for USA, and China influences as more, as USA business gets deeper into Chinese market. However, just Google walks out, another free search service will take its place quite soon.

    In other words, “to leave” means “to lose”.

  31. Well, any action has both a positive and negative side. China is a strategic partner, so games on the world arena plays stronger role for USA, and China influences as more, as USA business gets deeper into Chinese market. However, just Google walks out, another free search service will take its place quite soon.

    In other words, “to leave” means “to lose”.