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Should Google Escape the Death Spiral in China by 'Losing Face'?

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It's a well known and established fact that Google's withdrawal from having a direct presence in China -- or more correctly PRC -- and moving to Hong Kong has had a detrimental effect on the company's share of the market. Data released by Analysys in Beijing says that in the first quarter of 2011, Google lost market share to Baidu for the fifth quarter in a row, for the first time dipping below 20 percent to 19.2 percent.

Analysys also confirmed that this share is going to Baidu -- although two smaller engines, Sogou and Tencent, have also picked up tiny shares of less than half a percent each. Equally, in March we learned that a further Chinese search engine Sina, had moved away from using Google's technology to use its own.

Does Google Care?

Financially, Google probably doesn't care much. Speculation in the industry suggests that, thanks to general economic growth in China and in online advertising, Google's revenues are level or even slightly up over what they were -- and they probably have lower marketing costs in China as a result producing a better financial result.

Politically, the jury is out. Google gained a lot of public support for taking the moral high ground, but it's difficult to keep doing that every day -- especially when competitors such as Groupon and Facebook are making their own Chinese moves. At some point, their moral stance begins to look, at the very least, naive.

Strategically, Google's sidelined Chinese position is unsustainable. You can't be a "global player" without being fully present in what is expected to be the world's largest economy within a few short years if current trends continue. Shareholders, quite rightly, will be concerned with the current strategy going forward.

Getting Back Into China

Let's assume that Google will, at some point, decide that it needs to get its search engine moving again in China. It's almost inevitable that this decision will be made at some point. How should Google go about it?

Now getting into China isn't straightforward for Western companies at the best of times. For high profile Western companies which were already in China and then partially pulled out -- partially because it's only Google's search box which is no longer in China, Android continues to operate there as well as Gmail -- this could be a little tricky.

Google basically has four options:

  • Promote Google strongly in China but continue to sit in Hong Kong.

  • Do something completely different (e.g., a new Chinese search engine).

  • Re-enter China.

  • Do nothing.

The first option of promoting the Hong Kong Google in mainland China doesn't work -- or at least it's the same as doing nothing. But it just isn't a very dynamic forward looking position -- at best it's a wait and see.

Doing something completely different would mean something along the lines of creating a new search engine approved by the Chinese government but not called Google -- although it might describe itself as the Chinese search engine "powered by Google."

The problem with this approach is that Google already tried this and didn't like the result. The other alternative would be an acquisition -- except that's going to be vetted by the Chinese authorities too.

Who's Face Needs Saving Here?

Meanwhile, if Google were to re-open its search engine within mainland China, it would benefit from being inside the Chinese firewall, but it would need government support in order to obtain all the necessary certificates. This would mean going humbly to the Chinese government and begging forgiveness.

There is a superb irony here. Culturally, it's very important in China not to lose face.

Google messed this up somewhat with its rather clumsy move from China and so the Chinese government really could do with some way of recovering its own face. Ironically, Google is probably if anything more concerned than the Chinese about losing its own "face" by going back in and accepting Chinese rules on areas such as censorship.

Will Google Need to Eat Humble Pie?

No matter how you look at it, Google's current position doesn't work longer term and all of the alternatives bring you back to working somehow with the Chinese governement and dealing with the "face" issue.

But Google has a potential ally of the strangest kind -- the Chinese government itself. No one understands the issue of losing face better than the Chinese state. They will understand Google's position better than anyone and perhaps could actually help Google to come up with a solution.

The only sensible conclusion you can come to is that the best strategy is do do nothing. Or, CEO Larry Page could start open communications with the Chinese authorities and jointly figure out a way forward. Call it a "diplomatic solution" if you like!


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