Google (GOOG) just learned a vivid lesson about what it takes to do business in China: you must pay tribute to the authority of the state.
Although Google has portrayed Friday's decision by the Chinese government to renew the search giant's Internet business license as a victory, the outcome is actually a humbling demonstration of the government's control over China's Internet market.
Google's conflict with China highlights the practical limits of the company's "Don't be evil" philosophy. Chinese Internet censorship continues unabated. The source of Google's original grievance -- China-based cyber-attacks -- has not been resolved. And even with the renewal, the company's search product can be censored, blocked or even banned at any time.
"If you're a company and you go up against the state in a state capitalist country like China, you're going to lose," says Ian Bremmer, president of geopolitical risk consultancy Eurasia Group. "You need to either adapt or leave. Google has chosen to adapt."
The denouement of the conflict underscores a central truth about doing business in China: Fealty to the government is an essential precondition for existence, let alone success. And sometimes, even an apparently absurd solution -- like Google's fake search box at Google.cn -- can pass muster, as long as it's done while kissing the ring of Chinese state authority.
It Pays to Pay Tribute
A few months ago, the Chinese government declared Google's automatic redirection of China-based Web searches to an uncensored Hong Kong-based site "unacceptable." Yet China now approves of Google's "solution," which is merely to insert an additional step in the search process -- in the form of a landing page that sends Chinese users to Google's Hong Kong site with a single click.
To Western observers, It might beggar credulity that China found the automatic redirect unacceptable, and yet the fake landing page is just fine. After all, the fix is essentially cosmetic.
"The change Google made by adding a landing page was basically legal gymnastics," says veteran China expert Rebecca MacKinnon, Schwartz Senior Fellow at the New America Foundation. "But other than the fact that users need to click through an extra page, there's no substantive change to what they're doing."
And there's no change whatsoever to Chinese Internet policy. The government can revoke Google's license at any time and can censor or block search results from the Hong Kong at will. Throughout this saga, Beijing's main goal has been to demonstrate its sovereignty and control over the Internet within China. It has succeeded.
Cyber-Attacks Not Addressed
Bremmer points out the putative compromise doesn't address the original issue that Google claimed had prompted its decision to pick a fight with Beijing -- cyber-attacks. "This doesn't deal with the hacking issues whatsoever," says Bremmer. "Google had wanted the Chinese government to address the cyber-attacks, and it has not done so."
Moreover, Bremmer disputes the notion that the conflict was really about censorship, despite Google's claims that it could no longer tolerate the Chinese government's requirements that search engines filter out politically sensitive results.
"This was never about censorship," says Bremmer. "This was about Baidu (BIDU), Google, and the Chinese government's preference that a Chinese company dominate the Internet search market. Is Google suddenly going to get a large percentage of search in China? The answer is no."
During Google's standoff with Beijing, Google's market share in China fell to 30.9%, from 35.6%, while Baidu's market share jumped to 64%, from 58.4%, according to Analysys International, a research firm.
Saving Face, And Saving the Business
But if Google's claims of victory ring hollow, the Chinese government's stance may appear completely absurd to some Western observers. All this fuss, and in the end a silly splash-page solves the problem? Really?
"Living in China, you're faced with all sorts of rules and regulations just to function, and often times you have to go through these farcical regulations," says MacKinnon, who worked in China as a journalist for 10 years. "This is just much more public than ever before. If you don't learn to live with high levels of cognitive dissonance in China, you will go mad."
Mackinnon says pragmatists in Beijing may have succeeded by arguing that to kick Google out of the country would send the opposite message Chinese officials have been trying to transmit to Western companies -- that the country is open for business.
"If you shut one of the world's biggest Internet companies out of the market, that sends a signal to the international business community that China is a very politicized market where it's very hard to compete on [your] merits, and it's difficult to succeed as a foreign company," MacKinnon says. "That's not in China's interest."
Following months of bruising back-and-forth, Friday's solution is clearly intended to diffuse tensions and allow each side to save face. But the lesson is clear: Google operates in China at the pleasure of the Chinese government, and it was a remarkable display of hubris to imagine that the company could defy Chinese state power.
For Chinese officials, Google must have appeared at times like an irritating gnat. Under the current arrangement, Google lives to see another day in China -- though more than a little bit chastened.
Investing in Startups
The lucrative and risky world of startups.View Course »