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    Google in china Google in china Document Transcript

    • T was nice to meet you guys. [PDF] Adriel Pond File Format: PDF/Adobe Acrobat - Quick View MBAD 241: Global Perspectives. Spring 2011. Section 12, CRN 74629 [PDF] Breno Oliveira File Format: PDF/Adobe Acrobat - Quick View MBAD 241: Global Perspectives. Spring 2011. Section 12, CRN 74629 [PDF] Chito Peppler File Format: PDF/Adobe Acrobat - Quick View MBAD 241: Global Perspectives. Spring 2011. Section 12, CRN 74629 [PDF] Michael Nelson File Format: PDF/Adobe Acrobat - Quick View MBAD 241: Global Perspectives. Spring 2011. Section 12, CRN 74629 [PDF] Patricia Mininger File Format: PDF/Adobe Acrobat - Quick View MBAD 241: Global Perspectives. Spring 2011. Section 12, CRN 74629 [PDF] Whitney Milliken File Format: PDF/Adobe Acrobat - Quick View MBAD 241: Global Perspectives. Spring 2011. Section 12, CRN 74629 For: Prof. Bonnie Pierce The George Washington University
    • Table of ContentsIntroduction 3Google Company Background 3China Background 5The Internet Search Engine and Advertising Industry in China 7Google in China 9Recommendations 14Conclusion 15Appendix 16 2
    • IntroductionGoogle, Inc. is an internationally known business that has become the default providerfor Internet services for many consumers. In a world where individuals can connectfaster and across continents, Google has sought to provide its services in manycountries. With varying political and cultural climates, Google has encounteredchallenges in offering its typical services, namely its search engine, in countries withstricter access rights. One such nation is China that imposes rigid Internet censorshipwithin the country. This paper seeks to detail Google’s relationship with China and itsefforts to offer its services in the Chinese Internet market.The Internet is of top priority when it comes to they way people communicate and dobusiness today. With Google being the largest search engine and one of the fastestgrowing companies in the United States, they are also highly involved in debates aboutinternational Internet Freedom. In February 2011, Secretary of State Hillary RodhamClinton spoke at George Washington University about this topic: The choices we make today will determine what the Internet looks like in the future. Businesses have to choose whether and how to enter markets where Internet freedom is limited. People have to choose how to act online, what information to share and with whom, which ideas to voice and how to voice them. Governments have to choose to live up to their commitments to protect free expression, assembly and association.1Google’s mission is to organize the world‘s information and make it universallyaccessible and useful. Before going into the current state of Google and its internationalmarket choices, it’s important to go back to the beginning and see what the companywas founded on and how it has grown.Google Company BackgroundGoogle began as a search engine created by Larry Page and Sergey Brin whileattending Stanford University. Originally created in 1986, the company stemmed fromBackrub search engine, which operated on Stanford’s servers for more than a year.Later Page and Brin set up an office out of a garage in Menlo Park, CA, and GoogleInc., was later incorporated in 1998 with a $100,000 investment check. The nameGoogle comes from the word “googol,” a mathematical term for the number representedby the numeral 1 followed by 100 zeros, which is supposed to reflect their boundless1 Openness Online. 15 February 2011. GW Today . Washington, DC: George Washington Univesity. 3
    • amounts of information on the Internet. As the company grew, they eventually moved toMountain View in 2000, which continues to be the corporate headquarters today.2Management and TalentLarry Page and Sergey Brin still play very active roles in the company as President ofProducts and President of Technology, respectively. Eric Schmidt joined Google aschairman and chief executive officer in 2001 after being Chairman and CEO of Novelland Chief Technology Officer at Sun Microsystems, Inc. In April 2011, Eric Schmidt willstep down, as CEO, and Page will assume the position of CEO, with Brin will play amore active management role. Currently the company has over 100,000 employeeswith offices based all over the globe. Known as one of the top ten places to work, talentis recruited from the top universities and employment at Google is coveted. Despiterecent cutbacks in budget like the employee amenity of an in-house gourmet Sushi bar,Google was Fortune Magazines #4 on 100 Best Companies to Work For in the US in2009 and 2010.3Products and Service LinesGoogle has several well-known services and applications. The search engine is themost popular and is fueled by one of their most well known revenue streams, AdWords.Google’s website details how AdWords works: AdWords is the service where advertisers select words and phrases that are relevant to their business as keywords so that when people use Google to search for keywords, relevant ads may be displayed alongside the search results. We use an auction to price these ads, which runs automatically every time a user enters a query. Advertisers pay only when a user clicks on their ad, and our system guarantees that they pay the minimum amount necessary to maintain their ad position. They can also immediately track the results of their campaigns. We give marketers constant feedback. And in tough economic climates, when value matters more than ever, our measurement tools can help marketers allot their spending to the initiatives that have proven to be most effective. Hundreds of thousands of advertisers worldwide use AdWords to promote their products; hundreds of thousands of publishers take advantage of our AdSense program to deliver ads relevant to their site content.4Some of Google’s other products include its email server, Gmail, which currently hasover 190 million users worldwide. Google also maintains applications like Picasa, a2 Google Corporate. 2011. http://www.google.com/corporate/index.htm3 CNN Money. 7 February 2011.http://money.cnn.com/magazines/fortune/bestcompanies/2011/snapshots/4.html4Google Corporate. 2011. http://www.google.com/corporate/index.html 4
    • photo storing and editing application, and Blogger, a way to share information online.With Google Checkout and Google Talk, the company is rapidly changing the way manydo business online by enhancing the ability to communicate through different medium.Additionally, Google Earth allows users to see satellite images allover the world andplayed an integral part in the relief efforts of the earthquake in Haiti by pinpointingdevastated areas.In 2006 Google acquired the online video site YouTube for $1.65 billion in stock.YouTube, which was founded in February 2005, has quickly become the most wellknown online video site. More than 100 million videos, many of which are short videoscreated by the sites users, are downloaded a day on the site.5Financial PerformanceAt the end of 2010, Google, Inc. declared revenues of $29.32 billion, with a net incomeof $8.50B resulting in an operating margin of 35.41%. From 2010 to the beginning of2011, Google’s stock price (GOOG) has ranged from $433.63-642.96 with a one-yearreturn of 16.175% according to Bloomberg.com. As of mid-February 2011, stock waspriced at around $625, GOOG has continued on a positive growth trend as seen inExhibit 1 and Exhibit 2.Challenges Facing GoogleAs Google continues to grow internationally, considerations must be made toaccommodate the challenges faced with a global, online presence in multiple countries.Aside from the ongoing technology changes that are inevitable in the technologymarket, Google needs to be well prepared when entering new markets. With offices indozens of countries, by maintaining more than 150 Internet domains in more than 110languages, and serving more than half of their results to people living outside the UnitedStates, Google is bound to run into issues regarding privacy, security and freedom ofspeech.6 These issues have come to the forefront as Google has approached the onlinemarket in China.China BackgroundThe first dynasty of China dates back to 1600 B.C. and dynasties continued until 1912.7Prior to 1900, China had shown success internationally through their growth inastronomy, mathematics, engineering and medicine. However, by 1900 they had startedto grow weak compared to Britain, France and Japan. China began to experience5 LaMonica, P. R. 9 October 2006. CNN Money.http://money.cnn.com/2006/10/09/technology/googleyoutube_deal6 Times, T. N. 30 November 2010. Google Inc.http://topics.nytimes.com/top/news/business/companies/google_inc/index.html7 History of China. 2007. http://www.history-of-china.com/qing-dynasty/ 5
    • economic difficulty and discontent. Therefore in 1912, in order to avoid a civil war, Chinatransformed to a Constitutional Republic. In the early years of the Republic, theCommunist Party formed; however, they lost power to the Kuomintang’s under thedictatorship of Chiang Kai-shek. In 1937, Japan invaded China and the two Chineseparties presented a united front to defeat Japan in 1945 in World War II. However, afterWorld War II ended, the two parties broke into a civil war, which led to the resignation ofChiang and a victory by the Communists.In 1949, the People’s Republic of China was established and the new governmentworked to fix problems such as inflation and foreign relations.8 These changes did notlast long and chaos broke out for nearly a decade. During this time the governmentcontrolled what information was relayed to the people of China. The resulting lack ofinformation essentially isolated China from the rest of the world.9 Eventually newleadership took over and great improvements in the standard of living were made.These improvements were deemed a primary policy objective and the opening of theChinese economy was deemed of central importance.10Chinese PoliticsThe current Chinese government functions under the leadership of the Communistparty.11 The power of the country belongs to the people who participate in elections forthe local congresses. These members then elect the 3,000 delegates to the NationalPeople’s Congress. The National People’s Congress elect the rest of the state structureincluding President, Premier, Vice President and Chair of the Central MilitaryCommission as well as the President of the Supreme People’s Court and theProcurator-General of the Supreme People’s Procuratorate.12The Chinese government follows a Constitution that was written in 1982. TheConstitution states that citizens of China have freedom of speech, press andassembly.13 However, this has not prevented the Chinese government from continually8 Discovering China. 1999. Oracle ThinkQuest. http://library.thinkquest.org/26469/index2.html9 Ickovic, Caleb, Cristina Lane and Martha Jones. 12 April 2006. “Censorship in China”. Duke University.http://www.duke.edu/~faq/eagate/reports/Censorship_In_China-Report.pdf10 History of China. 2004. History of Nations. http://www.historyofnations.net/asia/china.html11 China’s Political System. 2006. China Internet Information Center.http://www.china.org.cn/features/political/2006-11/08/content_1029034.htm12 Chiu, Lisa. 2011. “China Basics”.http://chineseculture.about.com/od/thechinesegovernment/u/IntrotoChina.htm13 Rosenberg, Matt. 2011. “China Population: The Population Growth of the World’s Largest Country”.http://geography.about.com/od/populationgeography/a/chinapopulation.htm 6
    • controlling what information citizens can obtain. The Chinese has done this through avariety of rules. One of these rules is the monitoring of the Internet by China’s Ministryof Public Security. The Chinese government blocks their citizens from seeing someoverseas news reports and searching various words in search engines. The purpose ofthis is to keep China separate from the rest of the world. Over time, many of these ruleshave become less strict.China DemographicsChina has approximately 1.3 billion people living on the mainland making it the mostpopulous country. The population is expected to continue to grow for the next fewdecades with the average birth rate being 1.7 children to every woman that gives birth.With 91 percent of the Chinese population Han, the government has tried to reduce thepopulation by instating the One Child Policy for all Han Chinese living in urban areas.The most common languages spoken in China are Standard Chinese (Mandarin), Yue(Cantonese), Wu (Shanghaiese), Minbei (Fuzhou), Minnan (Hokkien-Taiwanese),Xiang, Gan, and Hakka dialects.14 The religions of China include Confucianism, Daoism,Buddhism, Islam and Christianity.15Chinese EconomyChina is currently the second largest economy in the world having a 2010 GDP of$5.8786 trillion. China is estimated to become the largest economy in the next twenty-five years.16 China’s economy is expected to continue to grow due to an increase inminimum wage and therefore an increase in household spending.17 China’s economybegan to grow substantially when barriers where removed to international trade in thelate 1970s. Since then, the Chinese economy has grown tenfold. The current Chineseeconomy is 43% agricultural, 25% industrial and 32% service.18 China continues tocompete internationally as their goods are substantially cheaper to export than othercountries making it more beneficial for other countries to conduct business with China.1914 Chinese Government’s Official Web Portal. 2006.http://www.gov.cn/english/2005-08/05/content_20813.htm15 Whyte, Bob. 2001. “Religion in China”. Society for Anglo-Chinese Understanding.http://www.sacu.org/religion.html16 McCurry, Justin and Julia Kollewe. 14 February 2011. “China overtakes Japan as world’s second-largest economy”. The Guardian. http://www.guardian.co.uk/business/2011/feb/14/china-second-largest-economy17 Shasha, Deng. 15 February 2011. “ABAC: Chinese economy expects strong growth due to increasedinflation pressure”. Xinhua News Agency.http://news.xinhuanet.com/english2010/china/2011-02/15/c_13733602.htm18 Briney, Amanda. 2011. “The Geography and Modern History of China”. http://geography.about.com/od/chinamaps/a/china.htm19 “Doing Business 2011: China”. 2011. World Bank.http://www.doingbusiness.org/~/media/FPDKM/Doing 7
    • The Internet Search Engine and Advertising Industry in ChinaPorter’s Five Forces Industry AnalysisAs one would expect, doing business in the Chinese markets is vastly different fromdoing so in many other countries around the world. Doing business in China hasbecome easier in the past five years. In terms of ease of doing business, China iscurrently ranked 79th out of 183 economies. (See Exhibit 3) However, starting abusiness is China is more difficult than starting a business in most other countries.Additional layers of complexity in the Chinese Internet search engine and advertisingindustry require special consideration. Michael Porter’s Five Forces of Competitionprovides a conceptual framework to better understand the industry context in whichthese firms operate. (See Exhibit 4)Potential Entrants – Extremely LowThree major elements must be taken into consideration when assessing the barriers atentry. First, The Chinese government follows a Constitution, which was written in 1982.The Chinese Constitution states that citizens have freedom of speech, press andassembly.7 However, this has not prevented the Chinese government from continuallycontrolling what information citizens can obtain. The Chinese have done this through avariety of rules. One of these rules is the monitoring of the Internet by China’s Ministryof Public Security. The Chinese government blocks their citizens from seeing someoverseas news reports and searching various words in search engines. The purpose ofthis is to keep China separate from the rest of the world. These rules have graduallybecome less strict but require constant relationship maintenance nonetheless.3Second, starting a business in China is more difficult than in most other countries. Thereare 14 procedures that must be followed, and it takes an average of 38 days. Getting aloan in China is getting easier; however, they are ranked 65 th compared to othercountries. They are expected to move up as their economy continues to grow. China is%20Business/Documents/Profiles/Country/DB11/CHN.pdf20 Ibid. 8
    • known for enforcing contracts in business as they were ranked 15 th in the world forenforcement of contracts. 13Third, to run a competitive and successful online search engine or advertising firm inChina requires a highly skilled and well-balanced assortment of professionals: well-connected businessmen, highly innovative computer programmers, software engineersetc. Although there are examples (Google and Apple) of mega-companies starting outof the garage, the ability to compete with existing businesses in this area is not thenorm, as finding the qualified professional mix is both costly and difficult. Furthermore,current competitors have thousands of servers deployed in locations all over the worldand have accumulated many years worth of data about user habits. A new entrantwould need to provide better search results at very fast speeds to compete in this highlycompetitive market.Bargaining Power of Suppliers – LowAll industries require inputs – which may include labor, components, and other rawmaterials. This requirement leads to buyer-supplier relationships between the industryand the firms that provide the inputs necessary to create their products. Suppliers, ifpowerful, can exert significant influence on a producing industry, such as selling inputsat a high price to capture some of the industry’s profits, establishing high switchingcosts etc. In terms of Internet search engines backward integration with webmasters isa very credible threat, which lowers the power of such suppliers. In advertising, the ad-making partner and ad-receiving individual are usually both customers of the firm andtherefore supplier power is not a concern.Bargaining Power of Consumers – Low-MediumThe vast majority of revenues in this industry are derived from advertising. However,dispersion of revenues across consumers as well as concentration of revenuegeneration from network partners plays an important role in bargaining power.Dispersion means that no single buyer has a controlling interest. Although much like inthe United States, many Chinese advertisers bid on keywords, popular keywords canalso be sold for a higher value-per-click. This distribution attracts both large companiesand small enterprises, keeping buyer power low. 9
    • Substitutes – None-Very lowAt this juncture in history, there is no real substitute for search engines. The Internet isthe primary mode chosen by people all over the world to request and retrieveinformation. Information can be organized in different ways including categories andsorted by date, but search engines provide tools to complete these tasks as well asconduct searches. A substitute product may be invented in the future, but there are noobvious substitutes to organizing information on the Internet.Rivalry - Medium and Trending UpwardAccording to Porter’s theory, the intensity of the other forces at play will greatly affectthe level of competition among existing players in the industry. In the sector there arecurrently a handful of major players of the size and depth of service that gainfullycompete in China. (See Exhibit 5) As expected, comparable companies in the sectorare large cap and reap sizable profit margins. (See Exhibit 6). However, Baidu isarguably the market leader because local companies may have a better grasp on thegrowth and development of the Chinese web resulting in crawls, indexes and betterthan Google – the distant second ranked engine. With few new kids on the block toshake up the establishment, the intensity of competition can easily be gauged by thevolatility of market share among existing competitors.Google in ChinaThe Great Firewall of ChinaOne of the most interesting facts involving the case of Google and China is its cross-cultural aspect. Google is an American corporation that crossed the ocean to dobusiness in a different environment. Although globalization brought standardization inbusiness practices, countries still have their peculiarities and laws may differconsiderably. When the laws of the organization’s home country differ from those of thehost country, there are no clear guidelines on how the organization should behave.As an independent country, China is sovereign and self-governed. People are entitled toset their own laws and decide how to build their institutions. On the other hand, thereare universal ideas of justice and fairness that are present regardless of politicalborders. Once Google went to China, unique features of the host country clashed withthe company’s corporate culture. However, Google could not ignore a country with over1 billion people and a fast growing economy. China could provide a huge boost toGoogles bottom line as growth in Google businesses steady in the U.S. in andEurope. 10
    • Google’s rocky experience in China started in 2000 when Google began offering aChinese language version of Google.com. The website was slow, unreliable and ofteninaccessible. These problems were due to extensive filtering performed by China’slicensed Internet service providers. For two weeks in the fall of 2002 and in Decemberof 2003, Google.com became completely unavailable in China. Once the service wasrestored, the company claimed it had stood by its principles and had not subjecteditself to Chinese censorship laws and regulations.In July 2005, Kai-Fu Lee, a former Microsoft executive, joined Google as a global vice-president in charge of China and announced a plan to establish a research center inChina. In January 2006, Google.cn was launched under widespread criticism becausethe company agreed to block certain websites in return for being able to run a localChinese service. Additionally, Google promised to inform Chinese users when searchresults are censored and not to maintain any services that involve personal orconfidential data, such as Gmail or Blogger, on the mainland. The unfiltered Chinese-language Google.com remained available.20The widespread criticism against Google’s decision to run a local Chinese service isdue to the disparity between China’s approach, and lack thereof, for human rights andGoogle’s corporate culture. China is widely known for monitoring the Internet,censoring speech and persecuting political dissents within its borders. This proactivelimiting of information conflicts with Google’s motto, “do no evil”, and their corporatephilosophy that “you can make money without doing evil.”21 Being based in the UnitedStates, Google is immersed in a culture of free speech—a right enshrined in theAmerican Constitution and extremely valued by American citizens. By doing businessin China, some critics accused Google of going against its corporate culture and beingan accomplice to human rights violations. As an Internet search technologycorporation, whose stated mission is to “organize the worlds information and make ituniversally accessible and useful," Google found itself in a difficult situation.22 Howcould they explain its decision to found Google China and start censoring searchresults?Google executives seemed to be aware of the ethical issues regarding the businessmove. According to Google Senior Policy Counsel Andrew McLaughlin, there weredebates “whether entering the Chinese market at this point in history could be20 Google China. 12 February 2011. Wikipedia. http://en.wikipedia.org/wiki/Google_China21 Our Philosophy. 2011. Google. http://www.google.com/corporate/tenthings.html212222 Ibid. 11
    • consistent with [Google’s] mission and values.” 23 After consideration, Google found amoral justification for their actions and called it “evil scale”. “We actually did an evilscale and decided [that] not to serve at all was [a] worse evil,” said CEO EricSchmidt.24 Since the Chinese government did not provide a list of words and websitesthat must be censored, Google would have some flexibility in deciding what to censorand what not to censor and possibly push the boundaries.In June 2006, Google.com was again blocked in China while Google.cn continued towork. In April 2007, Schmidt gave an upbeat assessment of Google’s outlook in China,saying that that the company was on track to lead the country’s Internet market inspite of challenges including censorship issues and fierce competition fromBaidu.com, its larger home-grown rival. It was not until September 2007 thatGoogle.cn received a license from the Chinese government that officially allowed it tooperate its website in China – more than 18 months after it set up Google.cn.Controversies surrounding Google in China did not cease to appear. In February2008, Guo Quan, a Chinese human rights activist, threatened to sue Yahoo andGoogle for excising his name from its local search results. Mr. Guo wrote that “tomake money, Google has become a servile Pekinese dog wagging its tail at the heelsof the Chinese Communists”. For his remarks, Mr. Guo was sentenced to 10 years injail in 2009. In January and April of 2009, Chinese regulators criticized Google formaking pornography available through its search engine. Later in June, Chineseregulators announced that they would “punish” Google China for failing to removepornographic content from its search results. The punishment included a suspensionof its ability to search foreign websites and its associative-word search function – amove that drove Google users away to rival Baidu.25 In the same month, Google’sglobal website was once again blocked in China and there were many reports inofficial media accusing Google of allowing pornography content.In the second quarter of 2009, China Mobile launched customized smartphones basedon Google’s Android operating system26. Although recent reports suggest that theAndroid is on a trajectory to become the dominant mobile operating system in China,this may not be a victory for Google. The Android is partly based on Linux opensource software. It is possible for handset makers and mobile carriers to replace theparts that are controlled exclusively by Google and integrate their own alternatives—23 “A History of Google in China”. 9 July 2010. Financial Times.http://www.ft.com/cms/s/0/faf86fbc-0009-11df-8626-00144feabdc0.html#axzz1Dt8mIdgv24 Ibid.25 “China: Baidu’s Gain Tests Google” 1 February 2011. Financial Times.http://blogs.ft.com/beyondbrics/2011/02/01/china-baidus-gain-tests-google/26 China Mobile is the most valuable telecommunications company in the world. At the end of 2010, it had584 million customers. 12
    • thus allowing them to adopt Android without having to make any concessions to theAmerican search giant.27The last controversy in 2009 involved copyrights issues. A Chinese copyrights groupdemanded talks with Google over compensation for Chinese authors who had hadtheir books scanned into the company’s electronic library. In December, a Chinesecourt agrees to hear a case brought by Mian Mian, a novelist, against Google forscanning her works, posing a fresh challenge to the company’s digital books project.28Challenging the SystemSoon after the copyright case, Google entered its worst period in Chinese soil. OnJanuary 12, 2010, Google posted in its Official Google Blog an entry entitled “A NewApproach to China.” Google stated that it had suffered a sophisticated cyber attackoriginated within Chinese borders and that the Gmail accounts of dozens of humanrights activists connected with China had been violated. As a consequence of thatepisode, Google took a hard stance against the Chinese government and on March 22it had stopped censoring its search services—Google Search, Google News andGoogle Images—on Google.cn. Google stock price fell for the two days after theannouncement and market analysts began to question what would be the long-termconsequences of the decision. (See Exhibit 7)Schmidt was very careful not to shut the door completely in China and, mostimportant, not to lose “face.” Schmidt said that Google aimed to stay in China even if itwas forced to close down its local search services as the company has a range ofother business opportunities on the mainland. In a recent interview, Schmidt stated,“we love China and the Chinese people. This is not about them. Its about ourunwillingness to participate in censorship.”29 The stakes were high and Google’smanagement would have to come up with a convincing strategy to deal with theproblem. While some human rights activists and government officials were praisingGoogle’s decision to stop censoring search results, business analysts asked if Googlehad chosen to engage in a “quixotic” fight for human rights in China rather thenfocusing strictly on business opportunities.27 Paul, Ryan. July 2010. “Android’s Ascent in China might not elevate Google”. ars technica.http://arstechnica.com/gadgets/news/2010/07/androids-ascent-in-china-is-not-elevating-google.ars28 Lau, Justine. 9 July 2010. “A History of Google in China”. Financial Times.http://www.ft.com/cms/s/0/faf86fbc-0009-11df-8626-00144feabdc0.html#axzz1Dt8mIdgv29 Zakaria, Fareed. 15 January 2010. “A Conversation with Google Chairman and CEO”. Newsweek.http://www.newsweek.com/2010/01/14/a-conversation-with-google-s-chairman-andceo.html 13
    • After March 2010, all search requests on Google.cn were being redirected to Google’sHong Kong arm and were not being censored. The Chinese government started tothreaten to shut Google down by the end of June. Google then placed a voluntary linkto its Hong Kong site on the Google.cn home page, rather than automaticallyredirecting users, in a bid to appease the authorities ahead of a license renewal due atthe end of the month. Surprisingly, the Chinese government renewed Google’s licenseto operate in the country, appearing to accept a compromise offered by the UnitedStates based search engine over Internet censorship.The Implications of the Pull-Out and 2011 PerspectivesGoogle lost market share in China after the clash with the government. According toDown Jones Newswires, in 2010, Baidus share of Chinas online search market roseto 75.5% in the fourth quarter from 73% in the third quarter, while Googles shareslipped two percentage points to 19.6%.30 (See Exhibit 8) Analysts expect Google togive up more ground in 2011, and many think that the return of Googles China marketshare to the level seen before the incident is very unlikely.The lost business in China does not reflect Google’s global performance. As notedearlier, Google reported profits of $8.5 billion, a 30 percent jump over 2009 profit. Withthe impending departure of Schmidt, a strong proponent of doing business in China,market analysts wondered if Google would distance itself from China. But just theopposite might happen. In an interview at the end of January, Schmidt indicated hisenthusiasm to step up the company’s China game and affirmed that “between thethree of us [Larry Page, Sergey Brin] I’ve always been the person who believe themost in expanding in China…over time, especially in my new role, I can try to getmore [of] Google… into China.”31Google is already changing focus in China. The company is targeting Chinese firms toadvertise on its dominant overseas search market, a business which alreadyconstitutes about half of its China revenues, according to T.R. Harrington, chiefexecutive of search marketing consultant, Darwin Marketing.3230 Fletcher, Owen and Joan E. Solsman. 31 January 2011. “Baidu Fourth-Quarter Net More thanDoubles”. Wall Street Journal. http://online.wsj.com/article/BT-CO-20110131-720213.html31 Fletcher, Owen. 28 January 2011. “Google’s Schmidt Still Chasing China Ambitions”. Wall StreetJournal. http://blogs.wsj.com/chinarealtime/2011/01/28/googles-schmidt-still-chasing-china-ambitions/ 14
    • The Moral ConundrumThere is more than commercial gain at stake in Google’s decision to expand into China.Co-founder Sergey Brin was born in the Soviet Union and stated that “having felt thatkind of oppression [from authoritarian state], I would never have wanted to compromisein that direction [self-censor].” On the other hand, it is self-evident that while doingbusiness abroad, we need to be responsive to local conditions. Schmidt said, “I think it’sarrogant for us to walk into a country where we are just beginning operations and tellthat country how to run itself.”33In the article Google, Human Rights, and Moral Compromise, George Brenkert arguesthat business in general might encounter situations where they have to compromisesome of their important principles or values in order to protect other ones. 34 To illustratehis point, Brenkert uses a metaphor of a son who “is torn between staying home to helphis mother during World War II or leaving her to join the French forces.” Whatever thedecision is, the son will fail his mother or he will fail his country.After careful analysis, Brenkert concludes that Google is right to engage in moralcompromise and do business in China. He claims that we live in an immoral andimperfect world, and Google could not afford a “moral purity.” Although compelling,Brenkert’s moral compromise is also a slippery slope, and once the door to moralcompromise is open, integrity will be at risk. Moreover, a moral compromise can set adangerous precedent and the ability to bear the pressure for new compromises in thefuture will be diminished. Another problem with moral compromise is the loss of trust.Those affected by the moral compromise and the public in general will start to doubt thevalues and principles of the organization. This is seen in Internet’s users increased usenot be perfect, but it is not an excuse for us to engage in selfish and destructivebehavior.RecommendationsGoogle is losing market share in China with its search engine and will likely continue todiminish its market presence with its refusal to censor. At present, the future of Chinacensorship is unknown, but it is recommended that Google continue business within32 “Google Plots New China Growth Plan” 13 January 2011. Reuters.http://www.businessworld.in/bw/2011_01_13_Google_Plots_New_China_Growth_Plan.html33 Ibid.34 Brenkert, George G. July 2008. “Google, Human Rights, and Moral Compromise”. Journal of BusinessEthics Vol. 85. 15
    • China. This recommendation stems from the consideration of two primary factors:investor confidence, ethics and Guanxi.Investor confidence must be carefully considered, especially given the extraordinarysize of the Chinese market – which rose to 338 million by the end of June 2009. 35 Fromthe share price perspective, a pull-out from the world’s second largest economy wouldsignal to market that the present value of the company’s future cash flows will besmaller than anticipated in the future. While the market does not look favorably upon thecurrent tit-for-tat relationship between Google and the government, the full effect of acomplete withdrawal from the company has not likely been captured yet in the shareprice. Consequently, with a full-scale withdrawal Google can expect to see its expectedcash flows, share price and investor confidence plummet. Google should not forgo thatits 21.6% stake in this still underdeveloped market in which only 40% of the populationis connected to the internet. Although growth in market share may be slower than inother nations owing to regulations and other country characteristics, the upside potentialin this two-horse race for new users is extremely attractive.It is evident that leadership within Google has struggled with the moral conflict ofoperating their business within a more oppressive country. Google should not fullyengage in a full-on moral battle with the Chinese government and its censorship. Thedebate over censorship in China is not new, and as noted earlier, it is presumptuous ofa business to enter a country this powerful and assume its values upon the nation.Censorship is a debate that will certainly take more time to resolve and undoubtedlyrequire a large role among governing bodies. However, Google can be vocal about itsviews on the matter given the nature of its business and philosophy.Moreover, it is understood that censorship does not coincide with the beliefs of Google.Indeed, recent world events (ie Egypt) have demonstrated the vitality of information, andno doubt that censoring would make Google subject to much scrutiny. However, byworking under China’s censorship conditions, Google is able to connect millions andafford them many opportunities otherwise impossible. In this situation, it isrecommended that complying with China’s censors would be the lesser of two evils. It isbetter to provide as much connectivity and information as possible to the Chinesepeople, than none at all.Finally, Google must consider Guanxi, a core concept that is rooted in thousands ofyears of Chinese ethics and business. Guanxi literally means “relationships” and iscritical to business relationships within China. Google’s decision to defy censorship was35 AFP. 28 July 2009. “Discovery, Baidu launch website”http://www.google.com/hostednews/afp/article/ALeqM5j1ljoTEss5nUHSfKAFxGuQxxXLVA 16
    • damaging to the relationship Google had with the Chinese government and businesscommunity. It is imperative that Google seek to bolster and renew its fragile workingrelationship within China. Without Guanxi, Google cannot operate within China.ConclusionWhile Google has very successful business operations in most of the world, it is clearthat special consideration must be taken when operating in China. Having relativelylimited resistance thus far, providing services in China present new challenges forGoogle, particularly with its most prevalent search engine. A thorough study of themarket climate and the unique aspects of China demonstrate that many obstaclesremain. Yet, it is also evident that Google can play a role in the current and futuremarket, and ethically should continue operating in China.Exhibit 1 17
    • Yahoo. 17 February 2011. Google Inc. http://finance.yahoo.com/q?s=GOOG 18
    • Exhibit 2 Income StatementView: Annual Data | Quarterly Data All numbers in thousands 19
    • Period Ending Dec 31, 2010 Dec 31, 2009 Dec 31, 2008Total Revenue 29,321,000 23,651,000 21,795,550Cost of Revenue 10,417,000 8,844,000 8,621,506Gross Profit 18,904,000 14,807,000 13,174,044 Operating Expenses Research Development 3,762,000 2,843,000 2,793,192 Selling General and Administrative 4,761,000 3,652,000 3,748,883 Non Recurring - - - Others - - - Total Operating Expenses - - -Operating Income or Loss 10,381,000 8,312,000 6,631,969 Income from Continuing Operations Total Other Income/Expenses Net - - (778,373) Earnings Before Interest And Taxes 10,796,000 8,381,000 5,853,596 Interest Expense - - - Income Before Tax 10,796,000 8,381,000 5,853,596 Income Tax Expense 2,291,000 1,861,000 1,626,738 Minority Interest - - - Net Income From Continuing Ops 8,505,000 6,520,000 4,226,858 Non-recurring Events Discontinued Operations - - - Extraordinary Items - - - Effect Of Accounting Changes - - - Other Items - - - 20
    • Yahoo. 17 February 2011. Google Inc. http://finance.yahoo.com/q?s=GOOGExhibit 3“Doing Business 2011: China”. 2011. World Bank. http://www.doingbusiness.org/~/media/FPDKM/ Doing%20Business/Documents/Profiles/Country/DB11/CHN.pdfExhibit 4 Michael Porters’ Five Forces of Competition 21
    • Threat of New Entrants Rivalry Among Bargaining Power of Existing Bargaining Power of Buyers Competitors Suppliers Threat of Substitute Products or ServicesExhibit 5 COMPARABLE PUBLIC COMPANIES DESCRIPTIONSGoogle Inc. maintains an index of Websites and other online content, and makes thisinformation freely available through its search engine to anyone with an Internetconnection. Its automated search technology helps people obtain nearly instant accessto relevant information from its online index. It generates revenue primarily by deliveringonline advertising. Businesses use its AdWords program to promote their products andservices with targeted advertising. In addition, the thousands of third-party Websitesthat comprise the Google Network use its AdSense program to deliver relevant ads thatgenerate revenue and enhance the user experience. In September 2009, the Companyacquired ReCAPTCHA Inc., a spin-off of Carnegie Mellon Universitys ComputerScience Department. In February 2010, it acquired Aardvark. In February 2010, itacquired On2 Technologies, Inc. In August 2010, it acquired Slide, a social technologycompany. In August 2010, it acquired Angstro.Baidu, Inc. (Baidu) is a Chinese-language Internet search provider. The Companyconducts its operations in China principally through Baidu Online Network Technology(Beijing) Co., Ltd., its wholly owned subsidiary in Beijing, China. It also conducts itsoperations in China through Baidu Netcom Science Technology Co., Ltd., which holdsthe licenses and approvals necessary to operate the Company’s Websites and provide 22
    • online advertising services. The Company has launched a Japanese search service atwww.baidu.jp, run by Baidu Japan. Its Japanese search services enable users to findrelevant information online, including Web pages, images, multimedia files and blogs,through links provided on its Websites. Baidu offers a Chinese-language searchplatform on its Website www.baidu.com. It provides Chinese-language Internet searchservices to enable users to find relevant information online, including Web pages, news,images and multimedia files, through links provided on its Websites.Sohu.com Inc. (Sohu) is an Internet company in China, providing Chinese with news,information, entertainment and communication. The Company’s business consists ofadvertising, online game and wireless business. The Company’s advertising business,including brand advertising services and sponsored search services, offers variousproducts and services to its users (such as free-of-charge content, interactivecommunity, integration search and other competitive Internet services), and providesadvertising services to advertisers on its matrices of Chinese language Web propertiesconsisting of www.sohu.com, a mass portal and online media destination;www.17173.com, a games information portal; www.focus.cn, a real estate Website;www.chinaren.com, an online alumni club, and www.sogou.com, an interactive searchengine. The Company operates two massively multi-player online role-playing games(MMORPG games), Tian Long Ba Bu (TLBB) and Blade Online (BO).SINA Corporation (SINA) is an online media company and MVAS provider in thePeople’s Republic of China (PRC) and the global Chinese communities. The Companyprovides services through five business lines, including SINA.com (online news andcontent), SINA Mobile (MVAS), SINA Community (Web 2.0 and social networking-based services and games), SINA.net (search and enterprise services), and SINA E-Commerce (online shopping). These business lines provide an array of services,including region-focused online portals, MVAS, social networking service (SNS), suchas micro-blog and album, blog, audio and video streaming, album, online games, e-mail, search, classified listings, fee-based services, e-commerce and enterprise e-solutions.NetEase.com, Inc., through it s subsidiaries and contracts with its affiliates GuangzhouNetEase, Guangyitong Advertising and Shanghai EaseNet, operates an interactiveonline community in China and is a provider of Chinese language content and servicesthrough its online games, Internet portal and wireless value-added services businesses. 23
    • The Company conducts its business in People’s Republic of China through itssubsidiaries, NetEase Information Technology (Beijing) Co., Ltd. (NetEase Beijing),Guangzhou NetEase Interactive Entertainment Limited (Guangzhou Interactive),Guangzhou Boguan Telecommunication Limited (Boguan), NetEase (Hangzhou)Network Co., Ltd. (NetEase Hangzhou), Guangzhou Information Technology andNetEase Youdao Information Technology (Beijing) Limited (Youdao Information).Source: Yahoo! FinanceExhibit 6 Comparable Public Companies Chinese Internet Search and Advertising Market Google Baidu SOHU SINA NTES Valuation Multiples Enterprise Value/Revenue (ttm)3: 5.9x 35.8x 4.0x 11.9x 5.7x Enterprise Value/EBITDA (ttm) :3 14.7x 66.2x 9.7x 53.3x 11.3x Valuation Measures Market Cap (intraday)5: 202.58B 44.19B 3.18B 5.24B 5.78B Enterprise Value (Feb 20, 2011) : 3 173.44B 42.96B 2.47B 4.64B 4.45B Price/Sales (ttm): 6.86 37.3 5.26 13.81 7.44 Price/Book (mrq): 4.34 35.12 4.05 4.06 4.23 Profitability Profit Margin (ttm): 29.01% 44.54% 24.26% 115.90% 40.89% Operating Margin (ttm): 35.41% 50.02% 37.62% 16.83% 46.04% 24
    • Management Effectiveness Return on Assets (ttm): 13.19% 28.76% 14.30% 3.23% 15.83% Return on Equity (ttm): 20.68% 53.58% 23.99% 46.18% 26.11% Sources: SEC.gov, Yahoo! FinanceExhibit 7 Table 1. Google Historical Stock Price Date Open Close Date Open Close 31-Mar-10 565.05 567.12 19-Mar-10 566.23 560 30-Mar-10 562.83 566.71 18-Mar-10 564.72 566.4 29-Mar-10 563 562.45 17-Mar-10 568.3 565.56 26-Mar-10 565.27 562.69 16-Mar-10 561.83 565.2 25-Mar-10 559.02 562.88 15-Mar-10 566.68 563.18 24-Mar-10 545.51 557.33 12-Mar-10 588.14 579.54 23-Mar-10 557.04 549 11-Mar-10 574.26 581.14 22-Mar-10 556.11 557.5 10-Mar-10 563.76 576.45 Source: Googl e Fi na nceGoogle Finance. 2011. http://www.google.com/finance/historical?q=NASDAQ%3AGOOG&start= 0&num=30Exhibit 8 25
    • Analysys International. 2010. Analysys. http://english.analysys.com.cn/article.php?aid=92795 26