Google Tiptoes Back Into China


Pragmatism versus idealism. The two are often at odds in the business world, but rarely more so than in the technology industry. When a company can balance its founders’ ideals with the practical needs of the market, it can lead to a great success, as it did with Apple (NASDAQ:AAPL). Much more often, a company is forced to choose one or the other — as Google (NASDAQ:GOOG) had to do in China.

Two years ago, after a cyberattack on its corporate infrastructure that originated from China, Google’s chief legal officer declared that the company is “no longer willing to continue censoring our results on,” and if the Chinese government didn’t allow the company to offer an unfiltered search engine in China, Google would “shut down, and potentially our offices in China.”

That’s what happened, and for the rest of 2010, Google’s stock had one of its worst years since it went public in 2004. Over the next six months, GOOG would lose 30% of its value. And by the end of 2010, it would still be 4% down from its level before it challenged China, compared with a 17% rise with the Nasdaq Composite. Ouch.

That performance can’t be blamed solely on Google’s decision to exit China. But the move did deprive the search giant of an important area of overseas growth at a time when its domestic search revenue was facing a new competitor in Facebook. Advertisers were growing enamored with the viral potential of social-network ads. And Google had no clear answer to the threat that Facebook posed.

Even so, Google held to its ideals. The company’s “don’t be evil” motto — famously explained by current CEO Larry Page as meaning whatever his co-founder, Sergey Brin, wanted it to mean — didn’t want to be seen supporting state censorship, or hindering human-rights activists, or working with the bureaucrats who directed hackers into Google’s servers. Whether shareholders liked it or not, idealism won the day.

But now that two years has passed, The Wall Street Journal is reporting that Google is quietly expanding in China again, hiring more engineers, managers and sales staff, and introducing products that don’t depend on the government’s ability to censor the Web. More than search, Google wants its Android mobile operating software to establish the strong foothold in China that it’s gained in many other growing economies.

In the Journal, Google’s top executive in Asia described the initiative as “pragmatic.” Chinese advertisers want to move online, and few mobile platforms can compete with the low-cost, open-source Android. In many countries with large populations but with relatively scarce wired Internet connections, the Web will primarily be accessed through smartphones.

Even in the best-case scenario, Google’s reentry into China won’t bring much material benefit to shareholders this year. It’s a long-term strategy, but the returns could grow year after year should Google draw a significant ad-revenue stream from China’s Internet users. Google rose only 0.6% Thursday following the Journal‘s story. But long-term investors in Google may see a much bigger return from China, especially in mobile ads.

China is to smartphone buyers what Android is to mobile platforms: Both lead the world in terms of sheer population. In that sense, they belong together. But the perennial clash of ideals has kept them apart. So far, China hasn’t presented any barriers it could easily erect to keep Google out. Reading the Journal story, you get the sense both parties are trying to find common ground, leaving room for differences in their respective ideals without either endorsing or rejecting them.

That kind of dance is the ultimate pragmatism. If it works, China’s 500 million Internet users could benefit from Google’s technology, while Google could enhance its revenue and profit by tapping a vast and growing market.

But for two giants that need each other, Google and China remain far apart on many issues. And so this delicate detente could end with both shunning each other — and hurting each other. Just another reason for investors to keep an eye on Google’s Chinese efforts.

Article printed from InvestorPlace Media,

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