Google risks losing market share in China after withdrawal

Google's gambit in pulling the plug on its flagship search engine in China leaves its remaining operations there exposed to the whims of Beijing, whose initial reaction is far from reassuring.

Google plans to maintain an advertising sales force as well as its large research and development operations in China, but risks losing market share, revenue, and staff to rivals, including market leader Baidu, the upcoming Tencent, and US heavyweight Microsoft.

Opportunities to develop and market its Android and Chrome operating systems for cellphones and PCs in China could also be threatened, a potential setback for partners such as handset makers Dell and Lenovo.

"There's no doubt the Chinese might make life difficult for Google," said Vivek Couto, an analyst at Media Partners Asia. "But they don't want to go directly after them. China also has to be a bit cautious."

Google's decision to shut its mainland Chinese-language portal and reroute searches to its Hong Kong-based site to avoid the self-censorship Beijing demands was seen more as an escalation than a compromise in the two-month-old dispute.

Though tensions could ease after an initial round of finger-pointing, the uncertainty and need for Beijing's tolerance, if not support, threaten Google's prospects in the world's largest internet market.

Initial indications that Google's gambit was getting a chilly reception came from the official Xinhua news agency, which cited an unnamed official calling the move "totally wrong" and in violation of Google's written promises.

In direct terms, Google may have to give up some or all of its revenue derived from China's search market, depending on whether its advertisers follow it to its redirected China site at google.com.hk.

Analyst estimates of Google's annual revenue in China range from $300 million to roughly $600 million, a small portion of its $24 billion in annual revenue.

Other stakeholders exposed to Google's actions include cellphone makers like Dell and Lenovo, which are both developing Android-based phones for China, as well as the hundreds of people who independently sell ads and develop software for Google's products.

Spokespersons at Lenovo and at China Mobile, which is planning to offer the Dell Android phones on its network, had no immediate comment.

Meanwhile, other search site operators stand ready to benefit form Google's withdrawal, most notably Baidu, which has 60% of China's search market, and others such as the fast-growing Tencent, analysts said.

"It will benefit everybody in China, but the obvious immediate beneficiary will be Baidu," said CLSA analyst Elinor Leung. Microsoft, which has launched a beta version of its Bing search site in China, could also pick up market share, she said.

Other Web players could benefit as well if Google decides to use them as a back-door strategy to invest in China's internet market. Yahoo used a similar strategy after abandoning its own efforts in China in favour of buying 40% of leading China e-commerce operator Alibaba Group.

Despite the potential for collateral damage, observers and those who work for Google were cautiously optimistic that the current conflict wouldn't spiral out of control, saying such escalation was in no one's interest.

Google's interest in the market is already clear. But China also has an interest in placating Western governments that have been critical of its heavy-handed approach to media control and civil rights. China also needs major global tech firms like Google to develop its own domestic industries so they can someday compete on the global stage.

"If Google leaves its R&D unit in its current headquarters in Beijing ... the staff will remain, so I think our activities will continue," said Arthur Wang, chairman of Beijing Google Technology User Group, one of Google's largest software development groups.

Advertisers could take a more cautious approach until they see if Google's Hong Kong site catering to mainland Chinese Web surfers gets the same traffic as its shuttered China site, said Kaiser Kuo, a China-based technology commentator.

"Buying on a redirected site that could be at any moment blocked is a risky strategy," he said. "So I think people are going to read the tea leaves and see what the government is going to do in this situation before making any commitments."

Edward Yu, an analyst in a China research firm Analysys, was confident that Google could continue to operate effectively in China.

"In the short term, some officials may be upset about Google rerouting its operations," he said. "But when things cool down, I think the other part of their operations are not affected as long as they comply with the regulations."