The push and pull of China

Sarah Lacy, on Techcrunch, wrote that the Google move today was more about business than about ethics. I am torn by her article, but to explain why I need to go into the push and pull of China and how it rips the heart out of US companies.

I’ve visited China twice, once in 1995 to work at a computer show there, and again last year to visit entrepreneurs in Shanghai, get a tour of Seagate’s factory, and see inside PCH, which is one of the supply chains that many of your favorite technology companies use, and visit a blogger conference.

As an American I saw two opposite poles: one of unending opportunity and one of unending frustration of dealing with the government.

First, the pull. The opportunity was in my face. When I visited Shanghai I met up with Gary Rieschel, one of the top VCs in the world (he helped start Softbank). There he showed me a nicely profitable taxi screen company and we had to wait for nine taxis before we found one with his screen. I could have copied his business plan and made many millions of dollars a month all without coming up with an original idea and all without really causing his company much new competition. In China there’s a gold rush underway and there’s gold lying in the streets for entrepreneurs.

Everywhere you looked you saw similar opportunity. In fact, if you are Chinese, it’s even easier. Just look to what’s getting popular in the west, copy it (there were tons of copies of Facebook and Twitter, at least one of which has a billion-dollar valuation) and go on your way. You don’t need to come up with an original idea, because what sells in San Francisco usually sells pretty damn well in China. All the American brands on the streets there were testimony to that fact. GM has a pretty good market share here, for instance, and there are more than 100 Kentucky Fried Chicken outlets in Shanghai alone.

I met with quite a few entrepreneurs and they told me they see nothing but unending opportunity for China and its digital future.

But now the push. Everyone I met with told me stories of how they need to play games with the government to stay in business. We all know that the government censors things, makes things tough for entrepreneurs, and forces complicity from them. How if the government asks for access to their servers you must give it. One entrepreneur told me his biggest expense was hiring censors to watch his Twitter clone and make sure nothing the government didn’t want up got up.

One thing, though, the government can do is reward companies that play the game.

Let’s say you have a Web service like Foursquare. It’s getting hot in America. Foursquare would love to expand into the huge China market, too, wouldn’t it? Of course it would. Ask any of the people running the big companies in Silicon Valley or Redmond and they spend years and billions of dollars to get access to the Chinese market. Money isn’t enough, because the Chinese market works on relationships and on playing the game with the government, both of which are hard to break into with just sheer economic power.

Anyway, my friends showed me how China will keep sites working for quite a while, which lets entrepreneurs hire hundreds of developers (remember, a great developer gets paid about $25,000 per year, a decent one about $15,000, and a new one even less) and they’ll just clone the site.

So, now Foursquare will have a Chinese copy of it. That’s not fair is it? No, but it gets worse. Eventually the Chinese government blocks Foursquare, which will eviscerate its business. Think this doesn’t happen? A couple of years ago the Chinese government blocked Google and let Baidu stay up.

Why? Relationships and willingness to play games with the government.

So, now, Baidu is the #1 search engine in China and Google is #2.

The government rewarded Baidu for playing the government’s censoring games and punished Google for not playing the games (or not playing them very well).

The small little Foursquare can’t fight back, either. (Have you ever heard of Facebook complaining about this? I have, behind closed doors, but not in public). Why can’t Foursquare fight back? Because it will guarantee that it won’t have access anymore. It will give up access to a market that’s much bigger than the US market (potentially). Since businesses are supposed to serve their investors this is a move not made easily. Even if Google were in second place its investors would want it involved in the Chinese market because that market is so large. Pulling out of China would be anti-investor. This is why Microsoft continues to invest in search even though Microsoft was #3.

But, if that Foursquare or other company would play the government games, it would get a huge black eye back home in the US. Remember how Yahoo was pulled in front of Congress and told that it was evil for turning over information to the Chinese government?

So, if you are an executive inside a large tech company you are always being pushed and pulled. I’m glad I don’t need to make that choice. Even in Google’s letter you can see the push and pull. They didn’t just say “we’re out.” Why not? Because of the pull.

Why doesn’t the US government do anything? Well, because the Chinese have loaned us tons of money because of our deficit. The government isn’t willing to put any penalties on Chinese products to force the door open for Google or Facebook. And it gets worse over time.

So, now that Google found out that it was getting attacked by hackers paid by the government it said enough is enough.

Look at the wording from Google’s post:

First, this attack was not just on Google. As part of our investigation we have discovered that at least twenty other large companies from a wide range of businesses–including the Internet, finance, technology, media and chemical sectors–have been similarly targeted….

Second, we have evidence to suggest that a primary goal of the attackers was accessing the Gmail accounts of Chinese human rights activists

This is the reality of dealing inside China. That’s why it was brave for Google to stand up to the Chinese government. Might have been a very stupid business decision (even being #2 in China means sizable profits and business over time).

Anyway, that was a long way of saying that I am torn by Sarah’s article. I both disagree with it and agree with it. Why? Because I’m feeling the push and pull of China.

Is Google doing this because of business or because of ethics? Probably a little bit of both. Or, maybe, just sheer frustration from the push and the pull of China.


Why now Google?

UPDATE: A Google Spokesperson just emailed me this: “This is not about market share. While our revenues from China are really immaterial, we did just have our best ever quarter [in China].”

Techcrunch’s Japan writer, Serkan Toto, tweeted at me tonight: “Astonished about how some people, i.e. @scobleizer, idolize Google now. What did G do in the past 4 years in CH besides playing along?”

Randy Holloway, who works at Microsoft, tweets: “You are a good guy, but you have lost your mind today. Ever think that Google is pulling out of China because they are *losing*?”

UPDATE: While I was writing this post, TechCrunch ran a post that said it was about business (and made the point that Google did this because it was losing again).

I think both questions are legitimate (albeit misguided) and they aren’t the only ones asking.

First, let’s take on the question of Google losing in China. I think this is an overly-cynical take (I stole that line from Danny Sullivan, search expert, who said the same thing).

Why is it too cynical? Because, well, if that was how business decisions got done than Microsoft would have pulled out of the search business long ago. But, seriously, to answer that you need to go and visit China, as I have. China is a HUGE market. In 20 years it’ll be much bigger than our own in the United States. Their people are getting online in HUGE numbers. So, to give up on this market now just doesn’t make sense.

Also, Google, and most other tech companies, have many employees there who develop features for the US market. I saw this first hand when I worked at Microsoft. Many of the coolest features inside Windows and Office were developed in China. So, to pull out of the Chinese market, even if you are a losing business concern there (Google was not, even though it was coming in #2 behind Baidu) doesn’t make sense at all because you’d have to give up these employees, many of which are smarter and work far cheaper than engineers in USA (when I visited China last year a HIGH END engineer was paid about $25,000 US per year, compare to a high end engineer in Redmond who usually gets paid $200,000 or more).

Pulling this move in China actually strengthens Google’s competitors (Microsoft, Yahoo, Apple, et al). Why? Because over in China EVERYTHING is done with government support. Every factory I visited was assisted by the government and approved. If Google falls out of favor with the government, it won’t get the best employees, won’t get approvals for offices, will get blocked even more frequently than it is today (how do you think Baidu got so big, anyway? You think they are actually more innovative? Yeah, right. More on that in a future post).

Not to mention that the best supply chains in the world are in China. Translated to English: that’s where the Google Nexus One phone was made (and the hard drives that Google uses, etc etc).

Google has EVERY INCENTIVE to kiss Chinese ass. That’s why this move today impressed me so much.

Now, onto the other point, that Google hasn’t done much up to now to fight Chinese censors and other human rights issues. Um, I’m sorry, but when I visited China I heard from many people that of the American companies Google didn’t play the game as well as, say, Yahoo or Microsoft. Remember Yahoo? Remember what they turned over to the Chinese government? When I worked at Microsoft I saw them play footsie with the Chinese government too. Heck, the Chinese president visited Microsoft’s campus when I worked there and got a red-carpet welcome. Why? Because China is a HUGE market and a HUGE supplier of labor that builds Microsoft’s products.

It doesn’t matter to me that Google played footsie up until today, either. They were the first to stop playing footsie and THAT deserves a HUGE round of applause.

UPDATE: VodPod’s CEO, Mark Hall made quite a few good points in his post about Google and China.