Google Out of China? - Analyst Blog

Google Inc. (GOOG) has publicly stated that it is considering pulling out of the fast-growing Chinese market. The statement was made as a result of an investigation over several weeks into China’s Internet censorship system that revealed a systematic and targeted hacking into Google’s corporate infrastructure. 

Google stated that the hacking resulted in theft of intellectual property (IP) and compromised gmail accounts related to human rights activists located both within and outside China. Twenty other companies have also been impacted. It is not yet clear however whether the Chinese government had a hand in the affair and China has not yet put forward any comment. 

It is interesting to note however that Google has only made a public statement, leaving the door open to further negotiations. It has not taken a strategic decision to exit China as Yahoo Inc. (YHOO) did when it sold off its stake in Alibaba Group in September last year. 

We also don’t think that any of the other top IT companies, such as Cisco Systems (CSCO), which provides networking equipment, Microsoft Corporation (MSFT), which generates significant revenue from Windows-based PCs sold in China, Hewlett Packard Company (HPQ), which sells a large number of PCs in China, or 3Com Corporation (COMS), with a significant base in China are likely to follow in Google’s footsteps. 

Of course, Chinese local Internet companies Baidu Inc. (BIDU), Sina Corp. (SINA) and Sohu.com Inc. (SOHU) would welcome Google’s decision. 

The immediate impact of Google’s move out of China would be significant. However, the company’s growth over the next few years would be impacted significantly. 

Additionally, Google could not solve the problem by staying away from it. Google facilitates communication, which builds awareness and moves people to protest. This process has got to run its course. 

We also believe that China will never realize the importance of IP or have strong legislations against its theft until it has significant IP of its own that it needs to protect. In the meantime, the U.S. government’s significant indebtedness to China and the free nature of its economy will continue to work against it. 

As analysts, we may expect to continue seeing many more investigations, lawsuits and decisions. 

We remain positive about Google and don’t expect the company to take a radical decision just yet.
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