Google and China: Silicon Valley Is No Longer King

The furor surrounding Google's bombshell announcement that it wascontemplating withdrawing from business in China has centered onlong-simmering issues of privacy, government control, and censorship.Google, a company whose DNA dictates that it "do no harm," isparticularly well-cast in the role of defender of western values offreedom of expression and open access to information against a Chinesesystem that brooks no political dissent and reserves the right toforcibly prevent certain types of information ranging from politicalexpression to porn.
But there is another story here, more prosaic but no less importantto the future arc of global business and the global balance of power.Google has not been doing all that well in China, as many have noted inrecent days, badly trailing the domestic Chinese search company Baidu.But it isn't just that Google has struggled. All of the New Economywestern companies in the media and information business have failed toestablish themselves in China. Before Google, eBay and Yahoo both madeinvestments of years and millions upon millions of dollars to tap thefast-growing Internet generation in China, and like Google, they couldnot gain traction. Both companies ended up pulling the plug on theirChina ventures, with eBay losing out to domestic Chinese auctioncompany Taobao, and Yahoo ceding its operations for an ownership stakein Alibaba.com (which also controls Taobao). (See the top 10 internet blunders.)
The failure of these New Economy players in China is in starkcontrast to the success of brick-and-mortar companies. Consumer starslike Nike, food franchises like Kentucky Fried Chicken, industrialgiants like General Electric and United Technologies, and technologybehemoths ranging from Microsoft to Intel to IBM have prospered inChina. In fact, mainland China has been the most impressive growthmarket for hundreds of global companies for the past decade. So how didGoogle stumble so badly?
The rap on China's growth is that there's lots of building andselling but not much innovation. In many areas of the economy, that'strue — and the same could have been said for the growth of the UnitedStates at the end of the 19th century. But in the areas of media andthe Internet, it isn't. There, China has a thriving culture ofthirtysomething entrepreneurs, many with U.S. work experience, who arecreating home-grown franchises catering to the burgeoning world of theweb in China. Baidu, the rival search engine to Google, is most in thenews lately; others include web portal and entertainment companies Sinaand Netease; on-line, multi-user gaming company Shanda (which recentlymade an acquisition of an American gaming company and plans to expandto the United States); internet and mobile applications giant Tencent;and a host of others, some public, some still in start-up mode. (See the best business deals of 2009.)
These companies have a distinct advantage over foreign competitorsbecause their founders and senior managers are part of the same eliteclass as the regulators who enforce the various and mostly unwrittenrules of censorship. They have offices in Beijing, and they lobby theChinese government through uncharted back channels and are in whatamounts to a continuous dialogue about what is and what is notacceptable. This includes not only political censorship but morals —especially relating to porn and sex. Google may have hired its owncadre of Chinese executives but it — like Yahoo and eBay before — hasalways played catch-up to the more connected crowd of Chineseentrepreneurs and their companies.
Google and the Western media in general have effectively turned thisimbroglio into a clash of morals. Perhaps. But it is also yet anothersymbol of the shifting balance of economic power globally. Othercountries censor content, and not just rogue regimes such as theIranian mullocracy. Web sites are blocked throughout the Persian Gulfand North Africa based on objectionable content and this hasn't createdmuch of a furor. Other countries also engage in cyber espionage,especially Israel and of course the United States Government itselfwith the largest group of hackers in the world employed by the NationalSecurity Agency.
But China's efforts to censor and monitor the web represent achallenge to the uncontested hegemony of Western business and to thedominance of Silicon Valley in the world of new technologies. Thatstory — of China's emergence and a burgeoning world of hungryentrepreneurs not willing to play second fiddle to America — is thebackstory for the Google imbroglio and one that is about to assumecenter stage.
Zachary Karabell is the author of "Superfusion: How China andAmerica Became One Economy and Why the World's Prosperity Depends Onit" (Simon & Schuster 2009) and president of River Twice Research(www.rivertwice.com)

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