Google is Reportedly Packing Up and Preparing to Leave Chinese Market

I haven’t written much lately about the ongoing game of chicken between Google Inc. (NASDAQ: GOOG) and the Chinese government over the search company’s announcement in early January that it planned to stop censoring its organic results but it

Google Packing Up and Leaving China?
looks like this story is finally reaching a conclusion. Despite the many opinions on both sides of the issue, it always seemed hard to imagine that Google would actually abandon the Chinese market which is the largest in terms of users — over 384 million at the end of 2009 (CNNIC) — and will undoubtedly represent a substantial share of global online revenues in the not-so-distant future. Well according to an article from the Financial Times, it seems that neither side in this showdown has been willing to back down and now it is “99.9 percent” certain that Google will shutter its Chinese search operations (ie – the Chinese version of its site at www.Google.cn).

In addition to the FT’s sources from inside Google the other indication that things had reached an impasse include the statement this past Friday by the Minister at the Ministry of Industry and Information Technology (MIIT) (link in Chinese) that Google’s violation of Chinese content regulations would not be tolerated.

While it is clear that Google would like to remain in China as a matter of good business it seems they are more resolved to abide by their company mandate to “Do No Evil.” Apparently they have concluded that Chinese censorship is an affront to that mandate and they can no longer submit to it. So if this story is true and Google plans to close down its Chinese search operations, it will probably take several months to actually execute on the plan while trying to maintain its non-search business operations that will remain in China.

The company’s non-Google.cn businesses include a research center based in Beijing and a sales force that sells advertising to Chinese companies on Google.com search pages that are made outside of China. Whether the fallout from this incident will cause Chinese advertisers to steer clear of Google even outside of its own borders remains to be seen but executives at the company know that they have to handle their withdrawal as diplomatically as possible — if that can even be done at this point.

Google had been the number two search engine with over 35% share in Q4 2009 behind domestic search darling Baidu, Inc. ((ADR) NASDAQ: BIDU) which accounted for almost 59% of searches. Since China only accounts for around 2% of Google’s revenues it would seem that now is the time it can afford to take the moral high ground. The only question is how will shareholders react to the moral high ground when China’s markets start generating revenues more in line with its user base and Google competitors like Microsoft — which has stated that it has every intention of complying with Chinese content regulations — start seeing an impact on their bottom line.

Even more significant than its online search revenues is the growth of mobile search revenues. Google was much more evenly matched in terms of market share in mobile search but I have to assume that the closure of Google.cn will also eliminate the company’s ability to be a search provider for the over 233 million mobile Internet users who are just beginning to adopt more advanced 3G smartphone devices. That market can become substantial and Google will be ceding its strong position to Baidu and the handful of U.S. competitors that remain.