China

THE ABCs of ALPHABET'S INTERNATIONAL BUSINESS: (C) is for CHINA

For leaders, decisions are when the hard works begins: there’s a reason why the word ‘tough” is so often followed by decision.  Google’s decision to leave China was emblematic of how we reach decisions, how our process works.  Formulating a strategy, hiring the right people, and creating a unique culture are all preliminaries to the fundamental activity of all business and business leaders: decision-making.”  – Eric Schmidt and Jonathan Rosenberg in How Google Works

*Image courtesy of Technode

*Image courtesy of Technode

China is the biggest and most promising market for everything, especially Google’s core products.  As the world’s most populated country, China is the largest e-commerce market in the world, with sales reaching $787 billion in 2016.[1]  In the year 2019 an estimated one out of every three retail dollars in China will be spent online, the highest percentage in the world.[2]  In September 2017, China had 1.39 billion mobile phone subscriptions and 800 million Internet users (the vast majority using mobile access, 725 million as of August 2017) – about three times more than that in the United States or India.[3]  Chinese are also 50 times more likely to use their mobile phone to pay for goods than Americans.[4]  According to Chinese retail expert Angela Wang, “It’s not very difficult to understand if you think about it.  A lot of the Chinese consumers are still very new in their middle-class and upper middle-class lifestyle, with a strong desire to buy everything new, new products, new services.  And with this integrated ecosystem, it is so easy for them to buy, one click after another.”[5]  While the opportunities in the Chinese market for multinational corporations like Google are enormous, so are the challenges.

As the world’s largest state capitalist economy, China is the most challenging and complex environment for international trade and investment, with the highest level of political risk.  The Chinese Communist Party’s legitimacy depends on maintaining rapid economic growth through state-owned enterprises (SOEs) that are controlled by the colossal State-owned Assets Supervision and Administration Commission.  A report in the Harvard Business Review stated that the Chinese government, “is forcing multinational companies in several sectors to share their technologies with Chinese SOEs as a condition of operating in the country.  This is fueling tensions between Beijing and foreign governments and companies, and it raises the critical issue of whether the Chinese brand of socialism can coexist with Western capitalism.”[6]  Furthermore, a requirement for doing business in China is self-censorship, which is counter to Google’s core values and commitments as a company.”[7]  China has banned some of the world’s most popular websites like Google and Youtube out of fear that they will dominate local competitors or amplify dissent.

Google has had to decide, on several occasions, how to interact with the Chinese market while remaining consistent with its core mission and values.  The chronology of Google’s market entry and market exit decisions in China over the course of two decades are a microcosm about the inherent difficulties of connecting two big, very different economic systems in an era of technological acceleration.  Google’s decisions to enter, exit, and then partially revisit the Chinese market are case studies in strategic decision making where there are no easy answers.  As described in the book How Google Works, “China and the United States have lots of issues, but there is so much trade between the two countries that we must find ways to maintain and build our relationship in spite of our differences.”[8]  Gary Liu, the current CEO of the South China Morning Post, said that “It’s a very mixed bag.  The Internet exists in a restricted, arguably manipulated form within China.  Yet it is massive, and vastly improved the lives of its citizens.  So even in its imperfection, the growth of the Chinese Internet should not be dismissed, and it is worthy of our closer examination.”[9] 

The best place to start is to understand the full scope and chronology of Google’s interactions with China instead of viewing this evolving international business story through the myopic lens of the 24 news cycle.  Google’s story in China so far can be divided into three distinct chapters: its first steps into China and how it carefully monitored the market, the company’s response to a cyber-attack on its corporate infrastructure that originated from China, and its current efforts to engage Chinese consumers across all certain components within Alphabet with a focus on artificial intelligence research.  In the background of all of these market entry decisions is the ongoing debate over whether Google should provide its search engine in China.  Ultimately, it will up to Google to constantly revisit and reevaluate its Chinese market entry strategies.   

*Image courtesy of Google Developers for China

*Image courtesy of Google Developers for China

Decision #1: Enter the Chinese Market – Carefully Monitor Conditions (2000 to 2008)

2000: Google began offering a Chinese-language version of Google.com.  But the website, which could not be accessed about 10% of the time, was slow and unreliable, due to extensive filtering performed by China’s licensed Internet service providers.[10]

September 2002 & December 2003:  Google.com becomes completely unavailable in China, but access is restored in about two weeks.{11}

- Mid-2004:  Google set up an office in Beijing, and “grudgingly decided to comply with local censorship regulations, but with a twist: Google would inform users when results were being blocked.  They couldn’t access the censored information, but at least they would be informed that censorship was occurring.” [12]

July 2005: Kai-Fu Lee, a former Microsoft executive, joins Google as a global vice-president in charge of China, and announces a plan to establish a research center in China.[13]

- January 2006:  Google launched Google.cn with servers inside China in the belief that “increased access to information for people in China and a more open Internet outweighed Google’s discomfort in agreeing to censor some results.”[14]  At that time, Google believed that Google.cn would, “make a meaningful – though imperfect – contribution to the overall expansion of access to information in China.”[15]  Google.cn’s traffic and revenue grew steadily between 2006 and the end of 2009.[16]

February 15, 2006:  Elliot Schrage, Google’s then Vice President for Global Communication and Public Affairs testified before the U.S. House of Representatives that, “We think we have made a reasonable decision, though we cannot be sure it will ultimately be proven to be the best one.  With the announcement of our launch of Google.cn, we’ve begun a process that we hope will better serve our Chinese users.  We also hope that we will be able to add new services, if circumstances permit.  We are also aware that, for any number of reasons, this may not come to pass.  Looking ahead, we will carefully monitor conditions in China, including new laws and other restrictions on our services.  If we determine that we are unable to achieve the objectives I’ve outlined above, we will not hesitate to reconsider our approach to China.”[17]

June 2006:  Google.com is blocked again in China while Google.cn continues to work.[18]

- June 2007: Google.cn finally receives a license from the Chinese government that officially allows it to operate its website in China – more than 18 months after it set up Google.cn.[19]

*Image courtesy of GSMNATION BLOG

*Image courtesy of GSMNATION BLOG

Decision #2: Exit the Chinese Search Market – A New Approach (2009 to 2017)

December 2009:  Google detected a highly sophisticated and targeted attack on its corporate infrastructure which resulted in the theft of intellectual property from Google.  Google discovered that at least twenty other large companies from a wide range of businesses were also targeted.[20]  The hack was geographically tied to China, and both the sophistication of the attack and the nature of its targets pointed to the Chinese government itself as an instigator of or a party to the attack.[21]

- January, 12, 2010:  David Drummond, Google’s Senior Vice President for Corporate Development and Chief Legal Officer wrote on Google’s Official Blog that, “These attacks and the surveillance they have uncovered--combined with the attempts over the past year to further limit free speech on the web--have led us to conclude that we should review the feasibility of our business operations in China.  We have decided we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all.  We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China.”[22]

- March 22, 2010:  David Drummond provided an update to his blog post which stated that Google would stop censoring its search services – Google Search, Google News, and Google Images, on Google.cn.  Users visiting Google.cn would be redirected to Google.com.hk where Google would offer uncensored search in simplified Chinese, specifically designed for users in mainland China and delivered via our servers in Hong Kong.  With respect to Google’s wider business operations, Google would continue its R&D work in China and also maintain a sales presence there, though the size of the sales team will obviously be partially dependent on the ability of mainland Chinese users to access Google.com.hk.

- May 19, 2015: The Chinese State Council (the chief administrative authority of the People’s Republic of China) unveiled its Made in China 2025 plan.[23]  The plan is aimed at in part, boosting Chinese self-sufficiency and leadership in advanced technologies like semiconductors, artificial intelligence, virtual reality, and the internet of things.

- October 20, 2015:  Google took a minority stake in Beijing-based artificial intelligence start-up called Mobvoi as part of a $75 million fundraising round.[24]  Mobvoi works on artificial intelligence voice-controlled software, like that used in Google’s Android products for mobile search, and also develops hardware like smart watches.  Mobvoi previously partnered with Google to provide Chinese-language voice search for the Android Wear smartwatch operating system.  Mobvoi indicated that it will use the money from its fundraising to invest in AI and robotics research.

- December 16, 2015:  President Xi Jinping said at the Second World Internet Conference in Wuzhen that, “We should respect the right of individual countries to independently choose their own path of cyber development, model of cyber regulation and Internet public policies, and participate in international cyberspace governance on an equal footing.  No country should pursue cyber hegemony, interfere in other countries' internal affairs or engage in, connive at or support cyber activities that undermine other countries' national security.”[25]

 - May 18, 2016:  At Google I/O 2016, Sundar Pichai mentioned that 1 million developers in China were watching the presentation over live-stream.[26]

 - June 1, 2016: At the Code Conference, Sundar Pichai told Walt Mossberg that, “I’ve always thought that Google is for everyone and that applies to China too...so where possible we want to be in China serving Chinese users.  We aspire to do things like that with Google Play where we can get our services working.  For example, for advertisers we do it today.  We provide analytics, we help them advertise, and reach users outside of China.  We are being thoughtful about it.  Definitely I would like to see more of it.”[27]  When asked by Walt Mossberg about the future of Google Search in China, Sundar responded that, “If we can do it in a right and thoughtful way, we are always open to it.  It depends on the situation, but we are definitely open to it.”[28]

 - June 9, 2016:   Eric Schmidt described Google’s current position in the Chinese market in an interview with Charlie Rose that, “We left in 2010, because they have these very, very strict rules about censorship, and we were unable to operate morally from our perspective under there censorship rules.  So, we keep trying, I spend a fair amount of my time trying to get it reopened, but it is really up to the Chinese government at this point.”[29]

Decision #3: Return to the Chinese Market – Science of AI has no borders (2017 to Present)

May 2017:  AlphaGo defeated China’s top ranked Go player, Ke Jie.[30]  AlphaGo was developed by DeepMind, the artificial intelligence arm of Google’s parent, Alphabet Inc.

- July 8, 2017:  The State Council of the People’s Republic of China announced the “New Generation Artificial Intelligence Plan”[31] which contains plans to build a Chinese AI industry worth $150 billion, and to make China the leader in the field by 2030.[32]

March 29, 2017: Google released version 5.8 of the Google Translate apps for Android and iOS which included an improved experience for Chinese users.[33]  Google confirmed that the apps will be maintained by Google’s joint-venture in China, which runs the services it has remaining there, and will be subject to any government-issued requests or censorship.[34]

November 2017: Eric Schmidt, then the chairman of Alphabet, told the Artificial Intelligence & Global Security Summit, in Washington, that reductions in science-based research will help China overtake the U.S. in artificial intelligence in a decade.  “By 2020, they will have caught up.  By 2025, they will be better than us.  By 2030, they will dominate the industries of A.I.” he said.[35]

December 13, 2017:  Google’s Chief AI Scientist, Dr. Fei-Fei Li announced the opening of the Google Artificial Intelligence China Center in Beijing. Dr. Li said that, “This Center joins other AI research groups we have all over the world, including in New York, Toronto, London and Zurich, all contributing towards the same goal of finding ways to make AI work better for everyone.  I believe AI and its benefits have no borders.  Whether a breakthrough occurs in Silicon Valley, Beijing or anywhere else, it has the potential to make everyone’s life better for the entire world.  As an AI first company, this is an important part of our collective mission. And we want to work with the best AI talent, wherever that talent is, to achieve it.” [36]

December 14, 2017:  Dr. Fei-Fei Li, stated in an interview with the political risk consultancy Eurasia Group that, “I grew up in China and got my education in America.  So, when I look at what my friends and colleagues are doing in China, I am very impressed by the passion and aspiration in AI.  I am also very impressed by the government level support.  I’m not that surprised.  I think there is a great drive in China for the past several decades now to make technological advances.  It is a country known to embrace technology.  Look at what China did for mobile technology, for social media, for Internet technology.  It’s really quite phenomenal.”[37]

January 2018:  Google and Tencent Holdings Ltd. agreed to share patents covering a range of products and technologies, an alliance between two of the world’s largest corporations.[38]  Google also opened an office in Shenzhen, which is home to Tencent’s headquarters.

January 2018: Google joined Qiming Venture, Shunwei Capital, and Alpha X Capital as investors in Chushou, a Chinese online e-sports platform where users can live stream their mobile phone games.  Frank Lin, Google’s head of development in North Asia said that, “Chushou has built an impressive platform, with a dedicated and quickly growing base of content creators and consumers, and smart expansion plans.”[39]  Chushou currently has 8 million streamers and 250,000 live streams a day.

January 15, 2018: Google relaunched its map service in China after an eight-year absence.[40]

February 23, 2018:  Google announced partnerships with Xiaomi, Huawei, and Samsung to release Google’s augmented reality ARCore apps in China.[41]

 - June 2018:  Google releases a China-specific version of Files Go, Android storage management app that can help people free up space for low-end devices.[42]

 - July 2018:  An intellectual property study published by Aistemos and Cipher indicated that China filed 8,000 patents relating to AI while the US filed less than 1,000 AI-relevant patents in the same time period.[43]

- August 1, 2018:  The Intercept reported that Google planned to release a censored version of Google search via an Android App codenamed Dragonfly.[44]  Sundar Pichai addressed this issue at an all hands meeting two weeks later in response to this report and a subsequent petition signed by 1,000 employees.[45]  Pichai clarified that plans to re-enter China with a search engine are “exploratory” and in “early stages.”  Pichai stated that, “We are not close to launching a search product in China, and whether we would do so or could so is all very unclear.”  “I genuinely do believe we have a positive impact when we engage around the world and I don’t see any reason why that would be different in China,” Pichai said. “We’ll definitely be transparent as we get closer to actually having a plan of record here.  We definitely do plan to engage more and talk more.”

- August 13, 2018:  President Trump signed the National Defense Authorization Act for Fiscal Year 2019 with bipartisan support.  This legislation expanded the ability of the U.S. government to block international trade and investment that would threaten national security.  This updated legislation largely due to China.  Though not named explicitly, the legislation contained thinly veiled references to “a country of special concern that has demonstrated or declared [a] strategic goal of acquiring a type of critical technology or critical infrastructure that would affect United States leadership in areas related to national security.”[46]

- August 19, 2018:  Redcore, a startup based in Beijing, claimed to have “broken the American monopoly” by developing a web browser based on its own technology.  However, an Internet user in China found a Google Chrome file in Redcore’s browser installation package.  Redcore later apologized through its WeChat account, admitting it made a certain degree of exaggeration during its recent financing marketing activities that could have misled the public.[47]

- August 24, 2018:  Alphabet’s self-driving car unit, Waymo, established a wholly-owned company called Huimo Business Consulting in Shanghai, according to China's National Enterprise Information Publicity System.[48} Waymo’s China Unit will develop and test self-driving vehicles and parts.

- July 1, 2047:  Hong Kong will be subject to mainland Chinese regulations.

NOTES

[1]  2017 Report to Congress of the U.S. China Economic and Security Review Commission, One Hundred Fifteenth Congress, First Session – Chapter 1, Section 3, U.S. Access to China’s Consumer Market, dated November 2017, available at: www.uscc.gov/Annual Reports/2017-annual-report

[2]  Id.

[3]  China embraces AI: A Close Look and A Long View, by Dr. Kai-Fu Lee, Founder of Sinovation Ventures and Former Google Vice President, Google Greater China; and Paul Triolo Geo-Technology Practice Head at Eurasia Group, dated December 6, 2017, available at: www.eurasiagroup.net/live-post/ai-in-china-cutting-through-the-hype

[4]  Id.

[5]  TEDX: How China is changing the future of shopping by Angela Wang, dated January 30, 2018, available at: https://youtu.be/dOt4NkcmIUg?t=3m47s

[6]  China vs. the World: Whose Technology Is It?, by Thomas Hout and Pankaj Ghemawat, Harvard Business Review, December 2010 Issue, available at: https://hbr.org/2010/12/china-vs-the-world-whose technology-is -it

[7]  Official Google Blog: Testimony: The Internet in China, posted by Karen Wickre, dated February 15, 2006, available at: https://googleblog.blogspot.com/2006/02/testimony-internet-in-china.html

[8]  How Google Works, by Eric Schmidt and Jonathan Rosenberg, published September 23, 2014 at 223 (“How Google Works”)

[9]  The rapid growth of the Chinese internet -- and where it's headed | Gary Liu. (2018). YouTube. Retrieved 26 August 2018, from https://www.youtube.com/watch?v=WBqnzn77MEE

[10]  Financial Times: A History of Google in China, by Justine Lau, dated July 9, 2010, available at: http://ig-legacy.ft.com/content/faf86fbc-0009-11df-8626-00144feabcdc0

[11]  BBC NEWS | Technology | China blocking Google. (2002). News.bbc.co.uk. Retrieved 26 August 2018, from http://news.bbc.co.uk/2/hi/technology/2231101.stm

[12]  How Google Works at 172.

[13]  Financial Times: Microsoft sues Google over executive, by Richard Waters, dated July 19, 2005, available: https://www.ft.com/content/7c7156d0-f88f-11d9-8fc8-00000e2511c8

[14]  Official Google Blog: A New Approach to China, by David Drummond SVP, Corporate Development and Chief Legal Officer, dated January 12, 2010, available at: https://googleblog.blogspot.com/2010/01/new-approach-to-china.html.

[15]  Official Google Blog: Testimony: The Internet in China, posted by Karen Wickre, dated February 15, 2006, available at: https://googleblog.blogspot.com/2006/02/testimony-internet-in-china.html

[16]  How Google Works at 173.

[17]  Official Google Blog: Testimony: The Internet in China, posted by Karen Wickre, dated February 15, 2006, available at: https://googleblog.blogspot.com/2006/02/testimony-internet-in-china.html

[18]  Financial Times: Microsoft sues Google over executive, by Richard Waters, dated July 19, 2005, available: https://www.ft.com/content/7c7156d0-f88f-11d9-8fc8-00000e2511c8

[19]  Fortune: Inside Google’s China Misfortune, dated April 15, 2011.  Retrieved August 26, 2018, from http://fortune.com/2011/04/15/inside-googles-china-misfortune/

[20]  A new approach to China. (2018). Official Google Blog, dated January 12, 2010.  Retrieved 26 August 2018, from https://googleblog.blogspot.com/2010/01/new-approach-to-china.html

[21]  Fortune: Inside Google’s China Misfortune, dated April 15, 2011.  Retrieved August 26, 2018, from http://fortune.com/2011/04/15/inside-googles-china-misfortune/

[22]  A new approach to China. (2018). Official Google Blog, dated January 12, 2010.  Retrieved 26 August 2018, from https://googleblog.blogspot.com/2010/01/new-approach-to-china.html

[23]  “Made in China 2025” plan unveiled to boost manufacturing (2018). GBTimes.  Retrieved 3 September 2018 from https://gbtimes.com/made-china-2025-plan-unveiled-boost-manufacturing

[24]  Google takes minority stake in $300 mln China start-up Mobvoi. (2018). U.S. Retrieved 27 August 2018, from https://www.reuters.com/article/google-china-deals/update-1-google-takes-minority-stake-in-300-mln-china-start-up-mobvoi-idUSB9N12F01I20151020?symbol=ABEA.DE

[25]  Remarks by H.E. Xi Jinping President of the People’s Republic of China At the Opening Ceremony of the Second World Internet Conference. (2015). Fmprc.gov.cn. Retrieved 3 September 2018, from https://www.fmprc.gov.cn/mfa_eng/wjdt_665385/zyjh_665391/t1327570.shtml

[26]  Google I/O 2016 – Keynote, dated May 18, 2016, available at: www.youtube.com/watch?v=862r3XS2YB0&t=3043s

[27]  Google CEO Sundar Pichai: 'We want to be in China serving Chinese users'. (2016). Recode. Retrieved 14 August 2018, from https://www.recode.net/2016/6/1/11830654/google-ceo-sundar-pichai-china

[28]  Id.

[29]  Charlie Rose: A conversation with Eric Schmidt, executive chairman of Alphabet, Google’s parent company, dated June 9, 2016, available at: https://charlierose.com/videos/28222

[30] The New York Times: Google’s AlphaGo Defeats Chinese Go Master in Win for A.I., by Paul Mozur, dated May 23, 2017, available at: https://www.nytimes.com/2017/05/23/business/google-deepmind-alphago-go-champion-defeat.html

[31]  State Council issued Notice of the New Generation Artificial Intelligence Development Plan, dated July 8 2017, translated via Google Translate on August 12, 2018, available at: http://www.gov.cn/zhengce/content/2017-07/20/content_5211996.htm

[32]  MIT Technology Review: China Plans to Use Artificial Intelligence to Gain Global Economic Dominance by 2030, by Will Knight, dated July 21, 2017, available at: https://www.technologyreview.com/s/608324/china-plans-to-use-artificial-intelligence-to-gain-global-economic-dominance-by-2030/

[33]  Google China Blog: The newest version of the Google Translate mobile app works even better for Chinese users. (2018). Retrieved 3 September 2018, from https://china.googleblog.com/2017/03/google_29.html

[34]  Google makes its Translate mobile apps available for users in China. (2018). TechCrunch. Retrieved 3 September 2018, from https://techcrunch.com/2017/03/28/google-translate-china/

[35]  Osnos, E., & Osnos, E. (2018). Making China Great Again. The New Yorker. Retrieved 3 September 2018, from https://www.newyorker.com/magazine/2018/01/08/making-china-great-again

[36]  Opening the Google AI China Center. (2017). Google. Retrieved 26 August 2018, from https://www.blog.google/around-the-globe/google-asia/google-ai-china-center/

[37]  GZero World S1E13: Ok, Google: Give me the World. (2018). YouTube. Retrieved 26 August 2018, from https://www.youtube.com/watch?v=W4Ybxjv9Bjs&feature=youtu.be&t=7m43s

[38]  Bloomberg Technology: Google, Tencent Agree to Share Patents in Global Tech Alliance, by Lulu Yilun China, dated January 18, 2018, available at: https://www.bloomberg.com/news/articles/2018-01-19/google-tencent-agree-to-share-patents-in-global-tech-alliance.

[39]  Google eyes Chinese e-sports market with investment in Chushou. (2018). U.S. Retrieved 27 August 2018, from https://www.reuters.com/article/us-china-google-investment/google-eyes-chinese-e-sports-market-with-investment-in-chushou-idUSKBN1EU0FJ

[40]  Google Maps available again in China after eight years. (2018). Nikkei Asian Review. Retrieved 3 September 2018, from https://asia.nikkei.com/Business/Companies/Google-brings-map-service-back-to-China

[41]  Google adopts a new approach to bring its AR service to China. (2018). TechCrunch. Retrieved 3 September 2018, from https://techcrunch.com/2018/02/23/google-arcore-china/

[42]  Engadget: Google’s Files Go storage management app lands in China, dated June 1, 2018, available at: https://www.engadget.com/2018/06/01/google-files-go-china/

[43]  IP Strategy Report: Technology Disruption through a Patent Lens, dated July 2018, page 34, Chart 31, available at: http://cipher.ai/wp-content/uploads/Cipher-IP-Strategy-Report-2018-.pdf

[44]  Gallagher, R., & Gallagher, R. (2018). Google Plans to Launch Censored Search Engine in China, Leaked Documents Reveal. The Intercept. Retrieved 3 September 2018, from https://theintercept.com/2018/08/01/google-china-search-engine-censorship/

[45]  Bergen, M. (2018). Google CEO Tells Staff China Plans Are ‘Exploratory’ After Backlash. Bloomberg.com. Retrieved 3 September 2018, from https://www.bloomberg.com/news/articles/2018-08-17/google-ceo-is-said-to-tell-staff-china-plans-are-exploratory

[46]  David J. Ribner, Tougher stance on Chinese investments comes at a cost (2018), The Hill.  Retrieved 3 September 2018, from http://thehill.com/opinion/finance/401233-tougher-stance-on-chinese-investments-not-cost-free-to-us

[47]  Chinese startup’s ‘self-made’ web browser built on Google Chrome (2018), ZDNET. Retrieved 3 September 2018, from https://www.zdnet.com/article/chinese-startups-self-made-web-browser-built-on-google-chrome/

[48]  Waymo sets up subsidiary in Shanghai as Google plans China push. (2018). CNBC. Retrieved 27 August 2018, from https://www.cnbc.com/2018/08/24/waymo-sets-up-subsidiary-in-shanghai-as-google-plans-china-push.html