Google incident illustrates dilemma for foreign companies in China

By Steven Mufson and Peter Whoriskey
Washington Post Staff Writer
Friday, January 15, 2010; A14

BEIJING -- Ever since the 1930s, when a Missouri-born man opened an ad agency in Shanghai and wrote a book called "400 Million Customers," the Chinese market has beckoned to American companies. And never more so than now, when the number of customers has grown to 1.3 billion and China is poised to surpass Japan to become the world's second-largest economy.

But Google's struggles here -- wrestling both with political compromises and with threats to its intellectual property -- raise the question: How much hassle are China's consumers worth?

While hundreds of U.S. companies have decided to seek a piece of the world's fastest-growing market, to do so they must weigh the allure of potential profits against human rights concerns, the threat of intellectual-property infringement and unpredictable treatment of their financial interests.

It hasn't always been an easy calculation. Levi Strauss & Co. stopped making clothes here in 1993, citing "the pervasive violation of human rights," but then returned in 1998, saying that the company could do more good for human rights by working from within the country. Time Warner opened about a dozen movie theaters here but decided to sell them in 2007, after new laws required Chinese control and because of limits on the number of foreign films allowed. EBay pulled out in 2006, largely because of stiff local competition.

James McGregor, senior counselor for Apco Worldwide in China and author of "One Billion Customers," believes that more and more U.S. companies doing business in China are rethinking their presence.

"Many companies came here because they believed they couldn't not be here given China's booming growth," he said. But, he added, "if trends don't change, we may see companies considering that maybe they can afford to not be here."

For now, that's not usually the case.

General Motors, for example, expects China's car market to be twice the size of the United States' by the end of the decade, Fritz Henderson said before he stepped down as chief executive. For now, foreign car companies hold 85 percent of the crowded Chinese market.

"If you don't go in with the best technology, you're going to be at a competitive disadvantage," said Kevin Smith, head of GM in China. "We have protections for all our IPR [intellectual-property rights], and we've had no issues." But he added that "it's a factor that everyone is aware of in emerging markets" and that "there are different rules in China."

Technology companies, in particular, have had to grapple with privacy and surveillance issues.

In 2005, Yahoo folded its China business into Alibaba Group, making a $1 billion investment in exchange for a 40 percent stake in the Chinese company. Earlier that year, Yahoo had provided information from the account of a Chinese journalist that led to his conviction on charges of divulging state secrets.

By agreeing to Chinese regulations, Google has had to delete or block references in search results to the Falun Gong sect, the democracy movement, the Tiananmen Square demonstrations of 1989 and the exiled Tibetan leader the Dalai Lama. Doing business in China has thus cast doubt on Google's devotion to its motto to "do no evil."

A group called the Global Network Initiative, whose participants include Google, Yahoo and Microsoft, was formed to provide a way for companies and other investors to resist government efforts to enlist companies in acts of censorship and surveillance that violate international standards.

"Google's decision to reconsider its business in China is an indication of the tough choices information and communications technology companies face around the world where respect for human rights is at risk," the group said in a statement. The group's statement didn't indicate what its other members might do, however.

"There is no 'one size fits all' approach to corporate responsibility, nor a single right course of action or script for all to follow," the statement said.

Microsoft has long made anti-piracy efforts a top priority even as it has built up research-and-development and software-packaging businesses here. Tang Jun, one of China's richest businessmen and formerly head of Microsoft's China operations, said that he disagreed with Microsoft's sharp focus on piracy.

"The pirates are very serious in China even today," said Tang, who left Microsoft in 2004. "At that time Microsoft asked us to go after every single pirate. It was not a good approach to me." But Microsoft told him that it was a worldwide policy.

"In a lot of other countries, that can work. But China is a very unique country," he said.

Many people in China are confident that the size of their market will keep foreign companies from leaving. Chinese commentators in the past two days have expressed confidence that Google will not follow through on its threat to exit the country.

Tang expects that Google will "clarify" its position, and possibly shut down its China domain site and keep everything else. "Chinese netizens have grown into a huge number," Tang said. "Giving up the Chinese market is equal to giving up half of the future."

Whoriskey reported from Washington.

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