The Tightrope Google Has to Walk in China

Executive Summary

Chinese consumer market is a tempting target for technology companies. Of course, it’s also a risky place to do business. The recent news that Google is considering a re-entry into China further highlights a troubling balancing act that technology companies looking to do business there have to engage in. There are very real dangers for Google or any internet firm in underestimating the threat that Chinese meddling poses. These include intellectual property theft, escalating government demands, regulatory creep and the risk of alienating employees. Internet companies need to think carefully about the business costs of conceding to Chinese regulation. In addition to the threat to their reputations, there are material risks that are equally dangerous.

HBR Staff

With over 1.3 billion people, the Chinese consumer market is a tempting target for Western technology companies. Of course, it’s also a risky place to do business. The recent news that Google is considering a re-entry into China further highlights a troubling balancing act faced by technology companies looking to do business there. The company last entered China in 2006 with a censored search engine, but pulled the plug on the operation four years later after it discovered that human-rights activists’ Gmail accounts had been hacked. While the economic opportunity in re-entering China could be massive for the firm, there are very real dangers for Google or any internet firm in underestimating the threat posed by Chinese meddling.

Any internet platform company doing business in China has to negotiate a major business and ethical dilemma: The Chinese government enforces overbearing regulations that censor speech in the name of national security and, under common conceptions of international norms, violate human rights. Reports indicate that Google has discussed some of its re-entry plans with Chinese government officials, including offering a search service that would “blacklist websites and search terms about human rights, democracy, religion, and peaceful protest.”

Google’s bind is a common one. Apple, for its part, gave in to a new, privacy-impinging Chinese data security regulation last year when the firm announced it would build a data center in Guizhou, partner with a Chinese cloud service provider, and accommodate Chinese government demands that it should be able to examine private data held by Apple. The potential loss Apple would have sustained had it not caved and, in the view of many, compromised human rights interests, was huge — its access to the vast Chinese market for devices, as well as its manufacturing base there. Reportedly, Facebook has also attempted to enter China, though it has faced tremendous public outcry and difficulty in doing so.

Google’s departure in 2006 and the maneuvers of other tech companies trying to negotiate this minefield illustrate the difficult choices their executives face. Companies are compelled to maximize shareholder value; should the firm’s executives ignore human rights concerns and seize economic opportunities, or should they take the ethical course and forego the profits to be had?

While ethical considerations should rightly be a central concern, there is an array of potential threats internet firms would be wise to think through as well as they seek to balance the costs and opportunities of entering China.

  • Intellectual property theft. It is well-known that the Chinese government engages extensively in IP theft. For internet firms like Facebook and Google that collect personal data and monetize it using proprietary algorithms, state theft of corporate secrets — and their potential exploitation by Chinese rivals linked to the government — would pose a serious threat.
  • Escalating government demands. It is now clear that companies operating in China are kept on a short leash even when they comply with governmental demands. Indeed, the government can be expected, over time, to make increasingly invasive demands. Qualcomm, despite its compliance, has received heavy regulatory fines succeeded by significant merger blocks. Apple, which complied with Chinese regulations last year, was subject to threats that the government would shut off access to the Chinese labor market should the ongoing trade war with the United States escalate.
  • Regulatory creep. Political backlash against the leading internet platforms is increasing. In the last year, we have seen novel rhetoric and regulation from governmental authorities in Brazil, India, the United States, and elsewhere. Internet companies desire open markets and unconstrained internet service. But by making concessions to China’s censorship and regulatory demands, companies will surely encourage other governments to impose their own restrictions on the industry. When questioned about its China plans on Capitol Hill, Google dodged. But moving forward, U.S. firms will have to maintain stronger lines of communication with policymakers to resolve regulatory concerns on the front foot.
  • Alienating employees. Until a few months ago, Google’s plans regarding China were a closely kept secret. When employees learned that the company was considering censoring the search platform for the Chinese market, many signed a condemning internal letter — a petition to which the company’s CEO replied by noting only that Google doesn’t have immediate plans to launch a censored Chinese search service.  Employees’ influence within technology corporations is growing; present and past Facebook employees (including former president Sean Parker) likewise have publicly condemned the company’s leadership for its lax data privacy practices; at Google some employees have left the company in protest of its policies.

China has long enforced a strict media and information regime. It’s unlikely that this policy framework will change any time soon. The ethical case for resisting Chinese regulation is clear. But Internet companies need to also think carefully about the business costs of conceding to Chinese rules. In addition to the threat to their reputations, there are material risks that are equally dangerous.