Google Sends Right Message to China's Police State: David Pauly
Comment of the Day

January 19 2010

Commentary by Eoin Treacy

Google Sends Right Message to China's Police State: David Pauly

This article by David Pauly for Bloomberg may be of interest to subscribers. Here is a section
Here's hoping Google Inc. makes good on its threat to quit China. It's time someone in the U.S. stopped coddling the Chinese police state. The American government can't, or won't.

Though Google is late coming around as an advocate of free speech in China, it still deserves applause. The company said last week it would stop censoring its Chinese search engine,, as the communist government dictates -- and might even close the business.

Google got religion after discovering that last month hackers -- read Chinese government technicians -- tried to access accounts of, and managed to steal information from, human-rights activists who used Google e-mail.

Hackers went after at least 20 other companies' computers, Google said. Adobe Systems Inc., the leading maker of graphics design software; Juniper Networks Inc., the second-biggest maker of computer networking gear; and Rackspace Hosting Inc., which manages Web sites, said they also had been attacked.

Google can exit China without hurting its stockholders, at least in the short run. The company's revenue from China would be as much as $350 million this year, about 1.5 percent of total sales, according to a report from Citigroup Inc.

Still, the potential market is huge. Some 330 million Chinese use the Internet. The company could sell its Nexus One mobile phone to the Chinese.

Eoin Treacy's view It remains highly uncertain whether the current face off between Google and the Chinese authorities is brinksmanship or they are actually serious about leaving the Chinese market. The stock market's answer to this uncertainty has been to pull back from purchasing Google shares and buy Google posted a weekly key reversal two weeks ago and followed through last week. This action reaffirms lateral resistance in the region of $600 and it needs to sustain a move back above that level to question scope for some further reversion towards the ascending mean, represented by the 200-day moving average. ., also traded on Nasdaq, has been consolidating in the region of the prior high since October but rallied impressively last week from near $400 and a sustained move back below that level would be required to question scope for further upside over the medium term.

Intellectual property rights have been an issue for those doing business in China for years. This is at least part of the reason why companies have tended to site low tech manufacturing in China but retain high tech and R&D elsewhere. China offers the promise of a vast potential market and just about every major company has a China strategy. However, what has to be sacrificed in return is often unpalatable. Companies that set up joint ventures in China have an obligation to share their technology and processes relating the products being manufactured with their domestic partners; allowing Chinese companies to bypass lengthy development work.

China has to find jobs for millions of new employees annually, so they are in a hurry to move up the value chain in terms of manufacturing and R&D. The US government has stated on a number of occasions that the majority of attempts to steal military secrets have come from Chinese operatives so it is reasonable to expect them to be at least as active in the corporate sphere. (Personally, I was surprised that they were sloppy enough to have been traced back to a Chinese IP address, but perhaps that is the conspiracy theorist in me at work.) China's stated objectives for decades have been to join the front ranks of the world's powers in military and economic prowess and the current issue reinforces the maxim that countries have interests, not friends.

Over the long-term, one has to make a judgement call as to whether China will evolve from today's authoritarianism into something approaching the Singapore model or will corruption eventually hollow out the economy turning it into a failed enterprise such as the USSR. Personally, I am a China optimist. The country has come a long way in the last two decades, and while it will experience 'growing pains' just like everywhere else, the problems of governing such a large, diverse country can be overcome and the project of lifting hundreds of millions of people out of poverty can contiues to succeed. However, this process should be measured by individual events but rather than the performance of the country over a period of decades.

This article by John Garnaut for The Sydney Morning Herald, kindly contributed by a subscriber, may also be of interest.

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