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How Much Will It Cost Google to Exit China?


Google (s GOOG), earlier today made a bold decision — it stopped censoring results on, its Chinese destination. The decision, was a direct consequence of a sophisticated attack on its infrastructure as attempts were made to penetrate Gmail accounts of human rights activists. This will most certainly get the company banned from China and it is going to cost it hundreds of millions of dollars.

This is not only brave, but a very costly decision. According to estimates by J.P. Morgan, if the Chinese government bans the search giant, then Google could be walking away from about $600 million in 2010 revenues.

In our current model, we estimate Google will generate ~$600M in revenue from China in 2010. We expect segment margins of the Chinese operations to be in the 15% to 20% range. However, if Google is not allowed to operate in China, beyond the immediate revenue loss, this could potentially have a far-reaching impact on the company’s overall long-term growth rate.

Of course, this could help Baidu, the Chinese search engine. Fortune magazine’s Stephanie Mehta had talked to Jennifer Li, Baidu’s chief financial officer back in December 2009. According to Li, “Baidu’s market share for search in China was about 77% in the third quarter” and Google “lost share in China, dropping to 17% in the third quarter, from about 19% in the second quarter.”

A more cynical view would say that perhaps Google is cutting its loses and getting rid of a money-losing unit. I don’t think so — for once Google is sticking to its aspirational goal: do no evil. It is a shame that they were kowtowing to the Chinese government in the first place — but better late than never.

Image courtesy of Joy of Tech

26 Responses to “How Much Will It Cost Google to Exit China?”

  1. Michael Parker

    Google’s 1st quarter revenue in China was 40 million renminbi, or $4.97 million. 4 times that gives 19.88 million for a year. Google’s revenue for the 1st quarter was $945 million. 4 times that gives 3.78 billion.
    If Google pulls out of China, there would be a loss of $19.8 million, or about 0.00528. Assuming a price of 620, which was the price when this was announced, This translates to a decrease of $3.27 from 620.
    The Chinese government wanted Google to filter emails and give the Chinese government the information. This information is used to put Chinese people in prison. That is what happened with Yahoo before it was purchased by Microsoft. Google has refused to do this in order to protect the rights of the Chinese people to use the Internet. The reason Google has a 30% market share which is quoted as being much less than that in other media, is precisely for that reason. The Chinese people want to use the Internet and freely speak and choose for themselves. The Chinese government is wrong, wrong, wrong. If they do not stop attacking people and computers outside of China and reversing human rights, those people will stop buying Chinese products, at a minimum. It is important for people everywhere to support the efforts of Google in China. Beware the power of the boycott.

  2. The ~$600 million estimation is bit too high, as Baidu reported bit higher profits while they own 60-70% share of the chinese market. Also, there are reports that Google was loosing market share in 2009.

    if they are not profitable in China, this might be their exit strategy? :)

  3. @drlulu. Sure Google even stated that they get attacked all the time but in these particular occasions it’s apparent that it’s the Chinese government that is involved. There’s a big difference.

  4. That will be absolutely a drastic step if one of the two parties does not change their attitude. If Google is banned then the users will be affected most (apart from the monitory loss). Google is not only the Giant SEO but Google is the representative of the people, Google speaks on behalf of the people. Lets hope for the best.

  5. gabriele

    «A more cynical view would say that perhaps Google is cutting its loses and getting rid of a money-losing unit. I don’t think so — for once Google is sticking to its aspirational goal: do no evil.»

    I don’t think that there is a good (or cynical) goal behind the decision, it is just a rational move. They get attacked despite the fact that they were following the orders of the Chinese government, so it doesn’t make any sense to be obedient for them. Furthermore they have a tiny market share and these attacks reveal the need for higher security costs and lots of political problems. Probably there will be future actions by the government to “nationalize” the chinese internet. They know that it doesn’t make any sense to continue operations in China unless the context changes.

  6. Exactly what is altruistic here?
    Is google leaving China because…

    • Someone attacked their servers… and that’s… wrong? Surprising? (regardless of what/whose data they tried to access?)
    • or because they are losing market share? (Even though they seem be making a profit?)

    In either case, I don’t see how exiting the market will be a rational/altruistic/financially sound response. They’re facing a purely technical issue (someone attacked their servers). Why are they trying to create a political issue out of it is beyond me.

  7. I wish I could feel warm and fuzzy about Google’s aspirations, but the cynic in me is thinking that they’re smart in exiting/pairing down a business unit that’s losing market share. I think Google is realizing it’s ok to fire customers, but for financial reasons, not altruistic ones.

    • Google is losing badly to Naver and Daum in South Korea. Google is showing no signs of pulling out of South Korea. Google is losing badly to Yahoo! Japan (operated by Softbank) in Japan. Google is showing no signs of pulling out of Japan.
      No need to be cynical. Google is angry that the Chinese cyber army hacked them. Google realizes the same thing that their former China head realized. It will be nearly impossible to beat Baidu which is very willing to be an instrument of the state in China, and very willing to allow activity which is considered criminal by many observers.

  8. It took ’em a while, but good for them.

    …and maybe a little savvy too: it’s not like Chinese users won’t be aware that Baidu is the censored search engine and if they want to get at the full internet, they’ll find a way through the Great Firewall to Google, just as the Iranian pro-reform movement finds a way to Twitter.

    I’m also betting that a good number of Google employees were unhappy with their China operations.

  9. I agree that this is a welcome development. Google must have information which strongly suggests that the Chinese government perpetrated this attack. That is why Google sees no point in cooperating with the Chinese government any more. If the attack had come from any other source, why would Google pick a fight with the Chinese government?

    However, a few questions persist: When will Google stop censoring in other countries? Will it take a cyber attack by the government of a country for Google to stop censoring in that country? What about not censoring because it’s the right thing to do? Because that is what freedom of speech is all about?

  10. Not only do they have a bunch of money to lose but I think someone like Microsoft is going to be more than willing to fill their void. However, the amount of PR and kudos they are going to get back may be well worth it. It’s about time corporate America started acting more responsibly.

  11. Om – again an interesting conversation around Google and your view(bias!) about the company is in question here How come u did not want to raise how much other kowtowing other competitors of Google are doing?