Procurement Intelligence Unit

In its latest move, Google appears to be defying the Chinese government by declaring it will stop self-censoring its search engine and could leave the world's largest internet market after email accounts of human rights activists were hacked into.

Google spoke out against a string of sophisticated attacks on Google and over 20 other companies in December, in addition to restrictions on free speech, in a statement on its web log. Photos of the 1989 Tiananmen Square crackdown were some of the previously censored images soon to be made available ongoogle.cn.

Leaving the Chinese market would deprive Google of an estimated US$600 million in annual revenue from China's 338 million internet users and could help rival search engine Baidu extend its lead in the country. At present, China's internet authorities, along with the rest of the world, are trying to find out more about what Google intends to do.

Google currently holds about one-third of the Chinese search market, a long way behind Chinese rival Baidu, which has more than 60%. So is this just a cover for Google being beaten at its own game by the Chinese one might wonder. Is pulling out of China, using the cover of free speech and the recent cyber attacks just a clever way of Google trying to cover up market defeat?

It doesn't really make sense for a business to pull out of its biggest market unless it is getting such a severe beating from competitors that it doesn't think it has a chance and instead decides to limp off the battlefield in surrender. Other players in the search market, Yahoo! and Microsoft's Bing, have not made any announcements to leap into the Chinese market either, which shows that Baidu is perhaps a fiercer rival than we are led to believe. Google has cloaked this by appearing to take the moral high ground and marketing spin on the question of rights to free speech.

Western companies operating in China face a difficult problem; on the one side is the benefit of China's dramatic economic growth, but on the downside companies have to deal with Chinese legislation and regulations, with markedly different policies on privacy and human rights. Gmail users, who are known human rights activists in the US, China and Europe, have had their accounts accessed, probably through phishing scams or malware on their computers.

If a company as renowned as Google struggles in China, many other companies must also be facing problems. A special feature of doing business in China is Guangxi - relationship - whether with a government body, partners and suppliers, and many procurement executives can no doubt sympathise with the obstacles facing Google, with their own stories to tell.

Google's possible departure from China would come after four years of fighting censorship and shows the problems that companies face operating in a country that controls the flow of information. If Google withdraws from the market, it will leave only Baidu, giving it a monopoly hold on the market.

It remains to be seen whether Google will see through its threats as China's government has responded by saying it welcomes companies to do business there, as long as they comply with the law - an indication that it believes it can live happily without Google. Even US Secretary of State Hilary Clinton has become involved in the issue and has challenged Beijing to end internet censorship, putting further pressure on relations between the two countries.

Online revenue generated in China rose by more than 30% to 74.3 billion yuan (£6.7 billion) in 2009, according to new research conducted by Shanghai-based consulting firm iResearch. The company also forecast that online earnings in China from advertising, games, shopping and similar items will increase by 51% to 112.3 billion yuan in 2010.

Such a market is not to be abandoned readily. Google is now planning what other changes it will make to its business plan for China, as an unreliable link in the supply chain. The company gave a strong signal that it may pull out of one big target - China's mobile phone market - by delaying the launch date of two phones in China that use its Android operating system. The company is also said to be reviewing its Chinese music search service, as well as the Chinese version of Gmail, Google Maps and other products.

Executives at Google have been quoted as saying they do not believe the company will withdraw completely from China, as it has more internet users than any other country in the world. While Google has a history of downplaying its moves into new markets, only to surprise competitors with new products and services, it has not pulled out of any major markets before - unlikely to do so now, Google will no doubt retreat gracefully from google.cn with its head held high.