A Close Look At Google's Vulnerable Position In China
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Since pulling its servers from China in 2010 after unresolved disputes with the Chinese government over internet censorship, Google (NASDAQ: GOOG) has tried to maintain its presence in the country by providing search engine services to Chinese web browser, Qihoo 360 (NYSE: QIHU). But, after citing a lack of sufficient customer service by Google, Qihoo recently launched its own search engine – replacing Google as its default search engine. While users can still access Google, Alex Xu, Qihoo's chief financial officer stated that he believes users will stick with the company's new default option instead.
This leaves Google in a tricky position as the company now has to find other ways to remain part of China's growing information technology market without getting into another battle with the Chinese government or engaging in tough competition with rivals. With much at stake in terms of international sales and revenue, Google needs to remain at the top of its game when it comes to managing its operations in China.
China's Growing IT Market
For Google, leaving China completely would be leaving a considerable amount of money on the table. In a very short time, China's IT market has grown tremendously. According to a new report published by Gartner, use of IT products and services by both consumers and businesses grew about 14 percent in 2011, with an estimated $312 billion in sales of online goods and services by the end of 2012.
With the potential to earn big profits, Google needs to find new ways to remain a competitive player in China's IT market. China's most popular search engine, Baidu (NASDAQ: BIDU), now faces tough competition from Qihoo. In the past, Google managed to gain just 15.7 percent of the market share as compared to Baidu's 78.6 percent. But since Qihoo's announcement to launch its own search engine, Baidu stock has dropped 5.7 percent, an indication that investors have lost faith in the company.
Unfortunately, with little ground to stand on against the Chinese government, entering a competitive race for search engine dominance with two other well established companies may not be the best decision for Google right now.
There's Still Hope…
With the boom in IT, mobile marketing has also increased in China. As more people rely on mobile devices such as smartphones and tablet computers, businesses and organizations have noticed an increase in response to online ads. Google has emerged as a leader in providing ads for mobile phone apps in China. After acquiring AdMob in 2010, Google has used the app creation platform to help web developers and others create ads tailored towards those who download specific apps.
Many Chinese businesses have turned to AdMob to help create ads for their apps. Considering that China will become the largest smartphone market in the world (an estimated 137 million units shipped in 2012), helping businesses reach millions of potential customers should also help Google regain its foothold in China.
Google may again have to compete with Baidu in app ad creation, but this time it may have the upper hand, considering Baidu's latest dip in stock price. This, in conjunction with limited content and materials to offer businesses for mobile marketing purposes, Google should be able to secure the marketplace and build a solid brand before the competition arrives.
Motorola Layoffs in China
But even though China has turned into one of the fastest growing smartphone and mobile device markets in the world, this has not stopped Google from laying off 1,000 Chinese workers just months after acquiring mobile phone manufacturer Motorola Mobility. Most of the layoffs were in the research and development division. Google stated the layoffs were necessary to help Motorola Mobility maintain current profits.
These layoffs have caused multiple protests by employees and others and may end in a review of labor union agreements giving approval to let Motorola employees go. While layoffs have become a normal part of business operations in many parts of the world, the timing of the layoffs does not rebuild Google's image in China. It only further represents the delicate balance the company must perform to conduct business in the country.
Google isn't the first U.S. business to receive bad press from its Chinese labor operations. Apple (NASDAQ: AAPL) became the target of the Fair Labor Association, a non-profit organization aimed at helping hourly workers worldwide, after the discovery of unacceptable work conditions and extreme levels of overtime performed by employees in factories owned by Apple iPad and iPod manufacturer, Foxconn.
Turning a Profit in China
With the success of its AdMob division and app ads, Google has begun to show promise in a market it was all but excluded from. Google still holds the top position in mobile OS, with Android picking up 80 percent of the market share in China. Apple picked up 12 percent, while other companies including Microsoft (MSFT) picked up 8 percent.
According to its second quarter earnings statements, Google earned $12.21 billion in revenue. Total revenue for sales outside the U.S. totaled $5.96 billion. That's a significant percentage of the company's total revenue for the quarter. For this reason alone, Google will not ignore China. The trick will be to find smaller markets within China, such as app ad development, to bring in continuous profits without upsetting the government or engaging in too much competition with rival companies.
Emerging markets such as China provide not only additional revenue, but also places for well-established companies to form long-lasting relationships with new consumers. From an investment perspective, watching Google maneuver through China to generate maximum revenues should prove very exciting, and hopefully, very profitable.
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