Google's move came as a surprise both to observers and to the Chinese government.
Google exited the mainland Chinese search market by redirecting all queries from Google.cn to its Hong Kong site, which offers an uncensored Chinese-language version of the search engine.
The move is legal because Hong Kong operates under more liberal laws — with its servers located outside mainland China, Google no longer needs an ICP (Internet Content Provider) license there, and, like any website hosted outside China, is under no obligation to censor results.
It remained possible, however, that the Chinese government would respond by blocking the search engine outright within the mainland. Google said it intended to keep its other operations, including R&D and sales, in China.
The stated reasons for the withdrawal were cyberattacks — allegedly originating from two Chinese universities — and Google's unwillingness to continue complying with China's internet censorship requirements. It's also plausible that Larry Page and Sergey Brin had simply grown tired of the persistent competitive disadvantages against domestic rival Baidu.
The Chinese government's perspective
From Beijing's point of view, several things didn't add up: Google never presented evidence of the alleged hacking attacks and never filed an official complaint; the universities named denied any involvement; and Google had operated under Chinese law for four years with no apparent reason to suddenly reconsider.
Initially, Google framed the censorship issue as global rather than China-specific, and described the whole matter as commercial or technical rather than political — noting that censorship in China mainly targeted pornographic, illegal, or state-security-related content, and that while China didn't need Google, Google stood to lose a large market. Later, the tone sharpened considerably, with Chinese state media portraying Google as an instrument of US interests or intelligence agencies.
Since the decision was made unilaterally by Google, both sides seemed keen to frame it as a business matter with no lasting impact on US-China relations.
How successful was Google in China?
Competitive disadvantages
Given the history of Google in China and the uneven playing field it operated on, Google China can reasonably be called a success story. It faced periodic censorship, especially ahead of politically sensitive events, and at times queries to Google were even redirected by ISPs straight to rival Baidu.
As a domestic company, Baidu was able to offer an MP3 search feature linking directly to music files, most of which were pirated. In several lawsuits brought by foreign rights holders, Chinese courts ruled in Baidu's favor, reasoning that Baidu wasn't itself hosting the illegal files and that any infringement lay with the sites offering the downloads. Google, as a US company, couldn't offer the same kind of largely-illegal MP3 search and instead had to build a legitimate music download service from scratch — a service widely seen as one of the main reasons for Baidu's early success.
Google as a success story in China
Depending on the source, Google held between 30% and 40% market share among China's roughly 380 million internet users at the time, with Baidu — competing under much more favorable conditions — holding around 60%. Other competitors like Yahoo and Bing were minor players, each under 2% market share. Given the difficult conditions Google operated under, its performance in China can fairly be called a success, and its search market share had been growing in the period leading up to the withdrawal.
What did the withdrawal mean for Google?
In terms of overall revenue, China — at around 200 million euros a year — was a relatively minor market for Google. Many Chinese businesses continued to advertise on Google's US version even after google.cn was shut down, but Google likely gave up an important growth market in the process.
What did it mean for China?
The Chinese government emphasized that Google was simply a foreign company obligated to follow the law, and that its withdrawal would have little impact on China overall. In practice, though, Google's services were used disproportionately by more educated Chinese users, and losing them affected both individual users and the many portals that had integrated Google search.
Baidu, as the direct competitor, stood to benefit, as did Microsoft, which could position its own search service as a Google alternative, particularly on mobile platforms. Some Chinese researchers worried that losing Baidu's main competitor would also reduce pressure to innovate.
Barriers for foreign e-commerce companies in China
Foreign companies face a number of structural disadvantages in China's e-commerce sector. Internet censorship is one: with sites like YouTube, Twitter, Wikipedia or Facebook blocked, domestic companies have been able to build Chinese equivalents without facing that particular foreign competition.
It has also historically been cumbersome for Chinese consumers to pay foreign companies online, effectively locking out international service providers without a local presence.
Any company — Chinese or foreign — operating a website within China needs an ICP (Internet Content Provider) license. Foreign companies can obtain a non-commercial ICP license fairly easily via simple online registration for a basic company presence, but running an online shop, forum, or any paid online service requires a commercial ICP license.
Foreign companies can only obtain a commercial ICP license by forming a joint venture in which they hold no more than 50%; a Wholly Foreign-Owned Enterprise (WFOE) cannot obtain one directly in practice. Google historically "borrowed" its license from a Chinese partner, before forming a joint venture with that partner after 2006 and obtaining an ICP license through it. Other companies, like Sina.com, have sometimes needed as many as ten different licenses for their various online services, overseen by multiple different authorities simultaneously.
Another complication for foreign companies is that each province interprets the rules differently, and the definition of which kinds of websites require a commercial ICP license remains fairly vague — regulatory hurdles that are naturally easier for local companies to navigate, and which tend to come with better relationships with local authorities.
What might a withdrawal scenario look like?
Setting up a company in China is considerably easier than shutting one down. Google couldn't simply close its China operations overnight — doing so would require clearing a series of bureaucratic hurdles and providing proof of things like regular tax payments and no outstanding debts. In any case, a full shutdown of Google's China operations was apparently never the plan.
The chosen approach — redirecting search queries to a Hong Kong server — was inherently risky, since Google's search results could be blocked in mainland China at any time, and the Chinese government was unlikely to be pleased by such a unilateral move. Beijing could also restrict other Google services unrelated to search.
It remained entirely possible that Google would end up losing the Chinese market altogether if the government chose to block the search engine outright — or, alternatively, that the search engine could remain accessible as long as users didn't search for specific restricted terms, with individual results pages containing certain links or keywords blocked rather than the whole service. Since blocked pages can't be reached regardless of whether they appear in Google's results, Google itself could in principle stop actively censoring anything — leaving that role entirely to China's own filtering system, the so-called "Great Firewall."
