Google May Exit China After ‘Sophisticated’ Attack (Update1)

By Brian Womack, Ari Levy and Mark Lee
Jan. 13 (Bloomberg) -- Google Inc., owner of the most popular Internet search engine, may shut its Chinese Web site and offices after a "highly sophisticated" cyber attack aimed at the e-mail accounts of human-rights activists.
Google also said at least 20 other large companies in industries ranging from finance to technology, media and chemicals had been targeted by hackers. The attacks, combined with attempts in the past year to limit free speech on the Web, has led the company to decide it will stop censoring results on its Google.cn site, it said.
A departure would follow four years of clashes over censorship and highlight the challenges global companies face operating in a one-party state that controls the flow of information. A pullout would deprive Google of an estimated $600 million in annual revenue from China’s 338 million Internet users and may help domestic Baidu Inc. extend its lead in the world’s largest online market.
"We are beginning to see companies saying ‘we don’t have to be here,’" said Duncan Clark, chairman of Beijing-based business consultancy BDA China Ltd. "We’re certainly seeing more of a trend toward protectionism, but also a feeling that there isn’t a permissive attitude toward foreign companies generally."
Wang Lijian, a Beijing-based spokesman for the Ministry of Industry and Information Technology, said he couldn’t comment as he was unaware of the situation. China’s foreign ministry declined to comment.

Baidu Shares Rise

Google fell $6.68, or 1.1 percent, to $583.80 in extended trading after closing at $590.48 on the Nasdaq Stock Market, while Baidu’s American depositary receipts added 6.8 percent after the end of regular Nasdaq trading.
Dozens of accounts of Gmail users, who are advocates of human rights in the U.S., China and Europe, were accessed, most likely through phishing scams or malware on the users’ computers, Google said. With phishing scams, hackers pretending to be legitimate Web sites ask users to divulge confidential information, while malware includes programs that record users’ keystrokes as they type in passwords.
The Chinese government’s human rights record "remained poor and worsened in some areas" during 2008, the U.S. State Department said in a February 2009 report on human rights practices in countries around the world. Authorities in China monitored various types of communication, including telephone, e-mail and the Internet, the department said.

More Attacks

Mountain View, California-based Google said it’s notifying other companies that were attacked and is working with U.S.
authorities.
"It’s probably too early to think that Google is pulling out of China altogether given how big the China market is and will be," said Jeff Papp, a senior analyst at Oberweis Asset Management Inc., which manages about $900 million, including Baidu stock.
The company was projected to generate revenue of about $600 million from China in 2010, according to estimates by Imran Khan, an analyst at JPMorgan Chase & Co. in New York.
Google hired Lee Kai-fu from Microsoft Corp. in 2005 to head its operations in China, where the Internet company started a local-language search service that excludes results censored by the Chinese government. The efforts were part of Chief Executive Officer Eric Schmidt’s to expand in a market that overtook the U.S. as the biggest Web market in 2008.

Yahoo China

Google and Yahoo Inc. were among companies that were criticized by U.S. lawmakers in 2006 for complying with the Chinese government’s restrictions on the Internet. Yahoo Founder Jerry Yang said in 2005 that a court order obliged the Sunnyvale, California-based company to hand over user records that led to the conviction of a Chinese journalist.
Yahoo spokeswoman May Petry said the company is preparing a comment.
Baidu accounted for 63.9 percent of China’s Internet search market in the third quarter, compared with 31.3 percent for Google, according to researcher Analysys International. Baidu declined to comment on Google’s decision.
"There’s no other competitor, so if Google pulls out, Baidu is left by itself," said Erwin Sanft, an analyst at BNP Paribas SA in Hong Kong. "If they pull out of China, it’s very hard to really get back in the market and still have a similar presence."

‘Don’t be Evil’

The move signals Google is hewing closer to its "Don’t be evil" motto, said Heath Terry, an analyst at FBR Capital Markets in New York. Still, Google is still a "long way away from getting out of China," Terry said. The company can threaten to leave the country because China accounts for such a small piece of Google’s sales, he said.
"This is their way of opening up this important conversation," Terry said. "This is their way of starting to move the conversation forward."
China has more Internet users than the total population of the U.S., according to the China Internet Network Information Center, a government-backed agency that licenses online domain names.
Google said the attack, which occurred in the middle of December, originated in China and resulted in intellectual property being stolen.

Gmail Acounts

Google said two Gmail accounts appear to have been accessed as part of the attack. The information gathered was limited to account information, such as the date the account was created, as well as the subject lines of e-mails, Google said. The contents of e-mails weren’t exposed.
State Department officials didn’t immediately respond to requests for comment. Federal Bureau of Investigation spokesman Jason Pack declined to comment.
Access to Google’s YouTube video site was blocked in China after Tibet’s government-in-exile released a video on March 20 that it said showed Chinese police beating protesters. The video was described by China’s official Xinhua News Agency as a fabrication.
Google also has drawn complaints from a Chinese writers’
group about its online book-scanning project. Google should stop scanning books without permission, the China Writers Association said in November. Google apologized to authors this week for a lack of communication.
Last year, China pushed personal-computer makers to install filtering software on their machines. The government backed away from that requirement in June, though it later said it would require the software on computers in schools and Internet cafes.

It is a shame that China can get away with whatever they want regarding human rights issues. However, Google has 0 leverage in this situation. It is loose loose. China is the fastest growing economy and marketplace of Internet users in the world. To pull out of that market place is a very risky decision for a company with global ambitions. However, if Google's motto of "Don't be evil" is important to their corporate social responsibility code of ethics then they must uphold that standard. This situation is sticky to say the least.

By Bloomberg News
Jan. 14 (Bloomberg) -- Google Inc.’s possible departure from China may become a defining pronouncement that the world’s biggest Web market is an inhospitable place for foreigners.
An exit by the world’s most popular Internet search engine would follow those by Yahoo! Inc. and EBay Inc. and leave China without a foreign company operating independently to serve more than 330 million Web users. Google, of Mountain View, California, said Jan. 12 it may shut its Google.cn site and close its China offices after hackers tried to access the accounts of human rights activists using its Gmail e-mail service.
Microsoft Corp., the world’s biggest software company, and Yahoo rely on local ventures because China’s government censors Web content, and local operators including Baidu Inc. and Tencent Holdings Ltd. offer more popular services. Chinese authorities shut more than 100,000 Web sites in December in an "escalation" of its Internet censorship efforts, affecting traffic at both Baidu and Google, according to Tian Hou, an analyst with Pali Capital Inc. in New York.
"Internet companies operate in a lot of the gray areas in China," said JP Gan, managing director at Shanghai-based Qiming Venture Partners, which oversees more than $500 million. "It’s kind of ridiculous that a country as big as China can’t allow the most prominent, popular Internet company in the world to operate."

More Pressure

Baidu will pick up "the lion’s share" of Google’s search business should the U.S. company leave, Nomura Holdings Inc.
analyst Jin Yoon wrote in a report yesterday. Tencent, operator of China’s biggest online chat service, and Sohu.com Inc. also will gain business, Yoon said.
Baidu’s American depositary receipts jumped 13.7 percent, the most in over a year on the Nasdaq Stock Market on Jan. 13, while Google fell 0.6 percent, to $587.09.
Google’s technology and efforts to tailor its services had made it the most successful overseas Internet operator in China, analyst Elinor Leung said.
"All the multinationals face a lot more pressure compared with local companies," said Leung, head of telecommunications and Internet research at CLSA Ltd. in Hong Kong. "If you go against the government, it’s not going to make your life easy."

Yahoo, EBay Ventures

Google will stop censoring results on its Google.cn site, the company said. China’s Internet authorities are seeking more information about Google’s intentions, the official Xinhua News Agency said, citing an unnamed "high-ranking" official with the State Council Information Office. Wang Lijian, a Beijing- based spokesman for the Ministry of Industry and Information Technology, said he couldn’t comment as he was unaware of the situation.
China’s foreign ministry declined to comment.
In 2005, Yahoo, of Sunnyvale, California, sold its Chinese unit and paid $1 billion to get a 40 percent stake in Hangzhou- based Alibaba Group Holding Ltd.
EBay, the most-visited U.S. electronic-commerce site, shut its China unit in 2006, and the San Jose, California-based company folded it into a venture with Hong Kong billionaire Li Ka-shing’s Tom Online Inc.
Microsoft, of Redmond, Washington, formed a venture with state-owned Shanghai Alliance Investment Ltd. in 2005 to operate its MSN China online messaging service.

Protectionism

Amazon.com Inc., the world’s biggest Internet retailer, controls Beijing-based e-commerce operator Joyo.com, while Australia’s Telstra Corp. owns stakes in Chinese sites including Soufun Holdings Ltd.
"We’re certainly seeing more of a trend toward protectionism, but also a feeling that there isn’t a permissive attitude toward foreign companies generally," said Duncan Clark, Beijing-based chairman of business advisory company BDA China Ltd.
Baidu, based in Beijing, accounted for 58.4 percent of the search engine market last quarter, compared with Google’s 35.6 percent, according to researcher Analysys International. The Chinese Web operator declined to comment on Google’s statement.
Baidu’s sales this year may rise to 6.2 billion yuan ($908 million), according to the median of 17 analysts’ estimates compiled by Bloomberg.

Censorship Clashes

Google may earn revenue of as much as $350 million in China in 2010, or about 1.5 percent of its total, according to a report by Citigroup Inc. analyst Catherine Leung yesterday.
Google will likely not permanently leave the market, Leung said.
Google’s possible withdrawal follows four years of clashes over censorship and highlights the challenges global companies face operating in a one-party state that controls the flow of information. The government uses what is dubbed "The Great Firewall of China" to block access to Web sites discussing sensitive topics including Tibet independence and the 1989 crackdown in Tiananmen Square.
"I will feel a little bit strange if I cannot use Google," said Allen Ren, who works for a consulting company in Shanghai. Ren said he prefers Google to Baidu’s service because he believes the U.S. company’s search results are more reliable.
Dozens of people gathered outside Google’s office building in the Tsinghua Science Park in Beijing yesterday in freezing temperatures, with some placing flowers and candles nearby.
Access to Google’s YouTube video site was blocked in China after Tibet’s government-in-exile released a video on March 20 that it said showed Chinese police beating protesters. The video was described by China’s official Xinhua News Agency as a fabrication.

Yahoo, Adobe Attacks


China said last month it will require individuals seeking to operate Web sites to register online information.
Companies need to show proof of their business licenses, according to a Dec. 11 statement by the China Internet Network Information Center, which is controlled by the Ministry of Industry and Information Technology.
Google and at least 20 other companies faced a series of "highly sophisticated" cyber attacks last month, the Internet operator said Jan. 12 in a Web log statement. The breach, which occurred in the mid-December, originated in China and resulted in intellectual property being stolen, Google said.
Yahoo was targeted by a Chinese attack similar to the one that affected Google, according to a person familiar with the matter. Adobe Systems Inc., the world’s biggest maker of graphic-design programs, said yesterday its network systems were attacked in a "sophisticated, coordinated" effort.
Increased censorship may curb Internet use, affecting earnings at Baidu, according to Pali Capital’s Hou, who cut her estimates for the company last week.
"Baidu may increase its market share if Google leaves, but it will be a smaller pie," Hou said.