Google in China: Ex-Microsoft VP Kai-Fu Lee’s Past Report Might Point to What Went Wrong

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Lee wrote up a report entitled “Making It in China.” It was a cultural assessment of how the Redmond, WA, company should enter into business relationships and build trust over in China. The report later took center stage when Lee sent a version to CEO Eric Schmidt of Google in 2005, as he prepared to leave Microsoft for Google, spawning a contentious court battle over his non-compete clause. (You can read all about the case in the book Guanxi, written by Bob Buderi and me.)

Lee sent the 23-page report to my co-author Bob (now Xconomy’s CEO) in May 2005, on the same day he sent it to Google. It included six “challenges” of doing business in China, and six “formulas” for meeting those challenges that foreign companies must practice “or they will be turned away.” Looking back now, it’s interesting to think about how he may have applied these lessons at Google—and where it all went wrong.

Here is a quick summary of Lee’s six formulas for success in China (this is adapted from Chapter 12 of our book, for those of you scoring at home; and again, Lee wrote it in 2003):

1. Learn the protocols and forge trusting relationships

“China’s culture is built on trust, relationships, and mutual respect,” Lee wrote. “Trust takes a long time to build, but there are many ways to break trust: by showing disrespect, by failing to provide favors in exchange for favors received, by not following the protocols, by condescending, coercion, or by dwelling on controversial issues.”

2. Establish a strategy for long-term commitment

“China is not hesitant to choose one ‘friend’ per industry and reward it richly,” Lee wrote. He added that the Chinese “are more interested in companies that are also willing to transfer technical and business knowledge.” Some examples of companies that had done this successfully over the years: Coca-Cola, Volkswagen, Sony, Motorola, Hewlett-Packard.

3. Nurture local talent and leadership

“MNCs [multinational corporations] that don’t value and develop local talent are viewed as exploitative,” Lee wrote. He cited Coca-Cola and Carrefour, the French retail giant, as examples of companies that have promoted homegrown talent to top management positions in China.

4. Be flexible and open to local needs and practices

Lee wrote, “The environment is often full of volatility and irrationality, so one of China’s market rules is: The rules keep changing.” One issue has always been price points. For example, he said, “Coca-Cola successfully avoided brand piracy by allowing its China [subsidiaries] to price products so affordably that it was no longer worth the effort to counterfeit them.”

5. Help build the local business ecosystem

“China expects multinationals to help nurture [the] local economy in exchange for access to the China market, even if this means that the MNCs are fostering future competitors,” Lee wrote. “Offering to share business culture, management concepts, and technology skills is even more helpful to building trust and business collaborations.” Some positive examples: Coke, KFC, IBM.

6. Build trust from a unified, humble organization

“To create a good image in China, other companies have worked hard to keep a consistent corporate message and a low PR profile. Rather than PR campaigns, they have concentrated on winning trust from government and local partners,” Lee wrote. “Philips China has seventy times more revenue in China than Microsoft, but only one-tenth as much PR as Microsoft.”

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By casual inspection, it looks to me like Google has broken with #1, #4, and #6 (if it ever officially followed them)—for what may be very good reasons. It has dwelled on the controversial issue of Internet censorship (#1), which cuts to the core of Google’s mission to organize the world’s information and make it accessible. It drew the line at being flexible to local practices after the recent cyber attacks it uncovered (#4). And it is doing anything but keeping a low profile in China, by calling the world’s attention to the current situation—in effect putting the Chinese government in a corner (#6).

But perhaps something Lee wrote above—that “the rules keep changing”—applies to these formulas for doing business as well. As it stands, I suspect this situation will not end well for either Google or China.

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

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