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

1/14/10Follow @gthuang

In the fascinating maelstrom that is Google in China, one thing is clear: this affects all of us. It’s not about whether Google’s decision to draw a line in the sand is based on ideals versus profits. It’s not about whether the Chinese government will open up its Internet policies and play ball with the rest of the world. It’s about the future of every company on the Web—including Microsoft, Amazon, RealNetworks, and all the smaller companies out there.

In case you haven’t been following every twist and turn, earlier this week Google said it might pull out of China following its investigation of a cyber attack that it says originated in China, targeting at least 20 large companies (including Google). One apparent goal of the attacks was to access the Gmail accounts of Chinese human rights activists. Google said it is “no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all. We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China.”

Google’s statement is very carefully worded. It doesn’t explicitly accuse Chinese officials of any wrongdoing. But the reactions of a lot of people, from the media to tech-business leaders to U.S. Secretary of State Hillary Clinton, have helped portray the situation as a cut and dried “Google (and freedom of information) vs. China (and censorship)” issue.

I want to tackle one piece of this sprawling puzzle. And that is the huge, ongoing cultural challenge that Google, Microsoft, and other western companies face in setting up business operations in China. No, this is not a new issue. But one part of the Google announcement was particularly telling: “We want to make clear that this move was driven by our executives in the United States, without the knowledge or involvement of our employees in China who have worked incredibly hard to make Google.cn the success it is today.”

Google has now been up and running in China for four years. That is not a lot of time to build deep relationships. And it certainly doesn’t help that Google’s biggest competitor in China, Baidu, is backed by the Chinese government.

Heading up Google’s China effort until recently was Kai-Fu Lee, the controversial ex-Microsoft vice president who founded Microsoft Research Asia in Beijing in 1998. Lee, a Chinese high-tech celebrity and education leader, was head of Google China from 2006 until last September, when he left the company to create an incubator in Beijing for Chinese high-tech startups.

In my view, it may not be a coincidence that the current situation has come about so soon after Lee’s departure. Frankly, I’m surprised this all didn’t come to a head much sooner for Google. But perhaps it was through Lee’s efforts that it didn’t—or maybe, conversely, it’s part of why Lee left Google. (I’ve pinged him for comment, but haven’t heard back on this topic.)

Which brings me to some analysis. Back in 2003, while he was at Microsoft, 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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