Google's threatened China exit caught a lot of attention in the American press. (If you have no idea what I am talking about, check out Danwei's coverage of the story and their associated links.) The early commentary hits on (1) Chinese censorship, (2) restrictions on foreign businesses in the PRC, (3) Google's "don't be evil" mantra, or (4) some combination therein. But I would like to suggest, however, that Google is exploiting the hacking incident as a cover for larger problems with their China operations.
Politically, Google knows that the Central Government does not tolerate anything that would undermine single-party rule, including unfiltered search results that include photos of Tank Man. Moreover, recent policy statements from the PRC Politburo repeatedly emphasize the efforts of China's leadership to promote "indigenous innovation" from home-grown Chinese companies.
Economically, sinophiles may recall that Kai-Fu Lee, formerly head of Google's China office, left the company in September of 2009, just four years after Google poached him from Microsoft. Chinese officials have repeatedly used the Great Firewall to block Gmail, Google search, and YouTube. Google itself agreed to censor search results and was even accused of stealing code from Chinese companies. At the same time, a home-grown Google copycat called Baidu has become a Central Government darling, even if it does facilitate rampant IP piracy with an MP3 search right on its homepage. Perhaps most important of all, however, Baidu owns an upward trending 74 percent of the market for search in the PRC, while China probably only accounts for about one percent of Google's revenue.
By hanging their hat on the hacking incident, Sergei and Larry kill two birds with one stone: they curry political favor back home and they obscure the poor performance of their Chinese subsidiaries. Small wonder, then, that this whole story broke on the same day that GOOG announced its Q4 2009 investor results.