Google Faces Fallout as China Reacts to Site Shift

By MIGUEL HELFT and MICHAEL WINES

Google pushed. Now China is pushing back.

The company’s problems in China escalated on Tuesday as its ties to some Chinese partners began to come apart and the government reacted angrily to Google’s attempt to bypass government censors.

The overseas edition of the People’s Daily, the main newspaper of the Chinese Communist Party, on Wednesday accused Google of collaborating with U.S. spy agencies, Reuters reported.

‘‘For Chinese people, Google is not god, and even if it puts on a full-on show about politics and values, it is still not god,’’ said a front-page commentary piece. ‘‘In fact, Google is not a virgin when it comes to values. Its cooperation and collusion with the U.S. intelligence and security agencies is well-known."

As for Google's move, the newspaper said: ‘‘All this makes one wonder. Thinking about the United States’ big efforts in recent years to engage in Internet war, perhaps this could be an exploratory pre-dawn battle."

Google, the world’s largest Internet company, once viewed China, the world’s largest Internet market, as a bottomless well of opportunity with nearly 400 million Web users, and an even larger number of potential customers for its nascent, but vital, mobile phone business.

But by directing search users in China to its uncensored search engine based in Hong Kong, Google may have jeopardized its long-range plans.

“I don’t understand their calculation,” said J. Stapleton Roy, director of the Kissinger Institute on China and the United States at the Woodrow Wilson International Center for Scholars. “I do not see how Google could have concluded that they could have faced down the Chinese on a domestic censorship issue,” said Mr. Roy, a former United States ambassador to China.

Google called the move sensible and said it hoped to keep its sales, research and other operations in China.

But some of those other businesses quickly came under pressure. China Mobile, the biggest cellular communications company in China and one of Google’s earliest partners in its foray into smartphones, was expected to cancel a deal that had placed Google’s search engine on its mobile Web home page. Millions of people use the page daily. In interviews, business executives close to industry officials said China Mobile was planning to scrap the deal under government pressure, although it had yet to find a replacement.

Similarly, China’s second-largest mobile company, China Unicom, was said by analysts and others to have delayed or scrapped the imminent introduction of a cellphone based on Google’s Android platform. One popular Web portal, Tom.com, already ceased using Google to power its search engine. The company is controlled by Li Ka-shing, the Hong Kong billionaire who has close ties to the Chinese government.

Technology analysts and the business executives said Google might also face problems in keeping its advertising sales force, which is crucial to the success of its Chinese language service on PCs and mobile phones.

In an interview on Tuesday, David Drummond, Google’s chief legal officer, said he did not see the company’s decision to serve Chinese search customers from outside China as an act of defiance. He said the move was consistent with Chinese law and with the company’s goal to stop participating in censorship. While it is possible that Google’s prospects in China could suffer, the company has yet to see any concrete business impact from its decision, he said.

“We certainly expected that if we take a stand around censorship that the government doesn’t like that it would have an impact on our business,” Mr. Drummond said. “We understood that as a possibility.”

But Mr. Drummond said that over time, Google would benefit from taking a principled stand in China and elsewhere. “It is good for our business to push for free expression,” he said.

Several analysts suggested that the government could shut down the company’s Chinese search service entirely by blocking access to Google’s mainland address, google.cn, or to its Hong Kong Web site, google.com.hk, though that had not happened as of Tuesday.

Users who went to google.cn were automatically being sent to google.com.hk. Google’s search engine in Hong Kong provides results in the simplified Chinese characters that mainland Chinese use. Chinese in Hong Kong use the traditional characters, which can contain more strokes and are more difficult to read and write. Government firewalls either disabled searches for highly objectionable terms completely or blocked links to certain results. That had typically been the case before Google’s action, only now millions more visitors were liable to encounter the disrupted access to an uncensored site.

Some China experts say they were perplexed by Google’s handling of the crisis, given its stated goals of keeping business operations in China.

David M. Lampton, director of China Studies at the Johns Hopkins School of Advanced International Studies, said it was not surprising for China to balk at the idea of an American company using Hong Kong, and China’s own “one country, two systems” policy, as a way around censorship.

“That would be seen as fundamentally politically subversive in China,” Mr. Lampton said. “I am not sure whether it was an attempt by Google to give the Chinese a way out, but instead it magnified the political controversy.”

Others said Google’s move also put Chinese authorities in a difficult situation, as the government might be wary of agitating loyal Google users in China, who tend to be highly educated and vocal.

“To block Google entirely is not necessarily a desirable outcome for the government,” said Mark Natkin, managing director of Marbridge Consulting, a technology research firm in Beijing. “It’s going to boil down to whether authorities feel it is acceptable for users to be redirected to that site without having to figure it out themselves.”

The potential loss of cellphone search customers could prove particularly painful over time, analysts say. As on PCs, Google makes money on mobile phones when people click on its ads. If carriers like China Mobile and China Unicom remove Google as their principal mobile search service, it could cut Google’s mobile business.

Also, the spread of Android phones, which is just beginning in China, was meant by Google to ensure the availability of its services like search and maps on smartphones. Yet this month, Motorola replaced Google’s search on Android phones in China with Bing, Microsoft’s rival service, because of the uncertainty surrounding Google’s fate in the country.

Estimates from analysts and some Google insiders put the company’s annual revenue in China at $300 million to $600 million, a small fraction of Google’s nearly $24 billion in annual sales. But investors were counting on that strategically important business to grow rapidly.

“Having that potential is worth quite a bit to investors,” said Ben Schachter, an analyst with Broadpoint AmTech.

Google shares have lost nearly 6 percent of their value since the company said in January that it might pull out of China. During the same period, the Nasdaq 100 index rose by nearly 5 percent.

For his part, Sergey Brin, a Google founder and its president of technology, on Monday held out the possibility that some day Google and China would patch up their differences.

“Perhaps we can return to serving mainland China in the future,” he said.

Edward Wong, Jonathan Ansfield and Xiyun Yang contributed reporting.