China's Silicon Ceiling
Gross, Daniel, Newsweek
Byline: Daniel Gross
Free markets require free minds.
Google vs. China represents a clash of what may be the two most powerful forces of the first decade of the 21st century. Like China, Google has changed the terms of competition in several crucial markets, thanks to its advantages in hardware, productive capacity, and engineering brainpower. The juggernaut rolls into new industries--e-mail, GPS, smart phones, operating systems for netbooks--heedless of the competition, racking up profits and disheartening competitors.
But now one of the world's most rapidly growing companies has threatened to pull up stakes from one of the world's most rapidly growing markets. It's a move that raises many questions about Google and its future--and a larger question about China. Can China get rich without becoming free?
History suggests it can't. Until recently China, which was technologically more advanced than Europe in the middle of the last millennium, had been left behind. Historians, led by the magisterial David Landes of Harvard, have made a convincing case that the slow erosion of arbitrary authority--the Reformation, the Enlightenment, the rise of rights, constitutions, democracy--helped stoke the capitalist revolution. For the past few centuries, the developed world has been led economically by democratizing commercial empires--Britain in the 18th and 19th, and the U.S. in the 20th. Without free minds, it's difficult to have free markets, and vice versa. Trying to develop economically while controlling the flow of information has generally been a losing bet. Either such regimes fail to grow and collapse (the Soviet bloc), or the forces of economic liberalism ultimately lead to political liberalism, as in Chile.
For the past 30 years China has been testing a new, inverted model: breakneck economic development while retaining strict limits on personal liberty. The Communist Party has wrenched the nation into the 21st century. The hardware is certainly impressive--the maglev trains, shiny new airports, and modern skyscrapers. China has displaced the U.S. as the world's largest car market, and is about to surpass longtime rival Japan as the second-largest economy. Such growth has attracted American companies, which inevitably make a series of trade-offs when they decide to head east. They accept local joint-venture partners and the risk of intellectual property theft, and learn to negotiate a commercial culture in which the government may arrest and jail a key executive, as happened with Australian mining giant Rio Tinto. As a group, the Fortune 500 has overlooked or come to terms with the lack of political freedom. After all, General Motors or KFC are in the business of selling stuff, not principles. And they have to be in China because that's where the action is. "If you don't come to the Chinese markets, other countries will," said Zheng Zeguang, director general of North American Affairs in China's Ministry of Foreign Affairs.
That's why Google came. Last summer, Google advertisements were ubiquitous in Shanghai. But Google is unlike other U.S. companies that have succeeded in China. It sells access to information. Its business model requires freedom of linking, surfing, and expression. And that's why it, along with other media and New Economy companies, hasn't done well in China. Google has 14.1 percent of the Chinese search market, compared to homegrown Baidu's 62.2 percent. Worse for Google (motto: don't be evil), doing business in Guangzhou means being complicit in activities that are antithetical to its mission. "How far do you go down the path to becoming a de facto adjunct to government control of information?" asks Zachary Karabell, author of Superfusion: How China and America Became One Economy.
Like Google, China is led by engineers--but the leaders were trained as civil engineers. Google's software engineers became billionaires by devising a democratic algorithm. …