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US/CHINA: U.S. Holds Fire in Google-China Feud

January 12th, 2010

U.S. government officials and business leaders were supportive but wary of taking sides in Google Inc.'s battle with China, a sign of the delicate tensions between the growing superpower and the West.

The White House said it would wait to comment until China responded to Google's threat to bolt from China, over censorship and alleged cyber spying. Commerce Secretary Gary Locke called Google's charge that it and dozens of companies were hacked "troubling" and encouraged China "to work with Google and other U.S. companies to ensure a climate for secure commercial operations in the Chinese market."

Secretary of State Hillary Clinton said Google's allegations "raise very serious concerns and questions," and that "we look to the Chinese government for an explanation." But later, a State Department spokesman said the dispute was within "the range of issues" that normally define U.S.-China relations, adding that it "is a broad, it is a deep, it is an expanding and durable relationship."

Chinese government officials didn't respond to Google's provocative declaration, posted on its Web site Tuesday night. A report by China's state-run Xinhua news agency quoted an official at China's State Council Information Office saying authorities were seeking more information on the statement.

Still, Google's move threatened to add to a growing list of disputes between the U.S. and China. Tensions have run high over the nation's trade imbalance and China's currency, as well as the push for a global climate-change agreement. This week, China tested a missile-defense system in a move widely viewed by Washington as a response to an expected U.S. weapons sale to Taiwan.

U.S. and European officials have been trying to gauge China's willingness to cooperate on a range of issues in coming months, especially the West's push to secure United Nations Security Council backing for new economic sanctions on Iran aimed at curbing Tehran's nuclear program.

"All of these tensions are taking place at a time during which China is rethinking what constitutes its national interests and how to secure them," said David Finkelstein, a China specialist at the Center for Naval Analyses in Virginia. "I see these things playing out against this larger context."

Google's move also put pressure on large multinationals, at a time when many are feeling their own tensions in China. Google said its internal investigation showed at least 20 other companies were affected. People familiar with the attack say at least 34 companies in the Internet, finance, technology, media and chemical sectors were hit by the cyber attacks. Only Adobe Systems Inc. has publicly verified an incident so far. Another company, Rackspace Hosting Inc., says it was victimized as part of the attack on Google.

On Wednesday, rival Yahoo Inc. said it is "aligned with Google," issuing a statement that condemned the attack while declining to comment on whether it was targeted. Yahoo, which came under fire for providing information to Chinese authorities that led to the arrest of a journalist, sold its Yahoo China business to Alibaba Group in 2005 and doesn't manage it, but retains a 39% stake.

Microsoft Corp., which also offers search and email services, said it wasn't targeted in the attacks cited by Google. But Steve Ballmer, its chief executive, questioned during a briefing whether they were unique. "It's unclear what's going on there," Mr. Ballmer said of Google's disclosures. "Every large company is subject to various attacks, from pros to hackers, and around the globe every day. Certainly we are."

Dozens of companies such as Morgan Stanley, Apple Inc. and Marriott International Inc., which do business in China, declined to comment on how the Google move may affect their strategies. Others, including Boeing Inc., McDonald's Corp. and General Electric Co., said the situation won't change their dealings with China.

A few were outspoken. "The cyber attacks are not an issue and they are not on our priority list," said General Motors Corp. China Group President Kevin Wale. "We understand the rules of China. We make a lot of effort to try and understand the rules so we may get along with the government more easily than others."

Still, Google's unexpected move reflected growing unease among some executives at the compromises that doing business in China sometimes require, especially agreeing to government interference that wouldn't be tolerated elsewhere. Google and other U.S. search providers, for instance, have agreed to filter search results on Chinese sites at the behest of the government, a stance that has drawn heated criticism from human-rights activists.

"Everybody feels that it's not related to my business," says Jörg Wuttke, head of the European Chamber of Commerce in China. "But when one after the other happens, you wonder what the heck is going on here."

Assiduously courted in the 1980s and '90s, foreign businesses now complain that the official line has shifted, with younger bureaucrats growing more nationalistic and skeptical of the value of letting in foreign companies, Mr. Wuttke says. Last year, foreign executives said bidding practices for wind energy were rigged to exclude foreign companies.

When the Chinese government in June tried to force personal-computer makers to include Web-filtering software known as "Green Dam" with all new PCs in China, foreign business groups representing scores of major technology companies publicly criticized the move and called on China's leadership to reconsider. Authorities announced an indefinite delay to the plan on the eve of its July 1 start date.

Later, a similar group of companies and business groups banded together to decry—again publicly—government rules that state agencies buy technology products containing Chinese intellectual property in a bid to boost local suppliers. That issue remains unresolved.

Companies say these problems are endemic to doing business in China. Ron DeFeo, chief executive of Terex Corp., a manufacturer of cranes and construction equipment, said the government has a strong voice in every part of business in the country.

Mr. DeFeo, who says his company does between $300 million and $500 million in business in China annually, said the government has blocked acquisitions he looked to make and has limited his ownership of certain businesses.

Though he hasn't had experiences similar to Google's, he said Wednesday that intellectual-property issues are problematic in China. "IP issues are big," he said.

Two years ago, he said, he had a customer call for parts for a 500-ton crane which he says he later learned hadn't been manufactured by Terex, despite sporting the company's name. "Every company should stand up for what it believes is important to its enterprise, and Google doing such is important because they are defending their turf," he said. "What's good for Google might not always be good for everyone."

Indeed, many experts are skeptical whether Google's move will change anything. "I don't think you're going to see a major change," said Hal Sirkin, a senior partner at the Boston Consulting Group. "China is such a huge growth opportunity that few U.S. companies will want to shut that door completely when there's money to be made. There has already been a lot of negative publicity about China—censorship there is well-known. None of these things are secret. This is how the world works—China is playing hardball."

Michael Cusumano, a professor at the MIT Sloan School of Management, said he doubts Google's move "is going to start a bandwagon.... I think the dollars will motivate against these other companies following suit."

Still, he added, "All of the eyes of the world are on Google right now," he said. "They have planted the idea that someone can stand up and say we are not going to take this anymore to the Chinese government. And somebody has to be first."

—Jessica E. Vascellaro contributed to this article.

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