Google – One armed bandit Pt II.

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There remains little opportunity for Google in China.

• On the back of AlphaGo’s victory over the world champion Go player, Google is renewing its charm offensivein China.
• Go is a very popular game in Asia and so when Google’s AlphaGo machine was able to beat the world champion 4-1, it created big waves with the Chinese media.
• Against that backdrop, Sundar Pirchai, CEO Google has been in China nominally to visit Nie Weiping Go School which plans to issue a challenge to Alpha Go.
• However, I am certain that the opportunity has been taken to push Google’s agenda to return to China forward.
• Google withdrew from China in 2010 after a row over censorship and has not been back since.
• In 2010, this was not a problem as its core developed markets were growing very quickly, but now that these are slowing down, Google needs to look back to China to bolster its flagging growth.
• I understand that the plans remain unchanged (see here) in that Google aims to return to China with a Chinese version of its app store as well as Android Wear for wearable devices.
• China is a massive market where RFM estimates that there were 738m ecosystem users at the end of 2015 from which Google is earning almost nothing.
• The problem is that Google will need to convince the Chinese government to let it back in and, even if it does, I think it will fail to get any real traction.
• There are two reasons for this opinion.
  • First. Even if the Chinese authorities let Google back in, they are very likely to place limitations upon Google such that the home grown crowd, Baidu, Tencent, Alibaba, Xiaomi and China Mobile have the advantage.
  • This, combined with the fact that these companies are solely focused upon ensuring that their Chinese ecosystems appeal the most to Chinese users, makes it easy to believe that Google is going to flounder.
  • Second. The Chinese have been very busy developing their own ecosystems over the last 6 years or so and this is no longer the virgin territory that it once was.
  • RFM estimates that 91% of all China ecosystem users are already using Baidu’s services with 87% also playing games and chatting with Tencent.
  • Furthermore, the adoption of shopping, banking and payments on mobile is already orders of magnitude larger than what it is in the West.
  • This means that Google will have to fight for market share even to get a toehold outside of Hong Kong (where Google is not blocked).
• The net result is that the Chinese market will be a tough one for Google to crack even with a level playing field.
• The fact that Google will almost certainly be trying to compete with one arm tied behind its back leads me to believe that Google is unlikely to get much more than the position in Hong Kong that it already has.
• I continue to believe that the Chinese market will be Chinese ecosystems for Chinese users created by Chinese companies.
• The Chinese market is so large, that there is plenty of space for these companies to flourish without having to look overseas in order to reach critical mass.
• In the long-run they will be forced to do so in order to keep their growth going, but in terms of creating hugely cash generative ecosystems, the home market is plenty.
• The good news for Google is that market expectations for its success in China are almost non-existent and against that backdrop the short-term outlook is reasonably rosy.
• However, the minute that the shares start rising on the back of an expansion into China, I am going to get very nervous.
• I would prefer Samsung, Microsoft or Apple in the short-term and am keeping a close eye on Facebook for the long-term.