Google will be out of China

 Google Out of China?

 Google Inc. (GOOG - Analyst Report) has publicly stated that it is considering pulling out of the fast-growing Chinese market. The statement w
as made as a result of an investigation over several weeks into China’s Internet censorship system that revealed a systematic and targeted ha
cking into Google’s corporate infrastructure.

 Google stated that the hacking resulted in theft of intellectual property (IP) and compromised gmail accounts related to human rights activist
s located both within and outside China. Twenty other companies have also been impacted. It is not yet clear however whether the Chinese gover
nment had a hand in the affair and China has not yet put forward any comment.

 It is interesting to note however that Google has only made a public statement, leaving the door open to further negotiations. It has not take
n a strategic decision to exit China as Yahoo Inc. (YHOO - Analyst Report) did when it sold off its stake in Alibaba Group in September last y
ear.

 We also don’t think that any of the other top IT companies, such as Cisco Systems (CSCO - Analyst Report), which provides networking equipmen
t, Microsoft Corporation (MSFT - Analyst Report), which generates significant revenue from Windows-based PCs sold in China, Hewlett Packard Co
mpany (HPQ - Analyst Report), which sells a large number of PCs in China, or 3Com Corporation (COMS - Analyst Report), with a significant base
in China are likely to follow in Google’s footsteps.

 Of course, Chinese local Internet companies Baidu Inc. (BIDU - Snapshot Report), Sina Corp. (SINA - Analyst Report) and Sohu.com Inc. (SOHU -
Analyst Report) would welcome Google’s decision.

 The immediate impact of Google’s move out of China would be significant. However, the company’s growth over the next few years would be impa
cted significantly.

 Additionally, Google could not solve the problem by staying away from it. Google facilitates communication, which builds awareness and moves p
eople to protest. This process has got to run its course.

 We also believe that China will never realize the importance of IP or have strong legislations against its theft until it has significant IP o
f its own that it needs to protect. In the meantime, the U.S. government’s significant indebtedness to China and the free nature of its econo
my will continue to work against it.

 As analysts, we may expect to continue seeing many more investigations, lawsuits and decisions.

 We remain positive about Google and don’t expect the company to take a radical decision just yet.