Google Inc said it may pull out of China because it is no longer willing to accept censorship of its search results, in a surprise retreat from the world's largest Internet market by users.
The announcement on Tuesday comes amid growing tensions between China and the United States over Internet freedoms, with U.S. Secretary of State Hillary Clinton set to announce a technology policy next week to help citizens in other countries gain access to an uncensored Web.
Google said it had uncovered a sophisticated attack on the email accounts of Chinese human rights activists using its Gmail service, and that more than 20 other companies were similarly attacked.
These attacks and the surveillance they have uncovered -- combined with the attempts over the past year to further limit free speech on the Web -- have led us to conclude that we should review the feasibility of our business operations in China, Google Chief Legal Officer David Drummond said in a statement posted on the company's blog.
We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China.
The search market in China, while small in revenue terms, has 360 million Internet users and is viewed as a critical battleground for Google. It is one of the rare markets where the U.S. company is not in the lead, lagging homegrown rival Baidu Inc, which commands a 60 percent share of the Chinese Internet search market versus Google's 30 percent.
Shares of Google fell 1.3 percent in after-hours trading following the news that it might withdraw from China, while shares of Baidu jumped 6.8 percent.
China's tough stance on Web censorship has put it at odds with Western technology firms in recent years. The latest dispute had pit personal computer makers against a Chinese government that said it was intent on keeping pornography out of the hands of China's youth, though many believe the move involved censorship and invasion of privacy.
In June, Beijing ordered Google to block overseas sites with vulgar content from being accessible through the Chinese language version of its search engine. Google said then that it met with Chinese government officials and was taking necessary steps to ensure search results on its Chinese site complied.
Google said the hackers had tried to access the Gmail email accounts of Chinese human rights activists but only managed to access two unidentified accounts, and then only subject headings and other data such as when the account was created.
It did not say what information the hackers tried to access from the other corporations, nor which they were. Google said it was now notifying the other affected corporations, adding that it was working with the U.S. authorities.
A Google spokesperson said the company was still investigating the attack and would not say whether Google believed Chinese authorities were involved.
The implication here is that the government is somehow responsible for conducting this cyber-attack and I guess they feel they cannot operate in that kind of an environment, said RBC Capital Markets analyst Stephen Ju.
This is a complete 180 turnaround (for Google). Just about every earnings call recently has been that they are focused on the long-term growth opportunities for China and that they are committed.
Google generated 53 percent of its $5.9 billion in revenue in the third quarter outside of the United States. It does not disclose the size of its business in China, where it maintains the Chinese-language Google.cn which the company says complies with local laws.
Google has faced a rocky road in China, where its video site YouTube has been inaccessible since March. Many of Google's primary services, such as Gmail and Google.com, became briefly inaccessible to many Chinese users last year.
We have decided we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all, Drummond said.
Human rights have been a frequent source of tension between the United States and China, which is the largest holder of U.S. Treasuries, with total holdings of $798.9 billion.
Last week, Clinton dined with tech heavyweights such as Google CEO Eric Schmidt, Twitter co-founder Jack Dorsey, Microsoft Corp research and strategy chief Craig Mundie, and Cisco Systems Inc Executive Vice President Sue Bostrom. It was not clear if the meeting was related to Google's revelation, and the companies had no immediate comment.
According to a JPMorgan estimate this month, the search market in China hit $1 billion in 2009 and will grow to $1.5 billion in 2010. But search advertising is still less than 50 percent of the total online ad market in China, compared with 67 percent in the United States, according to JPMorgan.
What makes Google the largest search engine and one of the leading Internet companies is that they care about users' privacy, and if that privacy comes under challenge it may impact their global business, said Collins Stewart analyst Sandeep Aggarwal. They obviously did not appreciate the attack ... We should not take the Google threat lightly.
(Reporting by Alexei Oreskovic and Edwin Chan; Additional reporting by Jim Finkle; Editing by Peter Henderson, Steve Orlofsky and Richard Chang)