Will Taiwan push back against Carlyle?

Bruce Einhorn

The uber-connected Carlyle Group may have some trouble getting deals done in China but is accustomed to having an easy time of it in Taiwan. The internationally isolated Taiwanese government knows that its needs to keep the Americans feeling happy about their island, and one way to do that is to be nice to Carlyle, long a home to former top officials from the Reagan, Bush I and Clinton administrations. No surprise, then, that the Washington-based private-equity group earlier this year won the Taiwanese government approved a $413 million bid by a Carlyle-led group to buy Eastern Multimedia, one of the island’s biggest cable operators.

But is the Taiwanese government going to go along with Carlyle's latest deal for one of the country's most important chip industry players? Advanced Semiconductor Engineering, the world’s No. 1 chip packager and tester, announced that last week that it was in talks with a Carlyle-led consortium regarding a $5.5 billion takeover. That would enable ASE to invest in high-end plants in China—something that it can’t do now because of Taiwanese government restrictions. But of course foreign-owned companies aren't covered by the same limits as locally owned firms, so if Carlyle can pull this off, ASE can then build up its operations in the mainland. That's been the goal for many Taiwanese chip companies, but few have managed to get to invest in China because of limits imposed by a Taiwanese government worried about yet another local industry relocating to the mainland. If ASE succeeds in turning itself American, other companies would be tempted to follow ASE's lead.

That's not an idea that appeals to Taiwanese President Chen Shui-bian. Chen's party, the DPP, is part of the anti-China camp in Taiwan, where many locals want to give up the fiction that the island is part of China and instead establish an independent Republic of Taiwan. Allowing Taiwanese industry to get even closer to the Chinese is not part of the agenda. So maybe it's no coincidence then that Taiwan's regulator on Wednesday said that it's looking into the Carlyle bid. The official line is that the Financial Supervisory Commission is concerned about insider trading. Who knows, maybe it's just that. But this also might be a warning shot from the Taiwanese government that there are limits to how accomodating it can be to its American friends.

Theories On Why Sony's Kutaragi Is Movin' On

Kenji Hall

Ken Kutaragi's move to hand over daily oversight of Sony's video games unit to Kaz Hirai has got the rumor mill working overtime. Given the timing of the announcement, I suggested in a story yesterday that Sony's top execs may have tired of Kutaragi's glitch-plagued PlayStation 3 launch. Howard Stringer & Co. may have wanted to crack down on the division and felt they could only accomplish that by forcing Kutaragi, known as a maverick and a brusque leader, to let a team player take over.

Here are a few others I've heard:
--Spin off the gaming division. It's highly unusual to appoint a chairman for a division within Sony. The gaming unit, Sony Computer Entertainment Inc., has always had a great deal of autonomy. It's even based in own building, designed by Kutaragi, across town from HQ. But Sony might want to spin off the games division, to insulate the rest of the company from the cyclical nature of the gaming business. If that happens, Sony Computer Entertainment would have to raise its own capital, spend its own cash on R&D, and answer to its own investors. In a good year, games can bring in a third of Sony's profits, or more. Not this year. You'll recall that the PS3's launch (and delays) is one reason Sony's operating earnings this year are expected to fall short of last year's. The timing of the games division's expected operating loss of $1.68 billion is bad for Stringer because he's in the midst of trying to fix Sony's core consumer-electronics division.
--No PS4? Kutaragi has had such a huge impact on the PlayStation's past success that it would foolhardy to stay the course without his daily input. Sony's naming of heir-apparent Hirai, a marketing whiz who led the company's push into online gaming, could signal the end of the PlayStation hardware era. The PlayStation brand could be all about software from here on out. PS3 could be PSFinal.
--PS3's 4D Universe. If you believe Sony's official line then Kutaragi's new post will allow him to focus on turning the PS3 into the ultimate in digital entertainment for home. Right now it's still just a gaming machine and a high-definition DVD player. To get beyond that, he'll need to seal all kinds of deals with content providers, not just game developers. Sony has its own Hollywood studio but that's not enough. It will want more movies, music, TV shows and video blogs than any other "channel." That's the way the PS3 will ever have a shot at replacing the PC as the digital hub of the home. Kutaragi has also talked a lot about a 4D world, in which we "live" through avatars in a video game alternate reality which obeys the rules of physics found in the real world. Think of a more realistic "Second Life." (Do we really want that?) For that, he'll certainly need time away from the daily paper shuffle.

Mixed fortunes for game developers

Ian Rowley

Yesterday, my colleague Kenji Hall wrote a story about Sony's decision to relieve Ken Kutaragi of day-to-day ovesight of Sony Computer Entertainment. Paying for the PlayStation3's jittery launch, daily management of the unit will now be undertaken by Kaz Hirai, his deputy in the U.S., with Kutaragi assuming a chairman role.

Kutaragi isn't the only one paying for the PS3's troublesome beginnings. Game developers are also suffering. According to a report in today's Nihon Keizai, a Japanese business daily, PS3 problems are offsetting the benefits of next-generation consoles, sch as the PS3, Nintendo's Wii and Microsoft's Xbox360 which launched a year ago. On the one hand, some Japanese game companies are expecting higher profits in the year ending March 2007. Square Enix, for example, expects operating profits to rise 23% to $164 million. Sega Sammy, meanwhile, also expects a big rise in profits in its video game division.

Others, though, aren't so lucky. A decision by Sony to delay the PS3 launch in Europe to March, for example, forced Koei Co. to halve its sales target for PS3 games to 640,000 units. Unsurprisingly, that's hurting the company's earnings outlook and stock price, which is yet to recover since Sony announced the European delay in early September. Namco Bandai has also cut estimates.

Rank and file game development staffers also have reason to bleat. Last week, I caught up with a friend who works at another Japanese game developer in London. She fumed that the PS3 delay meant she wouldn't be getting a bonus this year. Her pay, she said, is linked to the company's performance during the financial year ending March—just after Sony's revised European launch date. Like many gamers, she's hoping the PS3 will,eventually, be worth the wait.

PCCW's Father and Son Melodrama

Brian Bremner

The father and son drama at PCCW (Hong Kong’s biggest telecom player) has taken yet another unusual plot twist. On Nov. 30, shareholders of Pacific Century Regional Development voted against a proposal that would have shifted a 23% stake owned by PCCW Chairman Richard Li to an investor group led by well-known Hong Kong financier Francis Leung, Spanish telecom concern Telefónica and Li Ka-shing (Richard Li’s father.)

Billionaire Li Ka-Shing is arguably the most powerful exec in Hong Kong and controls his own whose telecom, ports, property, and retail holdings that span the world from Beijing to Tel Aviv. Li had been interested in selling his stake and moving on to other things, until his father surfaced as part of the financial backing for the $1.2 stock deal. Then he had a change of heart. The two aren’t on friendly terms and haven't spoken for some time, a family clash that is the talk of the town in Hong Kong. Go here for details on the entire saga.

The question now is what will Li do next? PCCW shareholders have to wonder about his commitment to leading the telecom company, which also has interests in broadband, Internet-TV programming, and other businesses. Finding other buyers won’t be easy, either. Leung after all is a well-known name in Hong Kong finance and a former Citigroup banker. He turned to Li Ka-shing for financial backing when it become clear that raising $1.2 billion was turning into a struggle. This tale is far from over.

Chinese companies not welcome in India? - An update

Bruce Einhorn

Remember a few weeks ago I wrote about the problems that Chinese telecom equipment makers were having trying to sell in India. (Here’s the item from Asiatech.) State-controlled telco BSNL rejected bids by ZTE, China’s second-largest telecom equipment makers, and Motorola (which was planning on using equipment made by Huawei, China’s biggest) for a big cellular contract. The worry among some Indian officials was that relying on Chinese-made equipment presented a security risk. That wasn’t the first setback for the Chinese. The Indian government, through the Foreign Investment Promotion Board, had also prevented Huawei and ZTE from expanding their small presence in India.

With Chinese President Hu Jintao having just spent four days in India, though, Sino-Indian harmony is the theme of the month, and things are looking up for the Chinese equipment makers. Both Huawei and ZTE early this month won some business from state-owned operators. And now comes news that ZTE is teaming up with an Indian partner. The Shenzhen-based company plans on working with MCorpGlobal, according to the Economic Times, “to set up a service-based company, which will import, distribute and sell telecom equipment and also offer other telecom-related services in India.”

Clearly this is a setback for ZTE, which no doubt would have much preferred to stick with its original plan of going it alone in India. Given the pressure from the Indian side, the Chinese company backed down and formed a joint venture. It’s hard to feel much sympathy for the Chinese in this case, though. For years, Rule One of doing business in China was find a local partner. That’s changed in the past few years (post-WTO) as China has opened up more. But lots of foreigners still think that they need local friends to make problems go away. Meanwhile, companies like eBay and Google that don’t have a local partner are struggling. So there’s some justice in the fact that the same rules now apply to Chinese companies trying to break into another giant Asian market.

Chindia - Cooperation in the space race?

Bruce Einhorn

Forget for a moment the heated rivalry between China and India. With Hu Jintao now in India, the theme for this week is cooperation. Maybe that's why a top Chinese scientist has told an Indian reporter that the two countries - both of which have plans to send missions to the Moon - should be pooling their resources on a joint effort in space. The Indian Express reporter, Pallava Bagla, interviews Wu Ji, identified as the "chief scientist for the Chinese space science research and Director for the Center for Space Science and Applied Research (CSSAR) in Beijing." According to Bagla, Wu says that India and China should team up in space. "It is not like the Cold War (days), relations between the two countries are getting better and better. We certainly wish to have collaboration with India and we should find more opportunities to talk with the India space agency," Wu tells the newspaper.

Bagla goes on to quote an Indian official, J N Goswami, director of the Physical Research Laboratory, Ahmedabad, saying that “a joint investigation in science which is well focused and transparent will be helpful.”

No doubt it would be great if the Chinese and Indians could pull this off. It took the Americans and the Russians decades to get to the point where astronauts and cosmonauts were working closely together. Rather than simply staging a 21st-century update of the U.S.-Soviet space race, Asia's emerging powers could show that they've learned from the Westerners' expensive mistakes by fast-forwarding to the era of cooperation. That would allow them to take advantage of talent on both sides and save money that they could use for other types of development. For all their economic growth and hi-tech aspirations, China and India certainly have better ways to spend billions of dollars than on a costly space race. Given the amount of distrust on both sides, though, folks like Wu and Goswami have their work cut out for them. But for this week, at least, we're allowed to daydream.

Can China close the software gap with India?

Bruce Einhorn

With Chinese President Hu Jintao in India, regional research house DBS has a timely look at the software rivalry between the two Asian countries. ‘What rivalry?’ scoff the India boosters out there, with good reason. India’s IT companies are so far ahead of their Chinese counterparts, maybe the two really are not in the same league. Just consider where the two industries will be by the end of the decade: According to DBS, Nasscom is targeting $60 billion worth of Indian exports by 2010, while the Chinese government wants software exports to hit just $10 billion that same year.

Still, the Chinese government is ambitious, and has made it clear that building a software and service outsourcing industry is a government priority. That’s one reason the DBS analysts, Ma Tie Ying and Aathira Prasad, aren’t ready to rule out the Chinese, despite the impressive lead that the Indians have. The Chinese industry may be small, but it’s growing at an impressive 40% clip. “By the rate the software industry is growing,” the DBS analysts write, “China may well be a future threat to established global suppliers like India.” Moreover, “Chinese policymakers and software entrepreneurs recognize their weaknesses in many aspects, and are keen to learn from international experiences, especially from India.”

That’s one reason that the Chinese are so happy to have the likes of TCS and Satyam set up joint ventures in (See, for instance, this BW story.) The game plan is pretty similar to what the Chinese did in manufacturing – open the market and encourage foreign investment, and then have Chinese managers who have gained experience thanks to the foreigners set up local-based competitors. It has worked in industries like telecom: See Huawei and ZTE. Ma and Prasad have their doubts about whether China can pull off the same thing in software services, where lax protection of intellectual property rights will be a much more serious problem. They point out that “massive infringement of intellectual property rights in China” makes it harder for the Chinese companies, which need to focus on their domestic much more than the export-oriented Indians. And the DBS pair hit on another major problem. For all of the enthusiasm about China’s deep pool of talent, it’s awfully hard to find qualified managers there. Ma and Prasad blame the Chinese education system and its emphasis on “rote-learning rather than compound capabilities such as innovation, communication, organizing and coordination.” Companies have ways of addressing the problem by putting in place training programs designed to teach Chinese how to think differently; more long-term, China’s schools are starting to change, with the goal of encouraging students to think more creatively.

But the Chinese have one big factor in their favor. India is getting expensive. Ma and Prasad point out that Indian IT wages are rising at about 16% a year, “and given that attrition rates are quite high, there looks like no option but for employers to continue increasing salaries every year to retain their employees.” The DBS pair think rising wages help make rivals in Southeast Asia and Eastern Europe more attractive. It probably will also give a boost to No wonder, then, that TCS and other Indian biggies are looking at major expansion of their Chinese workforce in the next few years.

Nintendo's big Wii debut

Ian Rowley

Good news for gamers counting down the days until the Japan launch of Nintendo Wii games console on December 2. Not only will the Wii be half the price of Sony's PlayStation3, but the odds on getting hold of one will be four times greater. According to today's Nihon Keizai, Japan's biggest business daily, Nintendo will have 400,000 Wii consoles ready to go on sale at the launch. Sony could only muster a 100,000 PS3s for its Japan debut last weekend, causing chaotic scenes outside Tokyo's big electronics retailers.

Japanese gamers who can't wait until December also have the option of heading to the U.S., where the Wii debut on November 19. Nintendo won't say how many machines it will have ready on the day, but the company plans to ship two million units in the U.S. by year-end, compared to one million in Japan.

Even that might not be enough, though, if Nintendo's U.S. marketing blitz goes to plan. Yesterday, the Kyoto-based company kicked off a $200 million, 12 month advertising campaign which TV commercials, mall tours and dozens of other events. Many of them will target older gamers and women as Nintendo tries to show the Wii's broad appeal. Of course, many analysts still expect Sony's PS3 to emerge triumphant in the latest round of game console wars, but at this early stage Nintendo can't be accused of not pulling out all the stops.

TCS looks to China and India

Bruce Einhorn

Are Indian IT companies outgrowing India? In high-tech hubs like Bangalore, it’s getting harder and harder to hire new engineers or keep existing ones. That’s one reason that up-and-coming China-based companies argue that that they have an advantage as they compete against Indian heavyweights for outsourcing business. “There’s a shortage of human resources in India,” crows Liu Jiren, the chairman and CEO of Neusoft, a software services company based in China’s northeast that has about 10,000 workers. Adds Liu of the India-based industry leaders: “Their salaries are increasing very fast.” Meanwhile, more companies are turning to Neusoft, which plans to double its headcount in two years as it adds more engineers in Dalian, the city in Liaoning* that is the center of outsourcing for customers in Japan and Korea. “Dalian is booming,” says Liu. “It’s just like Bangalore.”

A big flaw in Liu’s argument, of course, is that there’s nothing stopping Indian companies from taking advantage of lower-cost locations in China, too. See this BusinessWeek story on the Indians in China, for instance. Tata Consultancy Services, the Mumbai-based IT giant, is looking at (Note: BusinessWeek is finally giving up on Bombay as a name. Our editors are sticking with Bangalore, though.) Yesterday I spoke with the CEO of TCS, S. Ramadorai, during a stopover in Hong Kong for a big Citibank conference with Bob Rubin and other high-powered speakers. Like other big Indian companies, TCS has been moving very slowly in China but now Ramadorai is upbeat about the place thanks to a new joint venture with Microsoft and the city governments of Beijing and Tianjin, and he expects to increase the headcount from 500 today to 5,000 within a few years. Ramadorai argues that TCS engineers will be the ones to build up China’s outsourcing business. “We are pioneers in building a core competency,” he says. “That’s how we built our industry in India. We view the Chinese foray in the same spirit.”

And what about Liu’s contention that there aren’t enough workers to go around in India? Even as TCS builds its numbers in China, Latin America and other locations outside India, Ramadorai says that TCS still has room to grow at home. “If we just stick to Bangalore, Mumbai, Delhi or Chennai, the numbers are very limited because everyone is competing for the resources,” he says. “But if you go beyond that to the tier-2 cities, there are so many where there is a number of colleges” producing engineers. And he says that TCS also is looking beyond the engineering schools to hire graduates with degrees in math and physics. “There’s a lot more [in the] availability pool,” he says.

Indian companies like TCS are expanding into smaller cities at home and moving faster in China, where they’re going up against ambitious local players like Neusoft that don’t have the industry experience but do have the local roots. Should make for an interesting battle.

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* Originally I wrote Shandong. Thanks to readers who pointed out my goof.

Debugging PS3...Redux

Kenji Hall

First it was the supply shortages. Now it's a bug in the machine. Sony's new PlayStation 3 video game console is off to a rough start, with news just days after the much-hyped launch in Japan that not all games for the original PlayStation and PlayStation 2 are compatible with the new machine, as Sony had promised. In a statement in Japanese on its Web site, Sony Computer Entertainment Inc., the company's games division, said the problems differ depending on the games. But it didn't offer any details so it's impossible to know whether the problems are due to the Blu-ray next-gen DVD player or some incombatibility issues with the operating software. Nor did the company say how it learned about the glitch. Sony officials didn't immediately respond to emailed questions.

According to a report in the Japanese daily Sankei Shimbun, 200 of the 8,000 available software titles won't play on the PS3. On its Web site, the company has set up a search function that lets you check whether your games have been affected. A quick search turned up mostly minor issues.

Sony's Genji was problem-free, and Mortal Kombat II, Super Football Champ and dozens of other older games were still "in the process of being verified." The biggest problems I found were background music that wouldn't play (Electronic Arts' Best Hits 007 Night Fire & 007 Everything or Nothing, which goes on sale in mid-December, and Artdink's Zeus Carnage Heart Second from 1998), intro demo videos that would freeze (Capcom's Devil May Cry MEGA HITS! from 2002), or online games that were stored on the PS2's hard disk drive but couldn't be ported to play on the PS3 system (Final Fantasy XI/PlayOnline from 2003).

With nothing less than Sony's revival depending on the PS3's success, the company will certainly want to fix the glitch--before it ramps up production to meet its informal target of 2 million units for the holiday season.

Debugging PS3?

Kenji Hall

This just in from Sony. For all you video gamers who plan to buy a PlayStation 3 console in Japan on Nov. 11 (launch day), there's going to be a freebie: software update version 1.10.

You may be wondering why Sony is updating software that hasn't even reached store shelves yet. The company says v. 1.10 will let you plug into the PlayStation Network, the company's online gaming arena, from day one. Co-developed by Sony Online Entertainment and GameSpy Networks, PlayStation Network is a virtual playground and shopping mall for gamers. It matches players who are logged on, ranks scores, lets users chat by voice or video or instant-message, and is a megastore for game downloads. Good news, to be sure. But why is Sony announcing add-ons just days before the PS3 goes on sale?

It should come as no surprise for anyone who has been following the PS3's delays and production problems over the past few months. Of course, there's nothing wrong with improving the gaming experience. Offering v. 1.10 now is better than having owners complain on Internet gaming sites about the PS3's unfulfilled promises in the days immediately after the launch. Still, judging from the PS2 and Microsoft Xbox 360 launch, it's nearly impossible for game console makers to anticipate all the potential problems that might crop up. According to a source, execs at the games division, Sony Computer Entertainment, have got PS3 developers pulling all-nighters at Tokyo headquarters to test for bugs and other nasty gremlins that might be lurking inside the machine.

That's why v. 1.10 arouses my suspicions a bit. I'm dying to ask Sony if the software update ONLY contains the publicized update to connect to the online gaming service, and not a patch to fix bugs. The last thing Sony needs is bad press about glitches that might spoil the machine's debut. But my feeling is that if it's a patch, call it a patch.

Sony says this is not the final software update planned. Another will be downloadable in late November and is expected to let owners of both the PlayStation Portable, the checkbook-sized carry-around console, and the PS3 to link the two gadgets seamlessly. If Sony can keep adding goodies without a hitch, more power to it--and PS3 owners.

Lenovo's latest disappointment

Bruce Einhorn

More bad news for Lenovo. In a new setback for China’s leading PC maker, the company today reported that profits for the quarter ended September dropped 16%, to $38 million. That’s worse than the $40 million that analysts had been expecting. Back in August, when Lenovo reported its numbers for its fiscal-year first quarter, I wrote here that the company seemed finally to have gotten over the severe indigestion that came from Lenovo’s acquisition of the money-losing PC division of IBM. So much for that prediction.

In Lenovo’s defense, cutting costs is expensive in the short term. And the company has done the right thing by bringing in an experienced team of managers from Dell, led by current Lenovo CEO Bill Amelio. But Lenovo is just one of many companies from Greater China trying to establish its brand globally, and things aren’t going so well for them. There’s BenQ’s disastrous attempt to become a cellular phone brand through its acquisition of the Siemens handset business. TCL has tried to break into TVs and cell phones by making deals with French companies Thomson and Alcatel; those businesses have slid backwards ever since. Telecom equipment maker ZTE has been struggling even as it expands its businesses in the West and in the developing markets. I’m not saying that Lenovo is doomed. But the fact is, the company got big in China thanks to a big boost from the government, which was happy to have a local champion. Beyond the friendly confines of its home market, Lenovo is just another company. And a struggling one.

Samung's High-Speed Wireless Dream

Moon Ihlwan

Predicting a boom in next-generation wireless services, Korea’s Samsung Electronics on November 7 rolled out a portable gadget (shown above) designed to let users talk, surf the Web and watch TV all at the same time, using just one technology. The terminal, called MIT (or mobile intelligent terminal), is capable of handling voice and data for text, images and videos. Using the Mobile WiMAX technology standard, an evolution from WiMAX, it allows TV viewing and data transmission from a car moving at speeds up to 100 km per hour.

When folded down, the MIT is 14.3 centimeters wide and 9.4 cm long and just under 3 cm deep. The screen, measuring 5 inches in diameter, will be hidden in between the foldable, normal-sized QWERTY keyboard. The MIT, which runs on Microsoft’s Windows XP operating system and is equipped with 1 GHz CPU and a 30-gigabyte hard disk drive, is expected to be commercially available from next March at around $1,000. The technology also allows ultra-fast wireless Internet access on a PC or a PDA.

Users of Mobile WiMAX network could download data at a speed of up to 1 gigabit per second when stationed and 100 megabit per second on a moving vehicle. Sprint Nextel of the U.S. announced in August that it would invest as much as $3 billion in a fourth-generation wireless broadband network using the Mobile WiMAX technology by 2008. Korea, which began offering commercial services of Mobile WiMAX in limited areas, plans to expand the coverage to all of Seoul by early next year and across the nation a year later.

MySpace: coming soon to Japan?

Ian Rowley

At a speech in Tokyo today News Corp CEO Rupert Murdoch laid out his views on the economic and political challenges facing Japan and Asia in the 21st Century. In a thirty minute address, he praised Japan's recovery, championed measures to control global warming, and called for the U.S. to host a summit in Hawaii where Japan and China could work out their differences. Worthy stuff, no doubt, but the media mogul's audience seemed most interested in news that News Corp-owned MySpace is about to launch in Japan.

On Monday, both the Nihon Keizai, Japan's biggest business daily, and the Kyodo newswire, reported that News Corp and telecom giant Softbank plan to set up a 50-50 joint venture to operate a Japanese language version of the smash site. Without naming sources, the reports claimed Softbank chief Masayoshi Son and Murdoch will meet soon and hammer out an agreement. The service will be for PCs but, making use of Softbank's mobile know-how, will later become compatible with cell phones. The venture is likely to be capitalized at about 1 billion yen ($85 million). Murdoch didn't deny the claims. Calling Son an "old friend"--the two companies were once involved in Sky Perfect, a Japanese cable service--he acknowledged he hoped to meet with the Softbank chief. Murdoch also hinted that Japan wouldn't be MySpace's only port of call in Asia. "Here and in other Asian countries, we're certainly open to partnerships," he said.

Still, it's not at all　certain MySpace can match its global success in Japan. For one thing, while MySpace has 125 million registered users worldwide, Japan has more bloggers per head of population than the U.S. and numerous social networking sites. The biggest is Mixi, which listed on the Tokyo Stock Exchange in September, and has six million registered users. Softbank is also involved in the social networking space through group firm Yahoo Japan, although it doesn't directly operate any sites. There's also evidence that global web players that failed to make it in Japan. The ebay auction site, for instance, couldn't crack Japan. Nevertheless, mixi investors didn't take well to the news. In Tokyo trading Monday its stock was down 7.5%.

Google: How not to win friends in China

Bruce Einhorn

Last year, Google hired with much fanfare Kai-Fu Lee, the former exec from Microsoft whom Bill Gates had sent to China in 1998 to launch Microsoft’s Asia research center. Lee has been busy building a Google team in China, but so far the results have pretty disappointing. Google trails market leader Baidu.com and, according to one research firm, has actually lost market share in the year since Lee’s arrival. (See my BW story on Google here for more on the company’s China problems.)

Lee says that the game is just getting started, and he expresses confidence that Google will be able to muscle its way to the top. He may be right; after all, not many people have won by betting against Google. But Google China may have a bigger problem than just Baidu or any of the other Chinese Internet companies looking to expand their search business. Lee and the other Google China executives have to contend with a government that is probably less than thrilled at the idea of the U.S. company extending its dominance into Chinese cyberspace. Google has played by the Chinese rules when it comes to censorship, but with reservations. To its credit, when Google China does filter out search results, the company makes a point of letting its users know that they’re getting censored searches. Not the sort of thing that reassures Beijing cadres that you’re on their side. Adding to their unease were comments that Sergey Brin made back in June, expressing ambivalence about whether Google made the right decision by agreeing to go along with censorship in the first place. “Perhaps now the principled approach makes more sense,” he mused to reporters.

I doubt such comments reassure free-speech advocates in the U.S.; it's hard to convince them that Google has stayed true to its don't-be-evil ethos. Meanwhile, Google hasn't won friends in Chinese officials, the state-controlled press and ordinary citizens are pretty sensitive to perceived insults. Microsoft learned that lesson back in the early 1990s, when it announced that it was making its Taiwan office the company’s Greater China headquarters, a snub that Communists in Beijing remembered for years. Now, says one high-tech analyst whom I can’t identify, “you have a couple of Google guys who made the same mistake that Bill Gates did, who screwed his own company for five years.” Adds this analyst: “Saying ‘We don’t need China,’ that doesn’t play too well.”