Google probably has been wanting out of China for some time. Like many companies it had felt pressure to be in the 'largest market of the world'. The problem is that it really isn't equipped to compete with the likes of Baidu even if the playing field was level, which it isn't. As a poster upthread noted the Chinese Internet is entertainment dominated and not information/search dominated like in the USA. Just look at Baidu and you'll see videos, music, shopping and celebrity news where Baidu makes much of their revenue. Google doesn't have this content and more importantly Google is bound by western business ethics that prohibit the violation of copyright that the Chinese content companies engage in.
Secondly, the deck is stacked. There are no real opportunities to sell to the wider Chinese Internet audience for foreign companies. The Chinese government considers information distribution and the Internet key to its rather tenuous hold on 1.5 billion people. It will not let any foreign company participate in a significant way in this area. Period. On top of this is a system of corruption that foreign companies can't possible engage in. Google indeed realizes this, that even if they could compete the rule of law doesn't protect them and their business will be given to their competitors. One needs only look at the Youtube experience in China and the rise of Tudou as a result.
Thirdly, even if Google was able to compete and the rule of law applied the market opportunity really isn't that big. Of course you may sputter about this seemingly absurd statement given your week in China, however the facts don't add up. Baidu is projecting about some $800M of revenue in 2010, assuming you trust that figure (you shouldn't trust any number coming out of China). It seems around half of Baidu's revenue is from search where Google could participate. Google has 17% of the Chinese search market in the latest figures I could see (significantly down, they're losing due to the first two points I've made above). Doing the math this equates to some potential $73M in revenue for 2010. Probably equivalent to what they get from Northern Ireland.
There is no upside for Google in China.
Adding to that depressing bottom line is the fact of the continuous attacks on the infrastructure, the probable infiltration of Google by Chinese spies (see Wikileaks for more), the demands by the Chinese government for access to Google's logs and the beating that Google's reputation is taking in its important markets it's pretty obvious that the Google exec is fed up. Leave China to the Chinese and return when there's rule of law is their likely strategy.
My background is as an Internet entrepreneur that worked on a startup in Beijing for the past couple of years, having recently returned to Canada after falling prey to many of these issues, though at a much smaller scale than Google of course.
I take Google's statement at their word. If its no longer feasible to compete in China, they know and will make the best decision for themselves.
As to corruption in China, it certainly exists. If you come from the U.S. and have never been privy to the payoffs that do occur in the U.S., seeing it so much more open in China can be shocking. U.S. companies may not be legally allowed to make payoffs, but they certainly do. Its also illegal in China. If Google China has never paid kickbacks, they would be the first company of their size in China I have known to not do so.
One thing I've noticed in Shanghai is that businesses in competitive markets are increasingly not giving kickbacks as its simply not profitable to compete in some markets this way anymore. Additionally, there are many (not saying its the majority) Chinese business men and women that take great pride in running a clean business. For every Chinese dissident whose email the gov wants to snoop on, there exist many hard working people "doing the right thing". I've witnessed my Chinese wife run businesses and she would never payoff a business partner or gov official. She would fire any staff member she suspected of doing so.
Yes, its complex and sometimes risky to do business in China, but for the most part the net change is positive. This net positive change may not stay that way, but the only reasonable hope is that it will.
