Last week, Google announced it might exit from China market because of a recent hacker incident and Chinese government’s interference over Internet.  This came as a surprise to most industry watchers, especially when Google China’s business is in fact getting better and better.

Recently, it was able to gain market share from the local leader, Baidu. Google had a 35.6% share of market in the fourth quarter last year, compared to 31.3% in the third quarter, while Baidu’s share fell to 58.4% from 63.9%, according to Analysys International, a Beijing based market research firm. And this is a dramatic difference from what Google had 3-4 years ago, when it just entered China market – Google’s market share was as low as 16% in the second quarter of 2006, a year after it set up its China office.  At that time, Baidu had 50%, according to Analysys International.

And Google has momentum to do even better.  Google developed mobile search much earlier than Baidu.  According to former Google China president, Lee Kaifu, Google started developing mobile search in 2007, and it was, and still remains, one of its key focuses.  It has China Mobile, China’s largest mobile operator, as its mobile search partner since 2007.  Baidu only started to develop mobile search last year, and last May, partnered with the smallest of the three operators, China Telecom.  As 3G rolls out in China, more and more people will search the internet with their phones. Google’s advantages (over Baidu) should be even more apparent.

If Google can gain a further 5% from Baidu, that is 40% against Baidu’s 50-55%, Google will no longer be just a small rival. It will be a serious competitor to Baidu, and a powerful player in China internet space. So, why it chose to leave China market now?

With 384 million users, China has become the world’s largest internet market and it is still growing very fast – internet users increased 28.9% from a year earlier. (Note: the figure is from CNNIC, a Chinese government back research institute.) Moreover, it has a lot of room to grow, as only 29 percent of China’s population is online.  Why walk away from such potential, when your China operation is in fact doing well?

It is really bizarre, from any business points of view. But, an industrial insider suggested, there might be a chess game being played right now.

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