INTERNET: Google Lays Foundation for China Homecoming

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Bottom line: Google’s establishment of China-based servers and registration of Chinese domain names associated with its app store show it could enter the local smartphone market by Lunar New Year and quickly become a significant player.

Google sets up China servers

New information on a low-profile but authoritative techie website is hinting that Google (Nasdaq: GOOG) is inching towards a return to China, but this time in the less controversial hardware and apps areas where rival Apple (Nasdaq: AAPL) has built a lucrative business. The somewhat geeky posting says Google has quietly set up several servers in China, and has registered China-related Internet domain names associated with Google Play, its main app store that is now blocked in the country.

If and when it does announce its return, which could happen before the Lunar New Year, Google is almost certain to draw criticism from some western observers. Many of those previously lauded the company for the decision to shutter its China search engine in 2010, following a high-profile dispute over censorship. Those same people could accuse Google of hypocrisy with its decision to return to China, even though other major global names like Apple and Samsung (Seoul: 005930) already operate thriving businesses in the Chinese smartphone and app markets.

Google’s U-turn would come as it eyes a market that is both the world’s largest for smartphones and mobile Internet use. Chinese smartphone sales currently number more than 100 million per quarter, and a whopping 90 percent of the nation’s 670 million Internet users currently access the web over their smartphones. Those numbers are hard to ignore, and Google is looking enviously at the big money that Apple and Samsung are making in the Chinese mobile Internet market.

According to the new report, some Internet wonks recently discovered that online signals identified with Google were coming from servers in Beijing and Shanghai. (Chinese article) An IP address associated with one of those signals was listed as coming from an entity called “China Beijing Google”. The report points out that Google still has offices in Beijing and Shanghai, though both are small and mostly engage in advertising sales.

The report also points out that Google has been quietly registering domain names that could be associated with a future Chinese version of a Google Play store similar to Apple’s own China app store. Such names include googleplaychinaedition.com, and googlechinaedition.com. These are probably the most definitive signals yet of Google’s intent to return to China, especially the establishment of China-based servers that Beijing requires for anyone who wants to do business on the country’s Internet.

Strong China Partner in Huawei

Late last month, Google sent another signal of possible return to China when it announced that domestic telecoms powerhouse Huawei would become the first Chinese partner to produce its Nexus brand of smartphones. (previous post) That move had actually been rumored for several months, and Google could use Huawei’s extensive Chinese sales channels and political connections to quickly roll out its Nexus models for sale in China.

Before that, most of the reports that began to emerge earlier this year were based on unnamed sources saying Google was in talks to bring a local edition of its Play Store to China. The company shuttered its China search service in 2010 but maintained a minimal presence after that on its Google.cn site. But even that small presence has shriveled over time, and a visit to the site now contains only links to Google’s Hong Kong Chinese site, and to its translation service.

I doubt we’ll see much change at the Google.cn site if and when Google gets permission to open a China app store and start selling its Nexus phones to Chinese consumers. The company will need to be very careful not to cause more friction in its already tenuous relationship with Beijing, while also not creating too much outrage among global critics. I do expect there will be some controversy when it finally announces its return to China, probably in the next 4 or 5 months, but that it could quickly become a major player in the local smartphone market once the noise settles down.

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