On this episode of Industry Focus: Technology, host Dylan Lewis is joined by Fool.com contributor Danny Vena to discuss recent comments by Chinese government officials and what they mean for Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL).
A full transcript follows the video.
This video was recorded on Jan. 26, 2018.
Dylan Lewis: Danny, today we're going to be talking about China, specifically looking at two different story lines and what each one shows about the dynamics between U.S. companies, the government, and domestic companies in the country. The inspiration for this show came from a couple of articles that you wrote, so it only really made sense to have you on.
Danny Vena: I appreciate the opportunity. It's always fun to talk about these investments.
Lewis: Listeners, if you would like any of those pieces, just write in and we'll send them along. I think the case for why companies want to be in China is probably pretty clear at this point, but it's worth throwing a couple of data points out there. So, if there's any naysayers who are like, "Why are they interested in China?" give me a couple of stats here, Danny.
Vena: China has the largest population of any country on Earth, for starters. They have, at last count, an estimated 1.37 billion consumers there. That's a pretty large percentage of the global population that a lot of these companies want to tap into.
Lewis: And that's a population that's increasingly coming online, right?
Vena: It is. In fact, China has internet users that number, estimates vary, but somewhere between 700 million and 750 million internet users.
Lewis: And then, you also have the rising middle class in China. This is a megatrend that we've seen over the last decade get a lot of press. Basically, you have a huge opportunity here. The problem is, particularly as an American company, you can't just port over your operations like you would for most countries. I think that's especially true if you're in the business of information, and that's really come to light in the last couple of years with some major companies, namely Google and Facebook, trying to get their way in or eventually having to leave due to issues and disagreements with the Chinese government.
Vena: That's true. Google was actually in China for a long time, and left the country voluntarily, they say, back in 2010. They cited several reasons for that. One of which was, they said they were no longer willing to censor the results that Chinese consumers saw on Google's internet site. So, when consumers got on there and they would search for things, there were a lot of things related to the Chinese government, the outside world, that China said, "We don't want searchers to see that." Another reason was that, while Google was in the country, they said they experienced a sophisticated hack of their servers. And one of the things that was targeted was the email accounts of some human rights activists. Google essentially said that was the last straw, and they ported over their search results to their Hong Kong operation, and that essentially banned them from the country.
Lewis: And rather than leave voluntarily, Facebook was actually banned back in 2009.
Vena: That's right. In fact, Facebook was actually in the country as well, and it turned out there were some activists in the country that decided to use Facebook as a coordination tool so they could get folks to and from anti-government protests. The government looked poorly on that, and they shut Facebook out. Instagram was similarly shut out of the country back in 2014.
Lewis: So, these two major companies have not had a presence in one of the world's largest economies. Some recent comments from some government officials, I think, were kind of coy in that they talked about how, "As the Chinese government, we're happy to have these businesses up and running in China. Of course, for them to come back, they'd have to be doing it under the right conditions." Right?
Vena: Right. A government official was speaking at the Internet Governance Forum last month, and said that these companies were welcome to come back to China. We'd welcome them with open arms, as long as they abide by Chinese laws and regulations.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares) and Facebook. Dylan Lewis owns shares of Alphabet (A shares) and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool has the following options: long March 2018 $200 calls on Facebook and long March 2018 $170 puts on Facebook. The Motley Fool has a disclosure policy.