Why Google Is Bleeding Profits and Dying in China

Google (GOOGL -2.00%) is giving up on China (again). On Dec. 12, the search giant shut down the Chinese version of its Google Shopping engine. Government intervention and market demand have left several of Google's other China services on their last legs as well. Here's a brief rundown on Google's Chinese operations, and how they might affect your portfolio.

Google's dead services
Calling it quits, Google notified several merchant partners listed on its google.cn/shopping website that it would discontinue the Shopping service in China. Speaking to Tech in Asia, Google reasoned: "Shopping in China was not providing businesses with the level of impact we had hoped, and so we will be sunsetting the product in order to focus on the products that do: in-app mobile advertising with AdMob, mobile and desktop display, and export-oriented search advertising."

This statement sounds remarkably similar to Google's September announcement that it was shutting down its China-only music service: "The influence of this product turned out to be lower than we expected, and as a result we decided to transfer our resources to other products instead."

Though these two services may have not have been as impactful or influential as Google may have hoped, it's hard to believe that the company is simply refocusing its efforts on more profitable products. Google did see heavy shopping and music competition from Alibaba's eTao and Baidu's (BIDU 0.69%) Ting, respectively. However, the competition was probably made worse given Google's difficulties with Chinese laws.

After governmental pressures hit a tipping point in 2010, the search giant rerouted its services through a Hong Kong domain to work around China's Internet laws. In the end, China's Great Firewall continued to hamper Chinese access to Google -- service slowed and censored. Specifically, Tech in Asia's Steven Millward said using Google Shopping was "very slow," even as the site was "too simplistic."

And Google's dying products
Google's difficulties in China don't end with shopping or music. After Qihoo (QIHU.DL) developed its own search engine to replace Google search on its Qihoo browser, Google saw its search market share slump to fourth place with 4.7%. Qihoo's search share shot from 0% to 9.6% in a quarter's time.

Last month, Google also saw its Maps smartphone app lose half of its market share. As China censors portions of Google Maps, it's no surprise that the U.S. giant dropped from 17.5% to 9% of the country's mobile mapping market. For comparison, China-based AutoNavi (NASDAQ: AMAP) and Baidu are No. 1 and No. 2, with 26% and 19% of the market, respectively. One consolation is that Google is ahead of the world's second-largest phone manufacturer, Nokia (NOK), which stands at 5%.

Unfortunately for investors, there's no surefire way to track Google's misfortunes in China. Looking at the company's most recent 10-K, Google doesn't specify its revenue from that region.

Source: Google's 2011 10-K. Fiscal year ends Dec. 31.

Still, investors shouldn't be surprised to see "Rest of the world" revenues decline when Google reports its financials at the end of the month.

Google's foolish future in China
As you can tell, whatever foothold Google did have in China has disappeared. The fallout from its 2010 showdown with China's government damaged its efforts in maps, music, and shopping. Google may still be a great company, but don't count on growth in China as a reason to stay invested.