Google Faces an Antitrust Battle in China: What It Means for Investors

Chinese regulators are mulling an antitrust probe into Alphabet‘s (NASDAQ:GOOG) (NASDAQ:GOOGL) Google over complaints regarding Android’s dominance of the mobile OS market, according to Reuters.

The probe was proposed by Huawei last year, after U.S. sanctions cut the Chinese tech giant off from Google’s Android-based services. If initiated, the investigation could decide if Google can cause “extreme damage” to Chinese companies by cutting them off from its version of Android and its integrated services.

Google’s relationship with China

Investors might initially assume the Chinese market doesn’t matter too much to Google, since it discontinued most of its services in China, including its core search engine and mobile app store, a decade ago.

A Chinese flag superimposed on a circuit board.

Image source: Getty Images.

However, Google still allows Chinese companies to buy ads on its overseas sites. Google doesn’t disclose that revenue in its SEC filings, but The Information previously claimed Google’s ad revenue from the “Greater China” area (including Hong Kong, Macau, and Taiwan) rose 60% to $3 billion in fiscal 2018 — which would have accounted for 2% of Alphabet’s revenue.

Google has repeatedly tried to return to China in recent years. It attempted to launch a censored version of Google Play in China in 2016, but that effort fizzled out. Google also quietly developed a censored search engine for China, but it abandoned that project last year following a fierce backlash from its own employees and lawmakers.

Google also launched several mobile apps on Chinese app stores to stay relevant, including Google Translate and a file manager. Nonetheless, Google still remains overshadowed in the country by tech giants like Baidu and Tencent.

What is Huawei protesting?

Huawei’s protest might seem odd, since its Chinese smartphone users don’t have access to Google’s core services. Moreover, Android is an open-source operating system which any company, including Huawei, can freely modify.

Huawei's logo at MWC in Barcelona.

Image source: Getty Images.

However, Huawei is challenging Google’s dominance of the smartphone market outside of China, where Android devices are expected to provide access to Google’s services. So when Google cut Huawei off from its version of Android, its integrated apps, its Google Mobile Services (GMS) for developers, and other services, it likely throttled its overseas sales.

Huawei generated 41% of its revenue outside of China last year. It’s the third-largest smartphone brand in Europe, the second-largest brand in Africa, the fourth-largest brand in South America, and the sixth-largest brand in the United States, according to StatCounter.

To survive that seismic shift, Huawei will launch new phones running on its own operating system, HarmonyOS, and try to attract more developers to its own app store. It also plans to expand its own location-based mobile framework, Huawei Mobile Services (HMS), to replace GMS and support a new ecosystem of integrated location-based apps.

That’s a bold strategy, but consumers could simply flock to other Android device makers, like Samsung, which haven’t been blacklisted by the U.S. government.

Could Huawei cite other cases against Google?

Two years ago, the European Union levied a 4.3 billion euro ($5.1 billion) fine against Google over anti-competitive practices, which included forcing phone makers to pre-install its first-party apps while blocking rival apps.

Meanwhile, Indian regulators are probing claims that Google abused its dominance of the mobile market to promote its mobile payments app. Back in the U.S., the Justice Department is probing Google’s dominance of the online search and advertising markets.

These cases are different from Huawei’s complaints against Google, but Huawei could still cite them as evidence of Google’s market dominance and its power as a gatekeeper to the smartphone market.

Another regulatory headache for Google

China’s regulators might not launch an official investigation into Google, but the threat raises another red flag for the tech giant, which could struggle to expand its ecosystem as regulators scrutinize its core businesses. Chinese regulators could also probe Google in retaliation for the Trump administration’s latest moves against TikTok owner ByteDance and chipmaker SMIC.

On its own, an antitrust probe in China won’t derail Google’s business. But when combined with all its other antitrust challenges, it could erode Google’s reputation and force it to modify its core business models.