Breakingviews - Google's hidden costs give Beijing sticker shock

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HONG KONG (Reuters Breakingviews) - Google's hidden costs are giving Beijing sticker shock. Washington, busily upping the trade war ante, may ultimately ban Chinese telecom champion Huawei from using Google's proprietary technology, including its app store. The search engine is blocked in China, but local handset makers selling abroad have come to rely on the group’s technology anyway: the open-source Android system powers their phones. An embargo would threaten much of a $175 billion export market.

    Chinese executives have themselves to blame. Brands like Xiaomi <1810.HK> and Oppo needed operating systems; Android is free, and runs on almost anything. It can be tweaked to exclude censored services like Maps, Youtube, and Play. With Google's massive app market inaccessible, Chinese exchanges sprung up like mushrooms, offering downloads of homegrown games, mobile wallets, and selfie editors. 

    But these alternatives failed to internationalise - even as overseas demand for Chinese-branded phones grew. Huawei's store, for example, offers only a token English menu. The company, which holds nearly a quarter of the European smartphone market, got around this by installing Google Play on overseas models. This complacent parochialism now looks like a strategic handicap, and not just for Huawei.

    The Chinese mobile market started contracting in 2017. Industry association data showed shipments, a proxy for domestic appetite, fell 15.5% in 2018, and continued to decelerate through April. That makes foreign demand more important. Unfortunately, without access to Play’s catalogue of 3 million-plus apps, Chinese phones hold little attraction. The closest international alternative, Amazon Appstore, has only 500,000 or so titles - and is American too. Worse, many popular apps rely on proprietary Google code, and won't run on Android phones that don't include it.

    It is possible the White House will ease up in exchange for trade concessions of some sort. There is, after all, no compelling national security reason to deny Ren Zhengfei's company, or by extension its peers, access to YouTube. But this shot across the bows will be noticed by every manufacturer in China. It is too late to ditch Android - a generation of mobile developers has learned to code for little else. The sector has built few apps, much less app exchanges, of use to foreigners. Free Android could end up being quite expensive.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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