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Google Brushes Off a Shareholder Revolt Over Its Plans in China

Leo Sun, The Motley Fool

Last year, Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google faced a fierce backlash after details leaked about its censored search engine for China, codenamed Dragonfly. In December, The Intercept claimed that Google "effectively ended" the development of Dragonfly, but CEO Sundar Pichai refused to rule out future plans to develop another censored search engine for China.

That refusal sparked a revolt among some shareholders, who tried to persuade Google to conduct and publish a human-rights impact assessment of a censored Google search engine in China. Google recently struck down that proposal during a shareholder meeting, and the company reiterated its "desire to increase its ability to serve users in China and other countries."

An unplugged network cable in front of a Chinese flag.

Image source: Getty Images.

That result shouldn't surprise investors. Google still sees China as a big growth market, and its investors don't have any real power over its decisions -- since it uses a controversial multiclass share structure that silences regular investors.

How Google silences its investors

Back in 2014, Google split its stock into three classes -- Class A, Class B, and Class C. The Class A shares, currently trading under the GOOGL ticker, give investors one vote per share.

The Class B shares, which aren't publicly traded and are reserved for founders and insiders, are worth a whopping 10 votes per share and account for the majority of Google's voting power. The Class C (GOOG) shares, which were split from the Class A shares in a 2-for-1 split, included no voting rights. Google's transformation into Alphabet didn't affect the voting structure -- it merely swapped each share of the old company for the new one.

In other words, any shareholder revolt against Google is doomed to fail unless it has the support of a major Class B shareholder like co-founders Sergey Brin and Larry Page, who remains Alphabet's CEO despite being missing from the public spotlight for years.

Brin and Page were both reportedly responsible for pushing then-CEO Eric Schmidt to pull Google out of China back in 2010. However, it now seems unlikely that Brin or Page would side with shareholders and undermine Pichai.

Why Google refuses to give up on China

When Google left China over a row with the Chinese government regarding allegations of censorship and email hacking, it controlled over 40% of the country's search market. Its abrupt exit cleared the way for Baidu (NASDAQ: BIDU), which controlled over half the market, to become China's undisputed leader in searches.

Baidu controls 65% of the market today, according to StatCounter, followed by Sogou's 18% share and Alibaba's Shenma, which controls 8%. That market looks saturated, but there's still a strong demand for Google to return to China.

Last year, a poll on Weibo found that 72.8% of respondents would use Google if it returned to China, compared with 21.7% who preferred Baidu and 5.5% who were willing to use both. If Google returns to China and claims a meaningful slice of the market again, the growth of its core advertising business -- which faces market saturation and tough competition in many markets -- could surge.

What's Google's next move in China?

Google probably still plans to launch a censored search engine in China. But for now, it's taking other steps back into the market through alliances with Tencent (NASDAQOTH: TCEHY) and its e-commerce partner JD.com (NASDAQ: JD).

Google partnered with Tencent in a patent cross-licensing deal; launched social games for Tencent's WeChat, the top mobile messaging app in China; and introduced new mobile apps, including Files Go and Google Translate, for Chinese users. Google also invested $550 million in JD.com and started selling JD's products on its Google Shopping marketplaces overseas.

Those moves, along with the whopping voting power of Google's top brass, indicate that the tech giant still has big plans for China -- and it isn't worried that shareholder revolts will get in the way.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Baidu, JD.com, and Tencent Holdings. The Motley Fool recommends Alphabet (A shares), Alphabet (C shares), Baidu, JD.com, Tencent Holdings, and Weibo. The Motley Fool has a disclosure policy.