Yahoo! Management in China

Table of Contents

1. Introduction

2. The Case

3. The Issues
3.1 International expansion and Chinese Market entry
3.2 Long term strategy and lack of control
3.3 Compliance with the Chinese government
3.4 Crisis Management
3.5 Ethical Issues

4. Solution and Advice
4.1 How Yahoo could have avoided such a situation
4.2 How Yahoo should have managed the crisis
4.3 How Yahoo should have managed the after-crisis

5. Doing business in China: three major rules to know before entering the market

6. Conclusion

Sources

1. Introduction

In the past decades, the accelerated economic growth of China has attracted many Western companies wanting to profit from this boom and secure their share in the biggest consumer market worldwide (Straubhaar 2012 and International Monetary Fund 2012). The increase in prosperity offers a great potential for industries such as automobile, food and consumer electronics. With its 1.3 billion inhabitants and a continuously increasing online population, China is also a very important market for internet companies like Google, Microsoft and Yahoo (Poe 2009, p. 72). However the international expansion of the business activities does not only bring advantages like increased revenues. Companies operating in a foreign market also have to deal with challenges such as lack of control and complying with foreign laws and rules.

This paper analyzes the case of internet giant Yahoo which had to deal with an important crisis after having disclosed private user data in line with the compliance with Chinese authorities. In chapter two we will first summarize the case of the user Shi Tao whose personal data was disclosed by the internet provider. We will also refer to the public uproar that followed the imprisonment of the aforementioned user. In the third chapter we will shed light on the different issues that Yahoo faced in regard to the crisis. They can be divided into structural problems such as the international expansion of Yahoo, its long term strategy and lack of control in the Chinese market as well as the compliance with the Chinese laws. Other issues are the crisis management of the company and ethical issues. Subsequently we will present our solutions to these challenges and give advice on how Yahoo could have handled the situation better. In chapter five we will illustrate general guidelines for foreign companies that intend to enter the market and do business in China. Finally, we conclude our paper by summarizing the key issues and rules of conduct that we identified during our research.

2. The Case

In 2007, Jerry Yang, CEO of Yahoo, was accused and criticized by the US House Committee of Foreign Affairs, for how Yahoo has handled the case of Chinese journalist Shi Tao. A journalist who was arrested and imprisoned based on data provided by Yahoo in China.

The case is based on an incident that happened in 1989, where groups of students, labor leaders and others did a series of pro-democracy protests in different parts of China against the Chinese government. The protests climaxed on the 4th of June, when the Chinese government intervened at Tiananmen Square in Beijing, leaving hundreds of people dead (BBC, 2005). The incident caused an international outrage and criticism regarding the Chinese government. 15 years later at the anniversary of the Tiananmen Square incident, the Chinese government intended to reduce and hinder the press coverage regarding the incident. The government distributed a document to media outlets in China, which in short meant the censorship of press coverage on the Tiananmen Square incident. At the time, Shi Tao - Chinese Journalist at the Contemporary Business News Company - summarized the content of the document and forwarded it - with his private Yahoo e-mail account - to a NGO in the US. Within days after Shi Tao had send out the e-mail the Chinese government requested the identity of the user at Yahoo’s office in Beijing, indicating that the user in question was part of an investigation concerning the disclosure of state secrets. When the request was made, no company guideline was in place that applied to such circumstances. However, users of Yahoo have to agree to the terms of conditions before signing up for an e-mail account and the terms included the compliance with government investigations. The manager that had handled the request knew that it was a political investigation and was concerned that the non-cooperation would firstly, put Yahoo’s employees and secondly, Yahoo’s license to operate in China at risk. Furthermore, the manager was worried that the US headquarters would advise its China office to decline the government’s request, resulting in the same aforementioned risks. Eventually, the manager decided to hand out the information, secretly hoping that the matter would quickly disappear. However, the contrary was the case; Shi Tao was taken into custody, received a quick two-hour trial and was sentenced to ten years of prison. Amongst other things, based on information from Yahoo’s office in Beijing (Amnesty International, 2004).

The fact that Yahoo handed out Shi Tao’s information and steadfastly maintained it had to correspond with the government’s request caused heavy criticism in the US and the rest of the world. People believed that the Chinese government heavily violated Shi Tao’s human rights by restricting his freedom of speech and by an unjustified imprisonment. Amnesty international called for a letter campaign against Yahoo, pointing out that Yahoo’s actions in China conflicted with what it publicly stated they believed in. Moreover, there was a Lawsuit against Yahoo in California under the Alien Tort Claims Act and the torture victims Protection Act and additionally a hearing at the US House Committee on International Relations. Yahoo’s general counsel Michael Callahan testified in front of the committee that the office in China had no idea what the government’s intention was. Repeatedly stating that they had no choice, but to comply with the Chinese laws.

The case climaxed and turned into a public relations nightmare, when evidence surfaced that Yahoo China knew about the intention of the Chinese government and that Michael Callahan had, either intentionally or unintentionally, given false testimony (BBC, 2007). The delicate new evidence lead to a second hearing at the House of Foreign Affairs, with Jerry Yang and Michael Callahan in the hot seat. The Committee attacked Yang and Yahoo’s past decisions repeatedly. They questioned how Callahan could not have known of the document. Tom Lantos - committee chairman - stated in the hearing, that “[…] this was no misunderstanding. This was inexcusably negligent behavior at best, and deliberately deceptive behavior at worst […]”and added that the “[…] testimony reveals […] while technologically and financially you are giants, morally you are pygmies” (BBC, 2007). In addition, representative Christopher Smith summoned Yahoo to settle the lawsuit that Shi Thao’s and Wang Xiaoning’s mother had filed in a San Francisco federal court against Yahoo, saying that they should “settle it and settle it generously and in their favor” (New York Times, 2007). The internet writer Wang Xiaoning was arrested and imprisoned for ten years in 2002 after he was identified - with help from Yahoo - as the author of pro- democracy and anti-government essays. Yahoo had previously asked to dismiss the case that accused them for cooperating with the Chinese authorities, “arguing the case is a meritless attempt to meddle in another country's legal affairs” (BusinessWeek, 2007). Later in 2007 Yahoo settled the lawsuit (SMH, 2007).

3. The Issues

3.1 International expansion and Chinese Market entry

After its big success on the domestic U.S. market, Yahoo¹ expanded its operation to several foreign countries and reaches today more than 700 million users on all continents (Yahoo 2012a). The global presence poses some challenges, since Yahoo operates in different markets with various laws that require the adaptation to local regulations.

One of the most promising markets is China. With more than 1.3 billion inhabitants it represents the world’s biggest online population and is a major market for all global digital companies. Therefore, Internet giants try to cover all categories such as search, video, mobile and social. When Yahoo’s China operations started in 1999, it was one of the first foreign internet companies to enter the market (Deva 2008, p. 4). The global expansion and the settlement in China have proven to be a big success. Nevertheless, the company missed out on establishing some important guidelines and policies for its foreign divisions on how to behave in special and uncommon situations like the Shi Tao case. Additionally, since Yahoo entered the Chinese market, it had enough time to get familiar with the local particularities and circumstances. Unfortunately, the Shi Tao case shows that the company was not prepared for such a situation. When the Beijing office received the request for user information, no company policy was established as well as no procedure was defined how to respond to such a request. This is the main reason why Yahoo’s China manager was very uncertain on how to deal with the issue. But in general, the company’s terms of service for its Chinese accounts mentioned the compliance with government investigations (Yahoo 2012b).

3.2 Long term strategy and lack of control

After having decided to enter the Chinese market, Yahoo had several options how to undertake this action. Yahoo adopted a “buy over build approach” to acquire or partner with domestic companies. At the beginning, the company tried to establish partnerships wherever possible in order to complement its own product portfolio. After they acquired the Chinese software company 3721 in 2004 - which did not turn out to be successful - Yahoo China established a strategic partnership with the leading B2B Chinese portal Alibaba (Varma & John 2007). This deal comprised of several agreements; the most important one was that Yahoo gave his China business to Alibaba in exchange for a 40% stake and voting rights in Alibaba itself. The partnership should result in the creation of one of the largest internet companies in China and signify Yahoo’s long term commitment to the Chinese market (Wall Street Journal 2012). However, the result was a decrease in the US headquarters’ decision power, as it did not have any influence on the day-to-day business. Thus, it comes as no surprise that Yahoo’s China manager did not directly inform the California-based headquarter about the request of disclosing a user’s information. Another question arises, as it is not clear whether the Yahoo China manager had the power of decision to give the requested information away or if he should have consulted the main office in the U.S. Yahoo did not know about the happenings in China until the Shi Tao case got public. However, a parent company should be informed on what is going on in its foreign divisions at all times. The Shi Tao case shows what consequences can result as a lack of control. Even though Yahoo China was controlled by Alibaba, it is still the brand Yahoo that is directly connected to the case as well as perceived by the public. So more control by the headquarter might have changed the outcome of this issue.

3.3 Compliance with the Chinese government

Like in every country, US internet firms that wish to operate in China have to agree to the specific regulations posed by the central government. The situation differs largely to other countries as China developed legal and technological tools to regulate and censor the internet. In order to do business, all firms are required to comply with domestic internet regulations and limit, or self-censor the results of web searches (Poe 2009, p. 72). In 2002, Yahoo signed, without hesitating and proper considerations, a “Public Pledge on Self-discipline for the Chinese Internet Industry”. This pledge required Yahoo to agree to different forms of censorship put in place in the name of state security and social stability (Dambeck 2006). By signing the pledge, Yahoo also agreed to actively contribute to the censorship and control of its system.

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¹ Yahoo is a leading global internet communications, commerce and media company. Headquartered in Sunnyvale, California, this US internet giant was created in 1994 by David Filo and Jerry Yang as “Jerry’s Guide to the World Wide Web”. The two created a software for users’ navigation and the organization of Web sites into categories. Shortly after, the company was renamed into Yahoo and began a rapid growth due to the internet’s huge success.