The perils of China for Google, Apple

• Google ran into the Chinese market buzz saw
• Apple is readying a new iPhone for markets such as China
• The upside %u2014 and downside %u2014 are daunting

SAN FRANCISCO — Several years ago, when Google was making a strong push to boost search traffic and ad sales in China, one of its competitors there reportedly had a cunning idea.

The company was said to have compiled a list of alleged violations of China's censorship laws committed by Google, a list it then presented to that country's Internet police.

It's not hard to imagine that it would be long, given that Google's search algorithm was designed to produce results without regard to the sensitivities of a one-party government that represses political dissent.

Soon after, visitors to the company's google.cn website were being redirected to the site of Baidu.com, according to my source, a veteran executive of technology and media companies who is now running a consumer Internet start-up he founded.

In a previous job, this executive was charged with developing a market in China for a U.S.-based media company.

In the spring of 2010, four years after it entered the China market, Google shut down its google.cn service, after repeated cyberattacks against its servers, which it had traced to that country.

When Google exited mainland China in 2010 (it still operates a Hong Kong-based site) Baidu.com had a leading 63% share of that search market, while Google was a distant No. 2.

In early 2006, when Google first agreed to begin censoring its results in China, the company held a 27% share of the search market there, compared with Baidu.com's 47%.

The latest market share figures, compiled by market analytics firm CNZZ, show that Google is now in fifth place, with 3% of the China search market. Baidu.com controls two-thirds of the market, and three other China-based rivals have larger search businesses than Google.

Meanwhile, it's widely reported that Apple will begin marketing two new phones it will unveil next month. One is a lower-price version, dubbed the 5c, designed for developing markets such as China, where Apple got a quarter of its sales, or $4.6 billion, during the quarter ended in June.

Yet, the China market was a drag on growth in Apple's latest quarter, rather than a boost. As noted in a previous column, Apple's sales in China fell 14% during the most recent quarter, even while they climbed 15% during the first nine months of the fiscal year.

The reversal of Apple's sales momentum in China came after China's state-run media ran critical stories about the company's warranty policy in that country, the terms of which were less consumer-friendly than the one offered to consumers in the Americas.

After government officials made critical comments of Apple in those stories, Apple CEO Tim Cook issued a public apology about the warranty policy.

Will that apology make a difference to Apple's fortunes in China? The answer is hard to predict.

At the same time, a team of analysts from Citigroup's Asian brokerage operation examined the components of the iPhone 5c and found that the device will likely cost around $390 at the wholesale level. The average cost of a cellphone in the region, they wrote, is about $225.

The high price point could prompt wireless carriers in China to balk at carrying the phone, Citigroup analyst Glenn Yeung wrote in a report. He added, "Our Asia team revised down their build forecast," meaning how many of the new devices they estimate Apple will produce for Asia.

Yet, even if Apple should get onto one or more of the wireless networks in China, the world's largest smartphone market, and get the pricing right, there is no history to suggest that they'll receive a warm reception, now that officials have publicly identified the company as discriminating against consumers there.

Apple's business in the Americas was strong again last quarter, with sales rising almost 13% to $14.4 billion, even as the company's iOS software loses global market share to Google's Android mobile operating system.

Given Google's track record in China, Cook may want to re-evaluate his company's financial investment there if sales continue to fall in the second half of this year.

Whether he succeeds is something we won't know until January, after Apple reports a full quarter of results that include sales of its new phones.

Given that the stock market usually prices shares on their estimated worth roughly six months out, that earnings report is the one that will determine whether growth investors still betting on the stock will be rewarded or punished.

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John Shinal has covered tech and financial markets for 15 years at Bloomberg, BusinessWeek, the San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others.