NEW YORK (FORTUNE) -
Until recently, technology companies like Cisco, Yahoo, Microsoft and Google saw nothing but opportunity in China. Now they are experiencing headaches as well -- not because business is bad, but because their ethics are being questioned.
U.S.-China relations will take center stage this weekend when President Bush visits Beijing. With about 100 million Internet users, second only to the U.S., China is a big, high-growth market for technology. The trouble is, the Chinese government goes to extraordinary lengths to restrict what its people publish and read on the Internet -- and the authorities are getting help from the U.S. technology giants.
As a result, U.S. firms have come under fire from human rights groups, shareholder activists and members of Congress. Julian Pain of Reporters without Borders, an advocacy group, calls it "unethical" for technology companies to "help the world's most repressive regimes, especially China, carry out online censorship and surveillance."
A shareholder resolution asking Cisco to report on its human rights practices won support from 13 percent of the company's shareholders at its annual meeting Nov. 15. And U.S. Rep. Dan Burton, a conservative Indiana Republican, has asked the Commerce Department to look into the practices of tech firms in China.
There's no doubt that the U.S. tech companies have helped China build and manage its Internet. Cisco (Research) sells networking equipment to the government which is used to block Web sites that are critical of the Beijing regime. Yahoo (Research) helped the police trace a private e-mail account of a Chinese journalist who was subsequently imprisoned for revealing state secrets.
Chinese bloggers who want to use Microsoft's blogging software have found that they cannot use certain words or phrases -- past examples have included "democracy," "freedom" and even "capitalism" -- in titles of their blogs. And Google (Research), despite its promise to make all of the world's information searchable, has opted not to include news sources blocked by the government in its Google News product in China.
"China operates the most extensive, technologically sophisticated and broad-reaching system of Internet filtering in the world," says a June 2005 report from the OpenNet Initiative, a group that includes experts at Harvard Law School's Berkman Center for the Internet & Society. These experts say that China employs thousands of people to maintain what has been called its "Great Firewall" and to monitor the behavior of Internet users.
The U.S. companies say they have no choice but to cooperate with the government and obey local laws if they want to do business in China. And they all have big plans there. Yahoo, for example, recently invested about $1 billion in a Chinese e-commerce company called Alibaba, while Google is opening offices, hiring staff and selling ads in Mandarin through Chinese partners.
The companies also say that China's embrace of the Internet, even in a controlled form, has been good for its people. Yahoo believes its involvement in China "contributes to the continued modernization of the country through the advancement of communications, commerce and access to information," says Mary Osako, a company spokeswoman.
More specifically, the tech firms also say they can't control how their hardware or software is used. Yahoo says it didn't know the government wanted the identity of its e-mail user to prosecute a journalist. Cisco says that the routers that it sells, which China uses to block dissident Web sites, are the same ones used by librarians in the U.S. to keep school children off pornography sites or illegal file-sharing services.
Microsoft (Research) says it complies with "local laws, norms and industry practices." And Google explains that it excludes forbidden sources from Google News "in order to create the best possible search experience for our mainland China users" who, if they clicked on blocked sites, would be frustrated.
Adam Kanzer, director of shareholder advocacy at Domini Social Investments, acknowledges that the question of how U.S. firms should behave in China is complex. But he asks pointedly: "Are American companies going to become an arm of every repressive regime that hires them?"
Domini and Boston Common Asset Management, which together filed the shareholder resolution at Cisco, are among 25 investment fund companies, with more than $21 billion in assets, who signed a statement urging Internet companies to promote freedom of expression.
Kanzer says he plans to raise questions about censorship at Microsoft, Domini's biggest holding, and at Sun Microsystems. "We're not going away," he says.
Other activists say the U.S. firms, at a minimum, should use their clout to press China to open up its Internet. Spokespeople for the tech companies either declined to speak for publication or were unable to discuss their lobbying practices.
As it happens, the issue of providing technology to repressive governments isn't entirely new. Polaroid was once sued for selling instant cameras and film that were used by the apartheid government of South Africa to make race-based pass cards. And, 60 years after the Holocaust, IBM still takes flak for selling computer punch cards to Nazi Germany.