Google customers are people, not governments.
Long term, the people in China will succeed at demanding and obtaining all of the basic human rights enjoyed today by so much of the world.
They will remember that Google caved in to a former (by then discredited) regime that denied them some of these basic rights and (perhaps)participated in invading their privacy. In the long run that's a losing hand but short term, a winning hand.
Perhaps if Google wants to participate today in China's market it should offer to provide services to China's government as a subcontractor and let China operate the service under its own name. Eventually, when full rights are won by China's people and China's market becomes a truly free one, Google could re-introduce full unfettered service under the Google name.
Google should do the right thing and stand up for human rights and moral values. While this could hurt their profits in the short term, it is the right thing to do, and should boost their profits in the long term, as people who admire their stance will admire the company and the good values it represents. Goodwill on the part of consumers may be hard to measure, but it is immensely powerful. I suspect that taking the right stance will not actually hurt Google's balance sheet, even in the short term. Who else has the clout that they do now? If China tries to appeal to some other search engine company instead, due to Google's stance, public outrage against that other search company, whoever it is, would doom their sales and boost Google's. This is the right time to do the right thing!
All companies have to make moral decisions, whether it is being honest in their accounting, issuing safety recalls when they are needed, or standing up for basic human rights. The goal of making a profit must be secondary to such transcendent moral values.
It seems as though Google is caving in to the Chinese government. Like every publicly traded corporation, Google has a responsibility to its stockholders to generate returns. I think the only way that companies like Google and others will stop kowtowing to the Chinese government's restrictions is if they face some kind of consumer backlash in other places. The short-term temptation is to do whatever it takes to continue building a business in China. But doing so could hurt their brand in the long run.
Obviously it's not an easy position to be in. But I hope I would have the courage to say no to China and hopefully reap some rewards in the rest of the world from people who admire the company's stance.
I was living in Hong Kong during the 1989 Tiananmen Massacre. We faxed newspaper accounts of what happened to every fax number in China we had. I would hope faced with Google's situation I would find the same kind of creativity and courage to respond.