Scratch China Unicom from the list of Google’s Chinese search partners. The Financial Times reports that the carrier, China’s second largest, dumped Google’s search service from the Android smartphones it’s adding to its smartphone lineup.

An obvious and, I suppose, inevitable response to Google’s recent defiance of the Chinese government. Said Unicom’s president Lu Yimin: “We are willing to work with any company that abides by Chinese law…we don’t have any co-operation with Google currently.”

Bad news for Google (GOOG), which until recently seemed poised to do quite well in the world’s largest cellphone market. As the Los Angeles Times notes, “although it is a distant second on computer searches, Google is nearly tied for first with China’s Baidu Inc. for market share in China’s nascent mobile-search sector.”

Evidently, not for long. I imagine we’ll be hearing of a similar move by China Mobile in the near future.

Over the weekend, Vice Minister Miao Wei of China’s Ministry of Industry and Information Technology told Xinhua, the state-run news agency, that “[Google] never informed the ministry that it was planning to withdraw from China, [nor has it] filed reports over alleged Internet regulation and cyberattacks to the ministry or requests for negotiations.”

Odd to hear, considering Google’s rather definitive Jan. 12 announcement that it will stop censoring its Chinese search site and may withdraw from the country altogether. More so given the comments of another MIIT minister just a day earlier. On Friday, Li Yizhong told reporters attending the National People’s Congress that the ministry is in talks with Google about its plans to operate an unfiltered search engine in China.

Sources close to the situation confirm that this is the case: Google (GOOG) has been in private talks with Beijing, though not formally. Of course, though nearly two months have passed since Google first said it would stop censoring search results in China, queries to Google.cn continue to return censored results.

As I noted here a month ago, “we are no longer willing to continue censoring our results” is about as definitive a statement as they come. Is Google going to follow through or not? Why all the mystery and dawdling?

Could it be that Google is now backing off its initial threat? Because, as Yahoo CEO Carol Bartz suggested last week, that threat seems increasingly empty the longer this thing drags out. “It looked to me like it was more of a statement than an action,” she told CNBC. “If they wanted to pull out, they should have pulled out.”

Reached for comment, Google offered none beyond this now typical refrain: “Thanks for reaching out, but as you might suspect, we will not be commenting on any discussions with the Chinese Government.”

PREVIOUSLY:

• Chinese Scientists Recalibrate Google’s Evil Scale
• Chinese Schools Tied to Attacks on Google? Where’d You Read That, Mad Magazine?
• World War WAN: Google Hack Traced to Schools in China
• Nearly a Month After Debut, Google’s “New” Approach to China Still a Lot Like the Old One
• Google CEO: Ask Not What Google Can Do for China–Ask What China Can Do for Google
• China on “Google Farce”: Our Internet Is Open
• China to Google: No Worries, We Were Planning to Clone Those Android Phones Anyway
• U.S. State Department to Complain to China About Google Hack. Not That China’s Going to Listen.
• Microsoft: “Don’t Be Evil” Is Google’s Motto, Not Ours
• What’s the Chinese Word for Bing? Google Threatens to Leave China.

Speaking at the World Economic Forum in Davos, Switzerland, today, CEO Eric Schmidt said he really doesn’t want to shutter Google’s Chinese operations, he would just like the company to have more of a role in shaping its domestic policy.

“We like what China is doing in terms of growth…we just don’t like censorship,” Schmidt said. “We hope that will change and we can apply some pressure to make things better for the Chinese people.”

Asked later what it might take for Google (GOOG) to remain in China–aside from pull more Internet users than the total population of the United States–Schmidt replied, “We would very much like to stay in China. We would very much like the censorship we oppose to improve in China.”

Sadly, that doesn’t seem likely to happen anytime soon. Certainly, the public and confrontational manner in which Google has chosen to approach the issue has not gone over well with the Chinese government, which seems unlikely to capitulate. Meanwhile, Google rivals are making it known that they are perfectly willing to step in if and when the search sovereign leaves the country.

Consider this treatise on Sino-Redmondian relations from Microsoft (MSFT) CEO Steve Ballmer:

Engagement in China and around the world is very important to us, in part because we believe it accelerates access to 21st century technology and services and helps provide the widest possible range of ideas and information. We have done business in China for more than 20 years and we intend to stay engaged, which means our business must respect the laws of China. That’s true for every company doing business in countries around the world: we are all subject to local laws.
 
At the same time, Microsoft is opposed to restrictions on peaceful political expression, and we have conversations with governments to make our views known.  In every country in which we operate, including China, Microsoft requires proper legal authority before we remove any Internet content; and if we remove content, we give users notice.

Google (GOOG) stock has lurched five percent lower in the first few minutes of after-hours trading, as investors digest the news. If you want to anthropomorphize the market, you might speculate that it’s bummed that CEO Eric Schmidt and company didn’t show a higher revenue lift. But if you’re keeping track, revenue is up 17 percent compared with last year, and up 12 percent from the previous quarter.

Here is Citigroup (C) analyst Mark Mahaney’s “cheatsheet” for those playing at home (click to enlarge):

And you can see the company’s profit and loss and balance sheet here.

Google will be using YouTube to livestream its earnings call, but I’ll be providing some annotation here starting at 4:30 pm Eastern. You can also check out the company’s accompanying slide presentation here, and here’s a chart it’s particularly proud of (click to enlarge):

I’m trying out a promising new liveblog tool, but please bear with me if there are bumps along the way.

On the call: CEO Eric Schmidt, CFO Patrick Pichette, product guy Jonathan Rosenberg, sales boss Nikesh Arora. No Larry or Sergey.

Schmidt declares that he’s very pleased with Q4: “An extraordinary end to a roller coaster year.”

Schmidt: Clearly, we were right to start ramping up investments and will continue to do so. We’re investing in people and investing in tech based on our “70/20/10″ rule: 70 percent in core products, 20 percent in new business like mobile/Android, and 10 percent in “long view” initiatives like commerce and social.

And of course, more mergers and acquisitions. We’re continuing on a pace of roughly one M&A per month, some small, some big.

Pichette runs through the numbers in the release above. He reiterates Schmidt’s line about continuing investments.

Jonathan Rosenberg has a cold, but gets his message across: “We made some very hard decisions” to shut down some products to focus on winners. It’s our “more wood behind fewer arrows approach.” We’re focusing on DoubleClick integration, Android expansion and the Chrome OS. “YouTube, is in fact, monetizing well,” and we hope our partners make money, too.

Obviously, going forward, we’re going to plow resources into search. But other stuff too. Social, for instance. Not just social networking, but all of our products should be “social.” This can apply to search, local search, etc. We’re also focusing on commerce, whether people are making their purchases online or offline.

More Rosenberg: Mobile is important, and so is moving enterprise to the cloud.

Arora: We improved throughout the year, and Q4 was strong. Large companies like Staples (SPLS) and Volvo are directing an increasing portion of spending online [as they're supposed to do].

Arora: Search ads are always a value in December! Costs go up but they get more effective because people buy more.

Arora: Brand marketers are increasing their spending too. YouTube has had many successful brand campaigns. Have you seen Fox’s “Avatar” ads? They’re great. Other shoutouts for Sony (SNE) and American Express (AXP).

Arora: Most of the top networks have signed onto AdX ad exchange since we launched it in the fall.

Time for Q&A.

Google’s U.S. revenue had a big jump, but international revenue did not accelerate as quickly. What gives?

Arora: In the U.S., we saw large advertisers shifting offline to online. Other markets have different issues; hence, the different growth rates.

Are we back to normal in regard to seasonal patterns? Also, can you talk about “materiality” of mobile?

Pichette: We won’t talk about mobile revenue in any concrete way.

Arora: There is some different performance by vertical. Finance, obviously, isn’t as strong as it used to be.

Another question about mobile: Is Google trying to push revenue? Profitability? Also, please talk about China.

Rosenberg: Advertisers are starting to figure out what works on mobile. For instance, adding a phone number or an offer for mobile helps a lot.

Pichette: Regarding mobile, we want to drive innovation that in turn drives people to the Web, which is better for us. That’s the core engine of mobile.

Schmidt: “China stuff has been well-covered in the press,” the CEO notes before recounting the China story. “We’re in conversations with the Chinese government,” and our business has remained unchanged. “But in a reasonably short time, we’ll be making some changes there.” That said, we’d still like to be in China.

Missed a question. Apologies.

Please talk about outperformance of network business vs. owned and operated. Also, what accounts for higher marketing costs?

Pichette: Nothing to talk about re: network versus O&O. Re expenses, we said we were going to ramp up investment and we put in more there because we can track the results and the return on investment.

Arora: Yep, some of that money was to support consumer launches.

You said search increased five times on mobile. So what does that mean for revenue per search? Also, please talk more about increased spending on marketing.

Pichette: We’re really pleased with the marketing experiments we’re running.

Rosenberg: Regarding mobile, the new formats, targeting tools and reporting we’re giving mobile advertisers is making a huge difference. But I won’t answer your question about revenue.

Missed another question here.

YouTube monetization: Can you give us some metrics on how much inventory you’re selling?

Arora: Nope. But it has “gone from being a nice-to-have” to essential.

Pichette: The Youtube homepage nearly sold out in Q4. Hope that’s useful.

Can you break out ad spending by advertiser size?

Arora: Large advertisers are moving online, which is good. Retail was strong in Q4. We’re working with smaller advertisers to “bring them into the fray.” But the discrepancy so far has been mainly seasonal.

Can you rank your core businesses in terms of growth potential? Also, what’s up with you and Apple (AAPL)?

Schmidt: We’ve been saying for a while that display is a big opportunity. One story you haven’t seen so far is how successful we’ve been in display, but that will come out in 2010. [Note to PR staff: Start pitching!]

And obviously, mobile is small now but will grow quickly.

“With respect to Apple, it’s probably better to say”…that as a former board member “I have a special spot for Apple in my heart.” They’re a very well run company and “they have some very good stuff coming” strong competitor, etc.

Schmidt on Nexus One: What it is really about is a new way of buying a phone. Nexus One itself is the first in a series of examples where you can buy the phone online and pick your carrier.

Is Bing having an impact on cost per click?

Rosenberg: We think out CPCs are generally not affected by competitors. Prices are set by buyers.

Can you talk about Nexus One’s impact on margin?

Pichette. Not really. We want to innovate, etc. Nexus One will have its own margin and that’s how we’re focused on building the business.

We’ve seen third-party data on mobile projecting that iPhone could account for 50 percent of mobile traffic. Does that make sense to you? Also, you have said that the Apple relationship is “stable.” So what are the odds that you’re going to continue to provide search on the iPhone?

Schmidt: We won’t talk about the market share of Apple. And we won’t “speculate about any deals of any kind–true, not true, rumored, not rumored.”

Given that new display products are so great, is there any notion that people are moving dollars from search to display?

Schmidt: Advertisers “don’t shift, they add.” They might maximize search to maximize revenue and they might spend on display for long-term growth, branding, etc.

Pichette thanks Googlers listening for all their hard work. There’s an auxilary call at 6 pm Eastern with Pichette and Rosenberg, but I won’t be able to cover that one.

“Google’s review of its business operations in China has attracted a great deal of interest,” Clinton said during a speech on Internet freedom this morning at the Newseum in Washington, D.C. “We look to Chinese authorities to conduct a thorough investigation of the cyber intrusions that led Google to make this announcement. We also look for that investigation and its results to be transparent.”

Clinton’s remarks come as Google (GOOG) threatens to shut down its search operations in China after repeated attacks on its internal network, which appear to have originated in the country.

“In an interconnected world, an attack on one nation’s networks can be an attack on all,” Clinton said. “By reinforcing that message, we can create norms of behavior among states and encourage respect for the global networked commons.”

“We will be issuing a formal demarche to the Chinese government in Beijing on this issue in the coming days, probably early this week,” said State Department spokesman P. J. Crowley. “It will express our concern for this incident and request information from China as to an explanation of how it happened and what they plan to do about it.”

What they plan to do about it?

Not much, if yesterday’s comments from Beijing are any indication. Consider this report from Xinhua News, the official press agency of Chinese government:

… cyber attacks are a commonplace issue across the globe even if countries have been making every effort to combat hackers.

On Tuesday, China’s largest Internet search engine Baidu, which is also Google’s major rival in the Chinese market, suffered an hacker attack that paralyzed its website for more than three hours.

Microsoft’s CEO Steve Ballmer has said that “There are attacks every day …We’re attacked every day from all parts of the world and I think everybody else is too. We didn’t see anything out of the ordinary.”

So it’s far-fetched to blame China as a scapegoat for cyber attacks just because Google said something about that.

In addition, it’s quite natural for a multinational company to shift its market strategy or even pull out business from a certain area.

Since Google.cn was launched in January 2006, it has seen a continuous rise in its market share in China. But it is still unlikely for Google to rock Baidu’s status quo as a superpower in the Chinese search market.

Baidu and Google took 63.9 percent and 31.1 percent of shares, respectively, of China’s Internet search market in the third quarter last year, according to data from Analysys International, a leading advisor on technology, media and telecom industry in China.

While Google’s global share is over 90 percent, according to web analytics company Stat Counter.

Till now, Google’s real intentions to quit China are still not clear.

There is no sense blowing things out of proportion and turning a business issue into a political or diplomatic dispute.

Above all, Google’s decision is no bigger than a corporate action, no matter where the company comes from or how powerful it is.

Clearly, Beijing has no plans to compromise–at this point, anyway.