Google is playing hardball. After last week's ultimatum, the search giant appears to have left itself no way out: either China allows Google to operate uncensored or Google leaves China. Why would Google posture like that? Surely it's not serious about leaving China. What would be the point? Why would a company like Google make feeble idealistic gestures that will hurt its business and ultimately help no one else?
There must be a missing fact that makes this puzzle come together. My guess is that Google can prove that the Chinese government was behind the recent cyber-attack. There probably isn't any real proof yet, but all Google needs is enough proof to sentence China in the court of public opinion.
Google's real threat to China is not that it will leave the country. It's that it will embarrass China and damage its national reputation as a place to do business. On the other hand, if Google can convince China to end or reduce the censorship restrictions on its search engine, then Google will have a significant competitive advantage over market leader Baidu.
The way I figure it, Google believes it can pressure to China to loosen, though not lift, restrictions on Google's searches while keeping them firm on Baidu's - presumably China can be counted on do the minimum loosening possible. Such asymmetric loosening would be a significant competitive advantage for Google in the world's biggest Internet market (and one where Google is lagging behind Baidu by a margin of 2:1).
This is the only sense I can make of Google's actions. Of course, perhaps they're just being stupid...