Top PC names such as Dell and Hewlett-Packard could lose out in a spat over China's latest move to censor the Web, risking the wrath of U.S. and European consumers if they go along or losing ground in the world's No.2 PC market if they refuse.

Large Western computer makers face a dilemma similar to that faced by Internet giants Google and Yahoo in recent years when each bowed to pressure from Chinese authorities in matters involving Internet privacy.

The latest row began this week when Beijing decreed all PC makers must install software that filters Internet content from July 1, a move that has raised eyebrows in China and abroad over cyber-security and Internet freedom concerns.

China has sought to clarify by saying the software was meant to help parents block their children from watching pornography or other inappropriate content, and was not intended to monitor individual Web surfing habits, according to media reports.

These rules will not be good for the Western brands like HP and Dell, as they'll possibly have to face lots of criticism back home, said Vincent Chen, an analyst at Yuanta Securities in Taipei.

The real action is to see what brands like Acer and Lenovo do now, as sentiment favors them. But for HP and Dell, it's best they lay low for a while and hope everything blows over soon.

If the PC makers abide by the order, which some worry is a form of censorship, they risk the same negative backlash that Yahoo and Google faced in their core U.S. and European markets.

But they also could put at risk billions of dollars in sales and their huge investments in China, the world's No.2 PC market, if they refuse to toe the line, giving ground to homegrown brands such as Lenovo and Founder.

In a nod to the situation's sensitivity, HP would not say whether it plans to follow the Chinese order.

HP is working closely with the trade industry association, ITI, to seek additional information, clarify open questions and monitor developments on this matter, spokeswoman Pamela Bonney wrote in an email reply to Reuters.

HP and Dell are now the second- and third-largest PC brands in China, respectively, according to research firm IDC.

Any stumble could play into the hands of Asian brands such as Toshiba and Acer, which could step in and pick up some of the slack, as they are less likely to face such a heavy backlash.

But even Acer and other brands were noncommital on the new rule, declining to comment except to say they are looking at the implications of the policy and how best to comply with it.

UNITED FRONT?

China's PC market is forecast to be the world's largest by 2011 with nearly 50 million units shipped annually by 2012, and few believe any players will pull out of the market as a result of the new regulations.

If I've got to sell computers, I've just got to do it, said Pranab Sarmah, an analyst at Daiwa Institute of Research. Business is business, and there might be some negative publicity, but it's just a market you cannot ignore.

A more likely course, analysts say, is that PC vendors could band together to form a united front to enter into negotiations with the Chinese government to possibly soften the rules or do away with them altogether.

This approach would be similar to a move by Intel in 2004, when it refused to support a home-grown wireless standard that Beijing was forcing all companies to use in China over the globally accepted Wi-Fi one. China later backed off, one of the few instances it did so in response to external pressure.

The large PC brands are also extremely influential, and one thing you've got to remember is that it's unlikely they're just going to sit around and be complete pushovers, said analyst Peter Lin at research firm iSuppli.

If they come together and approach the Chinese government, I'm sure they may be able to form a consensus.

The new rule is also the latest reminder of one of the biggest risks of doing business in China, where sudden policy U-turns and abrupt implementation of new rules are common.

China's come a very long way, but like any other market, you've got to be comfortable dealing with its rules, said Robyn Hsu, a fund manager who manages T$11 billion ($335 million) on behalf of Taipei-based Capital Investment Trust.

You can't avoid it, so just live with it.

(Editing by Doug Young and Lincoln Feast)

China Electronics Lenovo Dell