Lee, who served as the president of Google China’s operations, created something of a hubbub last week by announcing his intention to quit without sharing any details.  Most executives’ movements are watched, of course, but Lee’s move was even more interesting given that he was once the subject of a tug of war between Google and Microsoft.  There’s also been some controversy about his subsequent performance.

But with respect to how he did leading Google China, Lee told David Barboza, "In my career, I’ve never run away from anything – I run toward things.  There’s clear evidence Google has doubled its market share in China under my leadership.  It’s on the upturn."

So it’s on to something called Innovation Works for Lee, and he explained the new company’s way of doing things by stating, "We’re going to collect the best ideas, and we’re going to hire the best engineers and entrepreneurs.  After one year, we’ll send the companies into the open."

Innovation Works will focus on the Chinese market, and has already raised $115 million, with YouTube cofounder Steve Chen providing some support.

Lee first made headlines when he attempted to move from Microsoft to Google.  Microsoft sued Google, Google countersued, and after a fair amount of public unpleasantness, the two corporations reached a mysterious out-of-court settlement.

Then Lee’s reign in China began.  It wasn’t an entirely successful one, considering that Google’s share of the Chinese search market is still only in the neighborhood of 20 percent.  But Eric Schmidt expressed his approval of Lee’s efforts on several occasions, which counts for a lot.

And that brings us back to current events.  Lee is leaving Google to work on an unknown venture, and apparently gave the search giant enough notice to find some replacements.

Jessica E. Vascellaro reports, "Mr. Lee will be succeeded by two Google executives . . . .  Boon-Lock Yeo, currently director of Google’s Shanghai engineering office, will run engineering for Google China.  John Liu, who currently leads Google’s sales team in greater China, will assume Mr. Lee’s business and operational responsibilities."

A recent iResearch report pegged Google China’s market share at 19.8 percent in the second quarter of 2009, down 1.1 percent from the first.  The division isn’t making money, either, even as its biggest competitor, Baidu, is both gaining share and practically printing money.

So Lee told The Daily Telegraph, "We are betting heavily on the mobile market.  In five years we think there will be more mobile searches than desktop searches."

Lee later added, "Market share will depend on the extent to which mobile search takes off . . ."

Lee has been thinking about mobile search since at least October of 2007, so he may have some interesting things lined up.  Or this may be another example of a longstanding effort producing little in the way of results.

Either way, though, it sounds like Google China will be getting very friendly with the Android team.

 Kai-Fu Lee

"Certainly, we would like to aspire to be a market leader in five years," he said at a recent conference.  Terence Poon reports that he later continued, "Gaining share against a well-established, supermajority competitor is a difficult proposition because there is a certain critical mass, economy of scale and word-of-mouth effect that one has to overcome."

And from watching Yahoo, Microsoft, and Ask, Google would certainly know, eh?  Indeed, in 2007, Eric Schmidt spoke of China’s 5,000-year history, and it seemed like Google China’s earnings wouldn’t be examined for another four years.

Unfortunately (for Google), five years – or any amount of time – may not be a long enough period for it to pass Baidu.  In a year-over-year comparison between fourth quarters, Google’s market share rose from 17 to 26 percent, according to Poon.  But Baidu’s went from 58 to 60 percent in the same period.

Since Kai-Fu Lee can’t simply give up, setting a nonbinding, far-out goal seems like a reasonable way to go.

“Lee understands that, at this point in Google China’s progress, Schmidt is concerned about ‘nothing but’ the growing head count,” reports Caijing.com.  “Then follows his second-year question about how much we’ve achieved in R&D development,’ Lee said.  ‘Data on Web page hits is after that.  And probably in our fourth year, we need to talk about our earnings.”

In the meantime, Schmidt was quoted as saying that he’s ninety-five percent satisfied with Google’s employees in China.  Never mind Baidu’s comparatively huge market share, or several embarrassing incidents (four of which Caijing.com outlines); “China is a nation with 5,000-year history.  That could indicate the duration for our patience,” Schmidt maintained.

Still, there are some indications that the CEO isn’t willing to wait forever.  Despite being “very proud of what Kai-fu has done,” he stated, “Google.cn will continue to get better and better – and more quickly.”  Put a little stress on the “more quickly” part of that sentence, and it becomes hard to believe that Schmidt will stand by Lee for too long if this improvement doesn’t take place.

Hat tip to Philipp Lenssen of Google Blogoscoped.

We’ll have to wait for word to start leaking out of the respective camps at Mountain View and Redmond, but for now Todd Bishop’s post about Microsoft’s statement at his Seattle P-I based Microsoft blog will have to suffice:

The companies and Lee were on the verge of going back to court in January, but further appearances won’t be necessary now. We learned a bit about Lee as his drama played out beginning on July 19, like his background in natural language and creating a world-beating Othello program in college.

Lee’s job title was vice president of Microsoft’s Natural Interactive Services Division and he accepted a job with Google to lead their Chinese R&D. Microsoft want to force Lee and Google to adhere to the agreements Lee signed with Microsoft.

Google announced today the creation of Google China R&D and that Lee would be the Vice President, Engineering and President of Google China. "The opening of an R&D center in China will strengthen Google’s efforts in delivering the best search experience to our users and partners worldwide," said Alan Eustace, vice president of Engineering at Google in their statement today.

"Under the leadership of Dr. Lee, with his proven track record of innovation and his passion for technology and research, the Google China R&D center will enable us to develop more innovative products and technologies for millions of users in China and around the world."

Microsoft stated on their website that, "Creating intellectual property is the essence of what we do at Microsoft, and we have a responsibility to our employees and our shareholders to protect our intellectual property. As a senior executive, Dr. Lee has direct knowledge of Microsoft’s trade secrets concerning search technologies and China business strategies. He has accepted a position focused on the same set of technologies and strategies for a direct competitor in egregious violation of his explicit contractual obligations."

"We have reviewed Microsoft’s claims and they are completely without merit," said Google spokesman David Crane. "Google is focused on building the best place in the world for great innovators to work. We’re thrilled to have Dr. Lee on board at Google. We will defend vigorously against these meritless claims and will fully support Dr. Lee."

While Crane claims otherwise, Microsoft may have merit to their suit. Google and Microsoft have emerged as major competitors in both the search. Google sits on top of the search heap, MSN, a Microsoft enterprise, is a solid third.

Many of the services the two companies offer attached to their search engines are quite similar and compete for advertising directly. With two such large companies, the rules might be a little different. There are going to be some negotiations for sure.

It might not end up in court, but Dr. Lee will probably be riding the fence for a while and if Microsoft has an ironclad no compete agreement, Google and Dr. Lee will either pay a very large sum of money to Microsoft or, as has been done in the past with other Microsoft defectors, Dr. Lee might be without a job.

The drama continues.