There isn't anything gray at the level of individual, straightforward morals considered in a vacuum—I think censorship is generally bad, therefore Google's decision to engage in censorship is bad.
Considered at a global scale, however, the outcomes of the collisions of interests of the many groups involved does not make this a simple issue. We have to examine, and this is not completely granular nor exhaustive list:
1. The interests of Google "the company" (execs)
2. The interests of the Chinese nation state
3. The interests of the Chinese people
4. The interests of the US nation state
5. The interests of Google employees
All of these interests intersect in interesting ways and the groups behind them may be for or against the motion. For example, Chinese citizens might be excited at the prospect of getting a higher quality search engine, even if it censors some results. The US might be interested in a broader form of censorship (no Google at all) in order to maintain some kind of global hegemony (or vice versa, to bring money into the US from a foreign market). The Chinese government may be interested in the service for different purposes than those of its citizens (tracking).
The list goes on.
I agree that the threat of a dangerous precedent is in play, but I also would like to point out that simply because a precedent was established doesn't make further applications of it inviolable, nor does it prevent an actor (e.g. Google) from breaking an agreement if they discover their tooling has been used for purposes more nefarious than basic censorship (e.g. putting people in prison camps).
There's not even anything binding Google to democratic principles nor the interests of the US nation state. We may like to think companies reflect our values as a nation, but outside of those imposed by the law, there is nothing binding them to doing so.
I'm not an advocate of the project, but I do think painting it as a simple moral question glosses over the many nuances and complexities of the issue. In some respects I find taking a reductive approach to these issues and treating them as unproblematic black/white moral questions is also dangerous, as not fully exploring the issue in its depth prevents us from seeing the potentially major effects a decision may have.