Microsoft gets diplomatic in China

Struggling with bad PR and a growing threat from Linux, Microsoft China works its connections and turns up the investments.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
5 min read
SHANGHAI, China--Microsoft is using the diplomacy card in China as it tries to stamp out piracy and put a curb on the growing popularity of open-source software.

The Redmond, Wash.-based software giant is courting government officials, donating money to educational projects, and investing in joint ventures with local companies, said Jun Tang, president of Microsoft China. A few years back, the company was grappling with widespread piracy and with charges, brought by its former top China executive, that it price-gouged Chinese customers.

"We just signed a deal with the State Council," the country's chief governing body, Tang said. "They all use Microsoft products."

Still, the company must contend with the realities of the market in China. Linux is catching on here. Earlier this year, the Asia-Pacific wing of research firm Gartner said 15 percent of companies in the region--excluding Japan--used Linux in the fourth quarter of 2001, up from between 5 percent and 7 percent a year earlier.

And the lure of Linux has proved especially strong for governments wary of relying too heavily on U.S.-based Microsoft. On Monday, both the German and Taiwanese governments announced serious open-source efforts. China is in the same boat.

Late last year, the Beijing municipal government rejected a Microsoft bid and awarded an e-government contract for 2,000 desktop operating systems to Red Flag Linux, a local Linux developer.

"Frankly, the contract value is quite small, but the impact is quite big," said Liu Bo, CEO of Red Flag. The government is one of the biggest purchasers of software, and its experiences often serve as a lab for private businesses. Since then, several manufacturers have released PCs containing Red Flag's desktop version of Linux. "In China, except Legend, almost every OEM (original equipment manufacturer)--Founder, Great Wall, TCL--has signed a contract with us," Liu said.

On the server side, the National Ministry of Science, the Ministry of Statistics, and the National Labor Unit, among others, have adopted Linux, while IBM, Hewlett-Packard and Legend sell servers containing Red Flag's version of the OS. Research and investment in open-source software by the government continues, and it's a priority at the Chinese Academy of Sciences, China's leading university.

"They (Microsoft) are too arrogant," said Liu, who served as deputy general manager of Microsoft China for a year and a half before leaving for Red Flag in 2000. "Microsoft thinks, 'We are No. 1. You have to buy our products."

Flying against the wind
Microsoft's China ventures have historically been uneven. Although the company conducts a substantial portion of research in the country, sales have been dampened by piracy.

"We are far below our expectations," said Microsoft China's Tang. "The software market is not what we would like."

The company also had to endure a storm of bad publicity two years ago when Juliet Wu, Microsoft China's former general manager, released "Flying Against the Wind: Microsoft, IBM and Me." The book, a memoir of her experiences as a woman in China's high-tech market, became a best-seller and made Wu a household name. She'd be recognized on the street, according to various sources in Beijing.

Gartner analysts Lane Leskela, Louisa Liu and French Caldwell say companies that enter China's markets will do best to follow the examples of foreign companies that have already achieved success there.

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The book included allegations that Microsoft charged high prices and was not committed to investing in China. Tang, who took over Microsoft China only recently, said he disagreed with many of Wu's statements.

Behind the scenes, though, Microsoft began to court government officials.

Approximately two years ago, while on a visit to China, Microsoft CEO Steve Ballmer told Premier Zhu Ronghi that the company wanted to invest in joint ventures with local companies, said Xiduo Zhu, CEO of Censoft, one of the ventures Microsoft invested in. Joint ventures are encouraged in China because they lead to local start-ups and to transfers of technology and skills, according to many here.

The meeting with Zhu led to meetings with Jia Qinglin, the party general secretary of Beijing. Jia put Microsoft in touch with Duan Yongji, a powerful local executive at Centergate Technology, a Chinese software developer, Zhu said.

Centergate then got in touch with the Stone Group. Zhu ran Stone (and before him, Centergate's Duan ran Stone). Together, Microsoft, Centersoft and Stone formed Censoft, which develops business resource management software.

Microsoft also formed another joint venture, called Wicresoft, a service company that focuses on developing proprietary applications for both Chinese and foreign customers.

Besides such business efforts, Microsoft has worked to polish its image. The company has donated money and technology to various educational projects, such as Project Hope, geared toward providing teachers and students in less fortunate regions with technology training.

And many of the reforms taking place in China have benefited Microsoft. Document 18, an edict issued by the government last year, formally outlawed piracy and set out specific penalties for buyers and traffickers. Microsoft provided feedback on piracy to the government, said Microsoft China's Tang.

Despite losing the Beijing contract to Red Flag, Microsoft has won other deals. A similar contract from Shanghai went to the company. The Beijing city government also uses Microsoft products for some of its projects.

Other hurdles
Microsoft's dealings with government officials and its other practices here aren't necessarily suspicious. Nearly all other Western companies are taking similar actions. IBM, which also conducts a substantial portion of research here, is often held up as an example of a company that has done well in China through diplomacy. Microsoft never engaged in any unfair conduct in its efforts to win the Beijing contact, said Red Flag's Liu, who added that the contract was subject to standard bidding procedures.

"We were surprised" at winning it, Liu said.

Liu, though, added that diplomacy aside, the price of Windows will open the door for a desktop version of Linux.

"Our OEM price (for the desktop version of Red Flag's desktop Linux) is 2 percent to 4 percent of Microsoft's," Liu said.

And open-source software also has an innate appeal to the government.

"The government would probably like to embrace more open solutions. They probably view Linux as a more open solution because you can see the source code," said Wen-Hann Wang, director of the software and solutions group at Intel in Shanghai, commenting on why some governments here have embraced Linux. In regard to the company's losing bid on the Beijing contract, Wang added, "Microsoft was a little bit surprised."

Other Chinese news: A cookin' Net appliance
Even Chinese consumers aren't buying convergence. Consumer-electronics manufacturers here have experimented with products that try to blend the Internet with non-PC devices. Haier has released a microwave with a five-inch screen for viewing the Internet, and other manufacturers have tried intelligent set-top boxes, said Alice Yang, senior vice marketing manager for Red Flag. Both, however, are more popular in the export market.