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Microsoft in China: Clash of titans

February 23, 2000
Web posted at: 4:09 p.m. EST (2109 GMT)

(IDG) -- As Microsoft enters a federal court in Washington, D.C. for the final oral arguments in the U.S. government's antitrust suit, repercussions of the long-running case are being felt half a world away, contributing to lingering image problems for the company in China.

The company's reputation in the West as arrogant and aggressive, along with cultural and business blunders and difficulty adjusting to China's unique political environment, have caused friction for Microsoft in what is becoming one of the world's most important markets, according to industry observers.


Every multinational company faces challenges in making itself welcome in China, but Microsoft's history and position in the world's IT industry has created hurdles higher than most.

Citizens in China today are well-connected to the outside world, and news of the controversy over Microsoft's alleged monopoly practices has fed Chinese resentment of Western arrogance, said one Beijing-based observer of the IT industry. "It can't be discounted the effect of what has happened in the U.S. with the suit against Microsoft and the way the Chinese people react to that," he said.

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"When the blood is in the water, the sharks start circling," he said.

The past year has seen controversy for Microsoft on both sides of the Pacific.

The latest chapter in Microsoft's stormy saga in China came last month, with the widely circulated news report that the Chinese government had barred its ministries from using Windows 2000, requiring instead that they use the locally developed Red Flag Linux.

Facing numerous queries from international press, the Chinese government denied the report, which originated from a provincial evening newspaper. For its part, Microsoft said it has been assured there is no ban and is working with ministries that are already beta testing Windows 2000. The OS is set to be released in China within 60 days, following its official roll-out last week in San Francisco.

But the government "edict," if it ever was issued, followed a long history of flare-ups. Microsoft is perceived by many consumers and the government as an arrogant foreign giant out to use its brand to dominate the software market and tap the country for profits, several observers said.

Opinions vary on how much of that perception can be traced to Microsoft's own actions and how much to the inevitable clash between an up-and-coming country and a symbol of American commercial might. Observers are also split on how widespread such negative perceptions are. However, conversations with people familiar with the situation indicate that the vendor has a lot of work ahead of it in making friends in this crucial market.

This challenge is one of the key tasks facing Jack Gao, named general manager of Microsoft China last month, in his new role. In comments sent by e-mail for this article, Gao emphasized positive steps the company has taken to foster good relationships in China, but he acknowledged the vendor has room for improvement in fostering a good image there.

"I'd say we've been working so hard on developing our business, we haven't sufficiently told the story of the positive, long-term projects we have undertaken in China," Gao wrote.

The company now plans to redirect some of its focus on products and customer service to promote its projects and investments in China and the region, Microsoft China spokeswoman Sandra Goh confirmed.

Some observers trace the roots of popular resentment against Microsoft to early Chinese-language versions of Windows sold in China. Part of the localization of these products was done in Taiwan, and the company recruited several executives from the island, officially considered a rebellious province of China, according to industry analysts. This rankled the government, they said.

"Trying to sell a product in China that was obviously a Taiwanese product was obviously going to get them in trouble," said Joe Sweeney, a Greater China analyst at Gartner Group in Hong Kong.

In response to a query, Microsoft said that both its first official version of Windows for China -- based on Windows 3.2 -- and the official China version of Windows 95 were developed in Beijing and Redmond, Wash.

Subsequent meetings between Microsoft executives and Chinese government officials also caused irritation, observers recalled. Only with a second visit were the tensions eased, they said.

Then a comment made by Microsoft Founder, Chairman, and Chief Software Architect Bill Gates in 1998 and reprinted widely and often in the official media became a lightning rod for criticism of the software giant. Fortune magazine reported that, in a presentation to business students at an American university, Gates said rampant software piracy might turn out to be a positive thing for Microsoft.

"Although about three million computers get sold every year in China, people don't pay for the software," Gates reportedly said. "Someday they will, though. And as long as they're going to steal it, we want them to steal ours. They'll get sort of addicted, and then we'll somehow figure out how to collect sometime in the next decade."

A local prime-time news show quoted the statement on several occasions, according to one observer in China.

"A lot of people know this quote," said the Chinese observer, a former journalist who spoke on condition of anonymity.

Gates' comment, which conjures up images of British opium imports in the 19th century -- the prime symbol in the Chinese media of Western exploitation -- helped to create a negative image of Microsoft in some peoples' minds, the former journalist said.

"They (Microsoft) have the reputation of a money-making animal," he said.

Microsoft's response to piracy is a key issue on which its reputation rests in China. Last May, the company cracked down on the practice by suing a Chinese company, Yadu Science and Technology, charging that employees of the company used pirated copies of Microsoft software. Local media reports on the case slammed Microsoft as a huge foreign company picking on a small Chinese enterprise. The case was dismissed after a court ruled Microsoft had not proved the suspects were Yadu employees.

Gartner's Sweeney pointed out that Microsoft's aggressive tactics, which would be normal actions in the litigious U.S., were seen in China as being too aggressive.

Moreover, the Yadu case exemplifies another problem that has plagued the company. The case was brought against Yadu less than a month after the May 7, 1999 bombing by NATO forces of the Chinese embassy in Belgrade, Yugoslavia. The bombing generated a flood of ill-feeling against NATO and the U.S. in China, resulting in public demonstrations and calls to boycott U.S. products.

Such poor timing is symptomatic of Microsoft's problems in China, Sweeney and other observers said.

Growing national pride, the power of the Chinese Communist Party, and a long-standing suspicion of Western intentions create unique requirements for multinationals doing business in China.

"Microsoft has not done a good job of understanding the nuances of China," Sweeney said. "China is a very political market, and Microsoft has not played that political side very well."

Other vendors, most prominently IBM and Hewlett-Packard, have done a better job of acknowledging these special factors, observers said.

Microsoft's current predicament has been caused not by any one blunder but by not focusing enough attention on cultivating good relationships with the right decision-makers, said Jared Peterson, a longtime China analyst at International Data Corp. (IDC) Asia-Pacific, formerly based in Beijing, now working out of Los Angeles.

"IBM and HP came in much earlier (to China), so they learned the techniques of how to deal with government officials and the press," Peterson said.

The moves, resulting in a favorable impression for IBM and HP, have included making charitable contributions, creating development centers with universities and other local entities, hiring government-affiliated enterprises to localize products, and purchasing parts from Chinese companies, observers said.

Moves like these have helped the companies convince the government, press and public that the foreign vendors are partners of China rather than threats, observers said.

"They've made a lot of contributions to China's economy," the Chinese former journalist said, recalling year-end summaries of investments presented by IBM.

Microsoft has made its own contributions and investments, Microsoft China chief Gao said in response to a query. He pointed to Microsoft Research China in Beijing, which is doing voice-recognition research, and the company's Asia Regional customer service center, located in Shanghai. The Shanghai center serves most of Asia outside Japan, Gao said. The company is also working with the city government of Dalian to retrain laid-off workers and made donations to flooded areas for creating schools, he added.

Nevertheless, Microsoft's high profile as king of the hill in computing has put the company in some awkward situations, observers said.

Former General Manager of Microsoft China Wu Shihong left the company last June after less than 18 months in the job and wrote an autobiographical book that criticized the company's approach to the Chinese market. The book reportedly became a best-seller. In an interview published last year by the Chinese magazine Securities Market Monthly Finance Edition after her departure, Wu said Microsoft should lower the price of pre-installed Windows in China, emphasize local sales while easing up on piracy, and go after foreign companies.

Also last year, Microsoft's Venus project, in which the vendor's Windows CE operating system is to be used in cable TV set-top boxes, came under attack from some quarters as a Trojan horse -- a less advanced version of the U.S. product WebTV that could allow Microsoft to capture a huge Internet access market in China. Although China's level of PC penetration is still relatively low, there are already hundreds of millions of televisions in use in the country today, making set-top boxes a natural Internet access medium.

Finally, Microsoft's primary business was bound to make it a target from the beginning, observers said. The software that runs China's computers has long been a focus of concerns over national self-reliance and security, they added.

"Even before Microsoft, there was the idea of having a homegrown PC platform, and over the years there have been a number of attempts at this," IDC's Peterson said.

Those concerns have risen up recently in the form of stated policies favoring the use of the Linux operating system in government agencies, as well as a recent flurry of government commentaries warning of a U.S. "back door" to Windows operating systems. Officials have said China must develop its own OS to prevent an electronic military attack.

Faced with government actions like this and with rampant piracy of its products, Microsoft has little power to respond legally, IDC's Peterson pointed out.

"In the U.S., there are a lot of things they can do if they feel they're being picked on, but in China there's not a lot they can do," Peterson said.

Making matters worse, because Microsoft entered the Chinese market later than some other major technology companies, the vendor has been forced to learn its lessons at a time when the country is no longer just an emerging market, but a critical one, IDC's Peterson said.

Microsoft is being challenged by a number of product-related issues at the same time that it has come under fire as a company, some observers said.

Chinese versions of Windows OSes are inconvenient to use because they require a lot of keystrokes to create each character, said Gary Liu, a China analyst and economist at Sassoon Securities in Hong Kong. After using this interface, some consumers believe Microsoft's Chinese products are technically inferior to the English versions because they have been given short shrift in the company, he said.

In addition, some Microsoft applications are inappropriate for users in China. For example, the vendor's personal-finance software contains a host of functions that aren't useful to the Chinese, who have very limited options for investing, he said.

"That kind of software is not particularly useful for people in China, so they don't see it as a value-added product," Liu said. Most significantly, Microsoft products are considered overpriced, according to Liu and other observers.

"When you buy Windows 98 in China, it costs about 100 percent more than other software written in Chinese," Liu said.

Microsoft strives for consistency in its global pricing, but there are various other factors that affect the final price of a product, according to spokeswoman Goh.

There are a large number of relatively simple, vertical applications written in Chinese with which local users are comfortable, Liu said. Microsoft products do face stiff competition in Chinese enterprises from these homegrown products, he added.

Resentment of Microsoft in the software community is most prevalent among the older Chinese programmers responsible for these simple, vertical applications, according to one Hong Kong developer. The developers recall events such as an attempt several years ago by Beijing-based Founder Group to introduce an office suite that would compete with Microsoft Office. Widespread use of Office effectively squeezed the Founder product out of the market, the developer said.

"The original software industry doesn't like Microsoft," said Ringo Lam, chief executive officer of Wisers Information, an Internet search engine provider. But, "when you talk to the young people, they like Microsoft."

To improve its relations with China, analysts have recommended that Microsoft take further steps like those taken by IBM and HP. Relations with the Chinese government are key, they said.

"It's a case of getting close to the real decision makers and convincing them they're not an evil company and are good for China," Sweeney said. "They haven't played to the government as well as some other vendors, but they'll learn."

Technology - Microsoft touts low-cost streaming media in Windows 2000
February 21, 2000
Easing adminstration with Windows 2000
February 18, 2000
Microsoft's fortune rides on Windows 2000, analysts say
February 8, 2000
China's deadline for software registration running out
January 31, 2000
Beijing tightens Internet security rules
January 28, 2000
Survey: China Internet use soaring
January 25, 2000

Microsoft, Feds enter final round
(The Industry Standard)
Oral arguments close antitrust trial
Is Microsoft today's Standard Oil?
(PC World Online)
Pirates lag behind Win2K launch
(Computerworld Hong Kong)
Microsoft guards against Windows 2000 piracy
China gov't partners to develop Chinese OS
(Computerworld Hong Kong)
Red Flag Linux: Has Microsoft met its match?
China backs Linux


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