China Raids Microsoft Offices in Anti-Monopoly Investigation

China regulators opened an anti-monopoly investigation into Microsoft Corp. (MSFT), seizing computers and documents from offices in four cities amid escalating tensions with U.S. technology companies.

The government also is investigating Microsoft executives in China, including a vice president, according to a statement posted today on the State Administration for Industry & Commerce website. The regulator urged the company to cooperate after almost 100 SAIC staff inspected the offices yesterday, copying contracts and financial statements.

China stepped up the pressure on U.S. companies after American prosecutors indicted five Chinese military officers in May for allegedly stealing corporate secrets. Microsoft, Google Inc. and Apple Inc. (AAPL) have since been criticized by state media for allegedly cooperating with a U.S. spying program, and Qualcomm (QCOM) Inc. in November disclosed an investigation related to anti-monopoly law.

“They’re playing a long game,” said Duncan Clark, the Beijing-based chairman of BDA China Ltd., which advises technology companies. China wants to discourage U.S. security agencies from using American technology companies, while also promoting domestic competitors, he said.

Photographer: Akos Stiller/Bloomberg

Microsoft, the world’s largest software maker, said in May it’s working with the government to evaluate Windows 8 after the software was excluded from a government purchasing order of energy-efficient computers. Part of the reason for the exclusion was concerns over Internet safety, the state-run Xinhua News Agency reported, without citing anyone. Close

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Photographer: Akos Stiller/Bloomberg

Microsoft, the world’s largest software maker, said in May it’s working with the government to evaluate Windows 8 after the software was excluded from a government purchasing order of energy-efficient computers. Part of the reason for the exclusion was concerns over Internet safety, the state-run Xinhua News Agency reported, without citing anyone.

Microsoft acknowledged the probe yesterday in an e-mail and said in a statement today that it “complies with the laws and regulations of every market in which we operate around the world and we have industry leading monitoring and enforcement mechanisms in place to ensure this. Our business practices in China are designed to be compliant with Chinese law.”

SAIC Investigation

Investigators descended on Microsoft offices in Beijing, Shanghai, Guangzhou and Chengdu, according to the company’s statement yesterday. The SAIC was told in June 2013 that Microsoft’s Windows operating system and Office software didn’t fully disclose information and caused incompatibility issues. The company didn’t elaborate.

Prior to the raids, Microsoft and the SAIC had been discussing the SAIC’s concerns and the company considered the talks productive, said a person familiar with the situation. The company was therefore surprised by the investigation, said the person, who asked not to be identified because the talks were private.

Evaluating Windows

Redmond, Washington-based Microsoft, the world’s largest software maker, said in May it’s working with the government to evaluate Windows 8 after the software was excluded from a government purchasing order of energy-efficient computers. Part of the reason for the exclusion was concerns over Internet safety, the state-run Xinhua News Agency reported, without citing anyone.

The U.S. and China have traded accusations over cyberspying on information-technology security for years.

In 2012, a congressional report said Huawei Technologies Co. and ZTE Corp., China’s largest phone-equipment makers, provide opportunities for Chinese intelligence services to tamper with U.S. telecommunications networks for spying.

Huawei has been shut out from a series of U.S. deals amid the accusations.

Revelations last year by former contractor Edward Snowden of a National Security Agency spying program has further strained relations.

China said in May it will vet technology companies for potential national security breaches after the government threatened retaliation for the U.S. indictment of Chinese military officers.

Making Inroads?

The tensions come as Chinese companies boost their capabilities in areas previously dominated by U.S. businesses.

Inspur Group Ltd. is building its server business to compete with IBM (IBM); Lenovo Group Ltd. has become the world’s biggest personal-computer maker; and Xiaomi Corp.’s smartphones attract the sort of devotion reminiscent of Apple product launches.

“The Chinese government has spent a lot of time and effort promoting and getting Chinese companies into the tech industry,” said Jim McGregor, an analyst at Tirias Research. “The motivation is clear: They want Chinese companies to excel in China and overseas.”

Google, Facebook

A spokesman from the State Internet Information Office, cited by Xinhua, said in May that “governments and enterprises of a few countries” are taking advantage of their monopoly status and technological edge to collect sensitive information.

Apple this month denied a report on China Central Television that software on its iPhones may result in a leak of state secrets. Last month, a commentary on the microblog of the People’s Daily website said Apple, Microsoft, Google and Facebook Inc. (FB) cooperated in a secret U.S. program to monitor China.

Qualcomm said in November that China’s National Development and Reform Commission began an investigation related to an anti-monopoly law.

The Chinese government has been stepping up corporate scrutiny as new leadership expands an anti-corruption drive among government officials and cracks down on business practices that it says lead to increases in consumer prices.

China is reviewing whether domestic banks’ reliance on high-end servers from IBM compromise the nation’s financial security, people familiar with the matter said in May. IBM said at the time it wasn’t aware of any official policy recommending against the use of its servers by banks.

To contact the reporters on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net; Ian King in San Francisco at ianking@bloomberg.net; Dina Bass in Seattle at dbass2@bloomberg.net

To contact the editors responsible for this story: Michael Tighe at mtighe4@bloomberg.net; Pui-Wing Tam at ptam13@bloomberg.net Robert Fenner, Jillian Ward

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