What Next for Microsoft in China?

With China honcho Tim Chen's fast break to the NBA, Microsoft is caught off guard. Chen's successor must keep the momentum going on the mainland

Tim Chen took over as head of Microsoft's (MSFT) Chinese business in 2003 with one of the toughest assignments of any multinational executive in China. The company was suffering from rampant software piracy and had rocky relations with Beijing's leaders, who didn't trust the U.S. giant and were promoting plans to develop a local operating system as an alternative to Windows. Microsoft had plenty of internal problems, too, with the company enduring several embarrassing defections of top China execs, including one who wrote a tell-all book in Chinese that was a big seller.

Chen, who today announced that he was leaving Microsoft to become head of the National Basketball Assn.'s Chinese operation, helped to turn things around for Bill Gates and Steve Ballmer. He cut deals with Chinese PC makers such as Lenovo (LNVGY), getting them to install legit copies of Windows on the machines they sell to Chinese government offices, companies, and consumers. Chen, 50, improved relations with the Chinese government so much that President Hu Jintao had dinner at Gates' mansion during his U.S. trip last year before traveling to Washington to see President George W. Bush.

Just as important for Microsoft, Beijing analysts also credit Chen for improving relations between the company's China office and its Redmond (Wash.) headquarters. Before joining Microsoft, Chen was head of Motorola (MOT) in China at a time when the company was No. 1 in the Chinese handset market, and that success helped win him credibility back in the U.S. "You [now] have a China operation that is more closely integrated with the rest of the company," says David Wolf, president and CEO of Wolf Group Asia, a technology and media consulting group in Beijing. (Wolf says that Microsoft is not a client of his.) "Before it was us-versus-them; the people in Redmond didn't understand what was going on in China and vice versa."

Cracking Down on Counterfeiters

One reason that the picture for Microsoft is brighter in China is the efforts by the Chinese government to crack down on software piracy. According to the Business Software Alliance, an industry group representing many top U.S. software vendors, the percentage of counterfeit software in China has dropped to 82% from 92% in 2003.

Thanks in part to pressure from the government, Chinese companies are now more willing to cut deals with Microsoft. For instance, on May 10, Lenovo announced that it plans to buy as much as $1.3 billion in software (BusinessWeek.com, 6/4/07) from the company.

To combat piracy—as well as Microsoft's Ugly American image—the company over the past few years also focused on building relations with local partners. On June 18, for instance, Microsoft announced it was paying $12 million to buy a stake in Sichuan Changhong Electric, one of China's top makers of TVs and PCs. In 2005, Microsoft spent $20 million to buy a stake in Chinasoft International, a Beijing software company, and $25 million for a stake in Langchao International, an IT company based in the northeastern city of Jinan.

A "Tough Decision" for Chen

That strategy has won fans for Microsoft locally. "They have tried to invest in some very large local software companies and build up a relationship with them," says Edward Yu, president and CEO of Analysys International, a Beijing research firm. The goal, Yu adds, "is not only to develop them as business partners to resell Microsoft software but also to use them to lobby the government and show we are committed to China." That's important because "any multinational that would like to win in China must become part of the local ecosystem," says Yu. "This is a wise move, even though the business results in the short term may not be that huge."

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