I just recently ran into this article from Dan Brody's Google News Reader on FaceBook (ironic). To be fair, MS has not really won as much as it has improved its position from years past. For the most part, the changes described below are tangible and really has made a big difference. In some ways, the MS model for China relations could be a blueprint for other foreign companies wanting to do business here. At least its not as bad as Yahoo China's response and business model.

Who remembers Red Flag Linux? Born during the dot-com boom and officially financed and adopted by the Chinese government, Red Flag Linux was supposed to be China’s answer for avoiding the double-team of Windows and Microsoft Office that dominates the rest of the world’s PCs. In some circles, the potential spread of Red Flag Linux in the world’s most populated nation was even hailed as a critical sign that Microsoft was not going to be able to spread its domination of the software market to the rest of the world.

However, Red Flag Linux has turned out to be little more than a key bargaining chip in a high stakes game of commerce between the Chinese government and the world’s largest software maker. Thanks to some major concessions on source code and a precipitous price drop, the Chinese government has now thoroughly embraced Windows and Office. And thanks to a major about-face in the way that it deals with piracy, Microsoft has also won over the Chinese people.

In April, Microsoft Chairman Bill Gates took a victory lap in China, and Fortune magazine’s David Kirkpatrick went along for the ride, writing an account of the trip and an excellent synopsis of Microsoft’s rocky path to success in China in a piece called “How Microsoft conquered China - Or is it the other way around?

 

This is the article linked to in the other article.

Today Gates openly concedes that tolerating piracy turned out to be Microsoft's best long-term strategy. That's why Windows is used on an estimated 90% of China's 120 million PCs. "It's easier for our software to compete with Linux when there's piracy than when there's not," Gates says. "Are you kidding? You can get the real thing, and you get the same price." Indeed, in China's back alleys, Linux often costs more than Windows because it requires more disks. And Microsoft's own prices have dropped so low it now sells a $3 package of Windows and Office to students.

...

"So with all this work," says Chen, "we start changing the perception that Microsoft is the company coming just to do antipiracy and sue people. We changed the company's image. We're the company that has the long-term vision. If a foreign company's strategy matches with the government's development agenda, the government will support you, even if they don't like you."

Microsoft put its money on the line, even inviting officials to help decide in which local software and outsourcing companies it should invest. So far Microsoft has spent $65 million, and it recently committed to an additional $100 million. Says Chen: "There was synergy, which we formalized, between the need of the Chinese economy to have local software capability and our need for an ecosystem of companies around us using our technology and platform."

At the same time, the Chinese government started thinking more like Microsoft: It required central, provincial, and local governments to begin using legal software. The city of Beijing completed its portion of the project late last year and now pays for software its employees - most of whom never adopted Linux - had previously pirated. (Microsoft won't say how steep a discount it offered the government.)

In another boost for Microsoft, the government last year required local PC manufacturers to load legal software on their computers. Lenovo, the market leader, had been shipping as few as 10% of its PCs that way, and even U.S. PC makers in China were selling many machines "naked." Another mandate requires gradual legalization of the millions of computers in state-owned enterprises. In all, Gates says, the number of new machines shipped with legal software nationwide has risen from about 20% to more than 40% in the past 18 months.

 

 Like or hate Microsoft, it will and can adjust to market conditions and public opinion.

 

ADDENDUM (Oct. 1) From the Silicon Hutong by David

Turning a Corner

In the space of four years, Mr. Chen ensured that the company reversed its slide with all of its critical audiences, not by micromanaging, but by catalyzing change in each problem area through personal attention and careful appointments of key managers.

Across China, the company began rebuilding its reputation with consumers, enlisting deeper support among the channel, getting key manufacturers to begin paying for pre-installed copies of Windows, reinvigorating its relationships with government across all portfolios and all levels, and making significant progress in its fight against piracy. The government's outspoken efforts to drive the adoption of Linux have faded, and the company is getting more credit for its R&D.

Internally, Mr. Chen pulled the company together by installing experienced, China-savvy leadership in each department. He built a bridge between Redmond and the "sub" in Beijing through increased contacts and an all-out effort to educate headquarters in the challenges - and opportunities - the company faced in China, while at the same time proffering solutions rather than making excuses.

After Tim

To credit Mr. Chen alone with all of the improvements in Microsoft's fortunes in China over the last four years may be stretching the point. But as my father was fond of pointing out, a fish stinks from the head. At the very least, Mr. Chen was a critical agent of change, applying effort and attention in those places where he saw that properly-applied effort would help turn specific problems around.

What he left behind was a company heading in a far different direction here than it was when he found it, with the people and systems in place to continue that momentum. Assuming Microsoft can choose a successor (whom, for the moment, remains The Player to be Named Later) with a vision that will ensure Microsoft continues to address its problems and grab its opportunities in China, the company's future in the PRC looks bright indeed.

... 

By all rights, Mr. Chen's efforts at Microsoft should have won him greater rewards and opportunities inside the company. In all likelihood, that was not in the cards. Growth for Microsoft is now a matter of adding and acquiring new businesses, and the company's senior leadership is fairly set in place. Mr. Chen's growth opportunities at Microsoft would probably have been largely limited to growing the China business incrementally. That's not a bad opportunity, but it's probably not the sort of thing to keep a guy with solid entrepreneurial/intrapreneurial instincts happy for long. Having to fly economy class on trans-Pacific business trips probably didn't help.  (haha so true)

 

 

-Frank Yu