Microsoft Adds To Investments In China

Microsoft continues to invest in China to expand its business in the promising market and strengthen government ties that could help future expansion plans. But CEO Steve Ballmer warned recently that software piracy is holding back Microsoft's revenue there.

Microsoft said Wednesday it would open a software-development center in Beijing with Lang Chao International Ltd., a Chinese computer distributor and software developer that Microsoft took a $25 million stake in last month. The Beijing center will perform software quality-assurance testing on Microsoft products, a Microsoft spokeswoman says. Lang Chao, which is listed on the Hong Kong Stock Exchange and majority owned by the state-run Langchao Group, last month sold up to a 28% interest to Microsoft.

The center's opening comes one month after Microsoft and Indian software-development company Tata Consultancy Services Ltd. disclosed a joint venture to establish a software services center in Beijing early next year. TCS holds a majority share in the venture and Microsoft and three Chinese companies are minority partners.

Microsoft and other tech companies, including Accenture, Google, and IBM, are expanding research and development in China to take advantage of the country's booming economy, low labor costs, and talent-breeding universities. India-based technology consulting firms Infosys, Satyam Computer Services, and Wipro Technologies also have Chinese operations. Microsoft entered the country in 1992 with a sales office and opened a research lab in Beijing in 1998. Four years later, Microsoft invested $750 million through China's state planning department to train hardware and software engineers in the country.

But analyst Paul DeGroot at market researcher Directions on Microsoft says the investment didn't deter the Chinese government from choosing the Linux operating system over Windows for its computers. "Western companies find the Chinese market very complex," he says. "When you deal with the government, you may find they're dealing with your competitor." Microsoft's deal with Lang Chao could be an inexpensive way to learn more about the Chinese market and make bureaucratic connections. "You need to have an insider who can help you," he says.

Making business in China even trickier for Microsoft is the country's high level of software piracy. Microsoft CEO Steve Ballmer told a meeting of financial analysts at Microsoft's headquarters last week that the company generates very little revenue in China compared with the size of the PC market there. "Piracy is rampant in emerging markets," he said. More than 90% of software in China is counterfeit, Ballmer added.

Meanwhile, competition for talent in China is heating up. Last month, Microsoft sued a former executive, Kai-Fu Lee, and Google Inc., after Google said it would hire Lee to head a new R&D center in China scheduled to open in the third quarter. Lee joined Microsoft in 1998 and established its Beijing lab, and Microsoft's lawsuit said Lee violated the terms of his contract by joining a competitor within a year of leaving the company. A judge ruled that Lee can't immediately perform the duties Google hired him for until further hearings next month.