Microsoft Growing Rapidly in South China

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TAGS: ECON EINV KIPR CH
SUBJECT: Microsoft Growing Rapidly in South China


(U) This document is sensitive but unclassified. Please protect
accordingly.


1. (SBU) Summary: Microsoft representatives told the Consul General
September 21 that with the company's rapid growth in Shenzhen and
elsewhere, they expect sales in South China to surpass those in Hong
Kong. Company representatives complained about weak copyright
enforcement and asked the Consulate to continue to highlight the
need for improved IPR protection with local government leaders. End
summary.

South China: a fast-growing key market for software
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2. (U) The two representatives - Ni Jianbo, General Manager of the
Branch Office, and Zhong Weidong, Southern Regional Manager of
Microsoft's branch company in Guangzhou - were bullish on the
company's overall development and future plans, but more tentative
about prospects for protecting Microsoft's intellectual property
rights (IPR) in southern China. South China accounts for about 30%
of the Microsoft's overall revenues countrywide, of which half comes
from Shenzhen. Some of Microsoft's businesses, such as its
enterprise partnership group, have grown by 200 times since the
establishment of the Shenzhen branch office in 2005. Ni and Zhong
believe Microsoft's sales in South China will exceed that of Hong
Kong next year, while sales volumes in East China have already
surpassed those of Hong Kong and are expected to exceed those of
Taiwan next year. The Greater China market (mainland China, Hong
Kong, and Taiwan) is so important to Microsoft that it is one of the
company's seven key subsidiaries in the world that reports directly
Microsoft's headquarters in Seattle.


3. (U) Microsoft's clients in Shenzhen include China's giant
telecommunication groups of Huawei Technologies and ZTE (Zhong Xin)
as well as local governments. Microsoft established its branch
office in Shenzhen to provide a quicker response to local clients,
to save operation costs and to better compete with other software
companies, such as Oracle, which came much earlier than Microsoft to
Shenzhen. Currently Microsoft has three sites in Shenzhen, dealing
with sales, technical support, research and development and
training.


4. (U) According to Ni and Zhong, Microsoft is building close
relationships with the local government in Shenzhen. To demonstrate
its long-term commitment to Shenzhen, Microsoft plans to upgrade the
branch office into a branch company, which would then pay tax
locally instead of to the main office in Beijing, to make more
investments, and to merge its three scattered office sites into one
in Shenzhen. Following a nationwide "cooperation" model with local
governments, Microsoft is partnering with a local company designated
by Shenzhen Government to set up a cooperation program called "MSTC"
(Microsoft Training Center) which helps local governments by
providing technical support, training, and solutions to e-government
projects; this also ensures the use of legal software. In the
Guangzhou consular district, Microsoft has opened one MSTC in
Xiamen, Fujian Province, is planning to open one in Hainan next
month, and has plans to open a center in Guangxi.

Weak IPR enforcement remains a big challenge
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5. (SBU) Ni and Zhong commented that while local governments have
been making progress in IPR protection, copyright protection for
software was a low priority for local officials, particularly in
Guangzhou. Zhong said local Copyright Bureau officials focused
mainly on developing the local cultural industry, including
publishing and audio and video products. Local government agencies
have made little effort to enforce the rights of stakeholders in the
software industry (both domestic and foreign),despite Microsoft's
lobbying efforts during the past several years. According to Zhong,
the main reason behind the relative absence of copyright enforcement
was that software industry contributes a very small portion of local
GDP, the majority of which relies on manufacturing. They also
thought that officials might be concerned about the impact of
rigorous enforcement on the local business environment since many
manufacturers use pirated software. Local officials often do not
attend copyright protection seminars or events that industry
chambers such as the Business Software Association (BSA) or Chinese
Software Association (CSA) organize. Both Zhong and Ni said that
the lack of interest in protecting software copyright puts Guangdong
at a disadvantage when competing with Shanghai; in addition, lack of

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protection will not help upgrade Guangdong upgrade knowledge-based
industries.


6. (SBU) Zhong, who had previously worked in Microsoft's branches in
Southwest China for three years, pointed out that officials in those
areas were more cooperative than Guangdong. Microsoft was
successful in getting enforcement action in Southwest China by
adopting a "top-down" strategy to build relations with local
provincial and municipal leaders and thus encourage them to order
local enforcement agencies to take more action. A similar strategy
in South China had not been as successful, though Ni acknowledged
this effort was new. In Guangxi, Microsoft got a commitment from
the local Copyright Bureau to take two enforcement cases, starting
in October. Zhong commented that most enforcement agencies just
want a few "showcase" actions they can point to and then do nothing
further. Microsoft's goal is to have local agencies do a minimum of
two-or-three enforcement showcases to achieve successes and hope
this will encourage them to do more. At the same time, the company
also realizes that it is impossible for local government to do too
many cases, given their limited resources.


7. (SBU) Zhong asked the Consul General to urge local government
leaders in Guangdong to be more cooperative in copyright
cooperation, since they found "Top-down" strategy is very helpful in
other areas where they also first encounter officials unwilling to
cooperate.

Comment
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8. (SBU) Microsoft's experience in South China highlights regional
differences in China's IPR enforcement. Enforcement is often
subject to local protectionism. Local officials often believe that
enforcement conflicts with the need to develop the economy in order
for them to get promoted. Until they can be persuaded that
enforcement actually helps development the economy, we will continue
to have problems such as those described above.

GOLDBERG