Tech Firms Keep Riding Chinese Tiger

China may be an important growth market for software and hardware companies alike, but doing business there is not always an easy affair. Microsoft Corp. just got bird's nest soup on its face when a software deal in the country went bust after Beijing soured on it less than two weeks into the contract. And there's a renewed push to buy more locally made software as China works to fight the rampant problem of software piracy -- more bad news for U.S. software players.

Bloomberg weighs in with an update on the Microsoft contract. Beijing's government procurement office canceled a $3.5 million software deal with Microsoft just 10 days after it was awarded "following official complaints that local governments are not buying enough software developed domestically," Bloomberg reported. "The decision underscores the challenge that Microsoft faces in building a profitable business in China. In addition to competition from the local software industry, which the government wants to promote, Microsoft must cope with rampant piracy of its products." Some 92 percent of software in the country is pirated, Bloomberg said, citing stats from the Business Software Alliance.
• Bloomberg via The International Herald Tribune: Beijing Cancels Purchase of Microsoft Software

The Financial Times said: "Beijing's decision to scrap the high-profile order is a potentially significant setback for Microsoft in China, since it is likely to make other local authorities more cautious about supporting a company already viewed with suspicion by many central government officials. Government procurement is a particularly important part of the multibillion-dollar Chinese market, in part because most software in private use is pirated," the newspaper reported. "Beijing's announcement earlier this month that it would buy Microsoft's Windows and Office software had fuelled fierce debate in China's software industry and media about the degree to which government procurement should favour domestic suppliers. People in the industry say China appears close to issuing rules that would require government departments to differentiate sharply between local and foreign software. The plan is causing concern among overseas vendors, who fear it will favour domestic suppliers."
• The Financial Times: Setback for Microsoft as Beijing Scraps Deal

An article today by CNET's News.com did not report the contract's cancellation, but noted the heightened push by some Chinese officials to buy locally made software over the likes of Microsoft. "There is growing disquiet about public sector IT contracts being awarded to Western vendors in China, a country long known for its fondness of open-source and home-grown companies," CNET reported.

Microsoft's contract to supply Beijing's municipal government with software came "the same week that Dell inked a $10 million agreement with Chinese education authorities. One of Dell's key long-term rivals is likely to be China-based Lenovo, previously known as Legend. Some government officials have spoken out, saying the deals may not only be bad for domestic vendors but also potentially in violation of a procurement law brought in at the start of last year. China is already a big market for Microsoft and some other Western IT vendors, but the rise of Asianux, an open-source operating system collaboration between the governments of China, Japan and South Korea, points to those countries looking to cheap, nonproprietary computing options." Microsoft's Windows also faces competition in China from the country's Red Flag Software and Kingsoft, Bloomberg said.
• CNET's News.com: Microsoft's Beijing Win Raises Concerns in China

Keeping It Real -- and Local

Beijing is working to make its government software purchases legit, Dow Jones Newswires reported today, but again the emphasis is on Chinese producers. "China's government is drafting a set of rules that could significantly limit its purchases of software from foreign companies, officials and academics said. The proposed restrictions come at a crucial time for ... companies trying to tap the potentially enormous government market. The authorities are trying to wean government offices at all levels off pirated software and make them buy legitimately," Dow Jones reported. "The push to stamp out pirated software will push the government's spending on software to 14 billion yuan ($1.69 billion) in 2004, from four billion yuan in 2001, estimates Ni Guangnan of the Chinese Academy of Sciences in Beijing. He said he hopes government guidelines will ensure a big portion of that goes to China's own young but growing software companies."

U.S. tech companies are already worried, even though Chinese officials have said the rules are still being hashed out. "They haven't specifically excluded foreign companies from participating, but it looks like a step toward that," Michael Mudd, Asia Pacific director of public policy for the Computing Technology Industry Association, told Dow Jones. (Microsoft is among CTIA's powerful group of members.) "It has the potential to lock a big portion of our members out of a very significant part of the market."
• Dow Jones Newswires via The Wall Street Journal: China Weighs Limits on Buying Software From Foreign Firms (Subscription required)

The China Syndrome

As software companies scramble to make sure they aren't squeezed out of business in China, other tech industries are feeling the heat too with China's hold on being king of discounted prices for products from PCs to widgets. Prices for manufactured goods are often 30 to 50 percent less than items made in America, Business Week reported in its latest issue.

"Makers of apparel, footware, electric appliances, and plastics products, which have been shutting U.S. factories for decades, know well the futility of trying to match the China price. It has been a big factor in the loss of 2.7 million manufacturing jobs since 2000," the magazine reported. "Meanwhile, America's deficit with China keeps soaring to new records. It is likely to pass $150 billion this year. Now, manufacturers and workers who never thought they had to worry about the China price are confronting the new math of the mainland. These companies had once held their own against imports mostly because their businesses required advanced skills, heavy investment, and proximity to customers. Many of these companies are in the small-to-midsize sector, which makes up 37 percent of U.S. manufacturing. The China price is even being felt in high tech. Chinese exports of advanced networking gear, still at a low level, are already affecting prices," the magazine reported. In China, "They're making cell phones, shampoo, autos, and PCs in China and selling them to its middle class of some 100 million people, a group that should more than double in size by 2010. 'Our commercial success in China is important to our competitiveness worldwide,' says Motorola China Chairman Gene Delaney."

The article concludes that the United States "will surely continue to benefit from China's expansion. But unless it can deal with the industrial challenge, it will suffer a loss of economic power and influence. Can America afford the China price? It's the question U.S. workers, execs, and policymakers urgently need to ask."
• Business Week: The China Price