Microsoft in the People Republic of China

Essay by morgan1234aUniversity, Master's October 2004

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Microsoft (MS) is losing money in PRC, partly because of the lack of intellectual

property protection in that market and partly because its product (Windows 3.1) can not meet

local customers" needs due to low level of localization.

Since localization of Window 3.1 seems indispensable for MS to succeed in the

promising PRC market, the question for MS is choosing the best localization solution from

the available three choices. These choices are either leaving the market open for Software

Vendors (SV) to localize the product, doing all of the localization by MS itself in Taiwan

(headquarter of Greater China), or adopting an intermediate solution such as localizing in



In addressing this question, I used several criteria as listed in Exhibit 1 to evaluate

these alternatives (Exhibit 1 also listed detailed analyses of each criterion used). My

conclusion, therefore, is that localizing in PRC will be the best choice for MS among all

alternatives as it helps build good government relationships that in turn benefit sales and

competitiveness. Meanwhile, Microsoft can acquire the best product quality by localization in

PRC due to familiarity with the market and convenient technical support. (Exhibit 2)

Among all the criteria used, the political issue, i.e. relationship with the Chinese

government plays the most crucial role, as it has the biggest impact on other factors.

Specifically, a good relationship with the government could: 1) Get the power from PRC

government to build a better legal environment, as piracy software is rampant in PRC market

and it seriously affects MS"s profit. 2) Increase sales, as SOEs and government organizations

account for a big percentage in MS"s total sales. 3) Help MS standardize the software

industry to guarantee its long-term profits. 4) Be decisive in securing Microsoft a competitive


advantage, as PRC is still not a totally free market in terms of degrees of government



Why will localizing in PRC bring government support? As Exhibit 3 shows, Chinese

government needs technology in PC industry badly, it also needs employment opportunities,

foreign capital, management and industry expertise, and other intangible assets such as

company image, all of which can be met by MS"s local investment. Therefore, MS can

acquire bigger bargaining power in dealing with the government and then utilize this power

to receive government supports in combating piracy software in PRC and setting up a

standard in the industry.

Following its decision to localize in PRC, Microsoft still has two choices available,

namely, localizing by itself or by allying with one local SV. I think that Microsoft should

have partnered with one of the key software vendors, preferably Great Wall, that is closely

connected to the government and also the local market leader for localization process. By

partnering with local SV Great Wall, Microsoft can have gained some other advantages

besides a good government relationship that include: 1)Smooth the distribution channel to

deal with poor logistic infrastructures in PRC. 2) Further increase sales by bundling the

operation system and future application software with SV"s hardware sales. 3) Save training

cost in developing software and technical supports by sharing the partner"s IT experts.

However, MS also takes the risk of losing control of timing and localization quality

and leakage of its advanced technology. To reduce the risk to the least, MS should have

participated actively in the localization process to reduce the risk of "hold-up" effects by its

partner. By keeping control on the technical part, Microsoft can also learn from its partner to

contribute to its learning curve and thus pave the way for future software development for

PRC market.


Exhibit 1 Criteria used for localization decision

Political § Central government plays a key role in combating piracy software.

§ SOEs account for a big percentage in revenue. (PC market grows at 32% and

40% of large or medium-sized SOEs are computerized)

§ Supports from government are also crucial in setting up a standard for operation

systems in PC industry.

§ Distribution is also affected by government opinions.

§ Taiwan is a political sensitive area to PRC.

§ PRC government needs investments in technologies. It also welcomes MNCs to

invest in China to bring foreign currency and employment opportunities,

especially big names like MS.

Product Quality § Many versions of translation software used in the market affect the product

quality negatively. (Using parallel software involves many technical problems.

Due to lack of knowledge, normal end-users may address these problems to MS )

§ Localization process also needs developers to understand local cultures and

customer needs.

§ Technical support needs the involvement of original software developers.

§ Very few local SVs are available for partnership. Bargain power is low and cost

may be high.

Legal § Directly affecting sales (overall losses due to piracy of computer programs is

over $300 M in PRC)

Sales § Customers include SOEs, government organizations, institutions and family


§ Other than small percentage of personal PC users, SOEs and other organizational

users prefer standardized PCs in both hardware and software. Normally orders

are made in bulk.

§ First mover is important, as SOEs will order standardized PCs and software for

compatibility and more convenient technical support.

§ Penetration of operation system affects future sales of application software.




§ Taiwan has MS"s technical base, as it is headquarter of Greater China.

§ Developers" wages in PRC are only 20-40% of their Taiwan counterparts, but

the training costs can be very high. MS is also not sure about the competence of

developers in PRC.

Time to Market § Can be very long if localized by SV in PRC (training is time-consuming and it is

impossible to give the task to more than one SV)

§ Taiwan has well-established software development infrastructure needed.

Competition § Lotus, the main regional competitor only has basic localization but it"s much

cheaper than MS in localization efforts.

§ There is a trade-off of product quality (extend of localization) and time to


§ Unix has already allied with local SVs for localization.

Distribution § Main target markets are SOEs and organizations.

§ Software are normally sold with bundling of hardware.

Standardization § Is important for long-term profits considering of repeat SOE customers and

compatibility problem.


Exhibit 2: Comparison of localization decisions

English Version +

Chinese Software


in PRC

Localization in



(government support)

+ ++ -

Product Quality - ++ +


(Combat piracy)

- ++ -

Sales - ++ ? (probably negative

due to political


Cost advantage

(technical process)

++ - +

Time to Market ++ - +

Competition - ++ +

Distribution Status quo ++ -

Standardization - ++ -

Exhibit 3 Congruency Assessment Matrix

Business Resources

For. Jobs

Government Needs Cap. Ex. Tec. Trg. Mgt. Infra. Mkts. Taxes


Employment + + +

Training + + + +

Bal. of


+ ?

Growth + ? + + + + + +

Productivity + + + + +

Infrastructure + + + +

Fiscal revenues +


Economic Power + ? + + + + +

Credibility + + + + + +


Education + + + + + +

Health +

Housing +

Income equity + + + +