Microsoft Conquer China or was Conquered

How Microsoft Conquered China

Or is it the other way around?

by David Kirkpatrick
Fortune 500
July 23, 2007
Vol 156, No.2

Abstract:

No other Fortune 500 CEO gets quite the same treatment in China. While most would count themselves lucky to talk with one China's top leaders, Bill Gates gets to meet with 4-members of the Politburo.

When Chinese Premier Hu Jintao visited Microsoft campus in Redmond, Washington, and was feted at a dinner at Gates home, Hu told his host: "You are a friend to the Chinese people and I am a friend of Microsoft. Every morning I go to my office and use your software."

Microsoft bumbled for years after entering China in 1992. It finally figured out that almost none of the basic precepts that led to its success in the US and Europe made sense in China.

It took Microsoft 15 years and billions of dollars of lost revenue to learn how to do business in China. "We were a naive American company," concedes Gates in an interview.

15 years ago, Microsoft sent a couple of sales managers into China. Their mission? To sell software. "It was a classic model - hang out a shingle and say, 'Microsoft: Open for business," Craig Mundie, the top Microsoft executive who now guides its China strategy said.

But the model failed, not because of brand acceptance but just that no one is paying - counterfeiting.

"In China we didn't have problem with market share. The issue is how do we translate that into revenue," said Ya-Qin Zhang.

Microsoft fought bitterly to protect its intellectual property. It sued but lost regularly in Court. Microsoft's strategy failed miserably and in a 5 years period, they had changed 5 country manager.

In 1999, Gates sent Mundie to figure out why Microsoft was so reviled. On the trip he had an epiphany: "Our business is just broken in China."

Mundie concluded that the company was assigning executives too junior and that selling per se was overemphasized. "Our business practices and our engagement did not reflect the importance of having a collaborative approach with the government."

Microsoft executives were concerned with China's weak IP-enforcement laws. However, Gates argued that while it was terrible that people in China pirated so much softwares, if they were going to pirate anybody's software Gates certainly preferred it to be Microsoft. Bill 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 is easier for our software to compete with Linux when there's piracy than when there's not," Gates says.

Microsoft's China strategy is clearly paying off. More than 24 million PCs will be sold this year, adding to the 120 million already in place.

"We have already found a win-win way of doing things together that will generate a substantial part of Microsoft's growth in the next decade," declared Gates.

(go get a copy of the Fortune 500 Vol. 156. It's worth it, just for this piece.)