Geopolitics

Inside The Crumbling Microsoft-China Love Affair

An antitrust investigation by Beijing authorities into the U.S. software giant was many months in the making, and may signal the end to a two-decade relationship built on billion-dollar deals.

Windows XP release in China earlier this year.
Windows XP release in China earlier this year.
Zheng Peishan

BEIJINGMicrosoft was once regarded in Beijing as the top foreign technology company that most values its relations with Chinese authorities.

But rumors had been circulating for months that there were problems between the U.S. software giant and the Chinese government. On July 28, the rumors were partly confirmed when China's State Administration for Industry (SAIC) suddenly initiated an investigation into four Microsoft China branches in Shanghai and Beijing, seizing documents and computers for antitrust inquiries.

According to You Yunting, an attorney at the Shanghai DeBund Law office, an antitrust investigation has been opened to probe alleged unfair trade practices and abuse of market dominance.

"Microsoft's relationship with China finds itself in a very bad situation," a Wall Street analyst told Caixin. "And it may get worse."

The problems began over services for the company's XP operating system.

Last year, Microsoft announced that it would no longer provide technical support for XP users, including system updates and security patches. This created potential security risks for nearly 200 million computers, including a significant number that belonged to Chinese state-owned enterprises and government departments. Meanwhile, Microsoft also raised the price of its Windows 8 operating system. Taken together, the decisions raised the ire of relevant Chinese government agencies.

Earlier this year, China's National Copyright Administration made direct demands on Microsoft that took into account China's current pricing policies, sales practice regulations and support to promote copyrighted software.

Microsoft China's subequent request for preferential policies led the Chinese authorities to criticize the company's lack of willingness to compromise. On May 16, China's state procurement center issued a notice saying that government computers were no longer allowed to install the Windows 8 operating system.

An industry analyst says the Chinese authority views Windows 8 as uncompliant with current government office policy. Not only are the costs considered too high, but Internet security is also a concern. For instance, Windows 8 allows content sharing through cloud services, which could easily lead to the leaking of government information.

The analyst says that unless Microsoft swiftly responds to the crisis, it will face even greater difficulties in the Chinese market. But it won't be easy because China accounts for only 10% of the company's overall sales. For the American giant, China is still a regional market ain which it does only about one-forth to one third of the business it does in North America. "The headquarters might ask, "Why should Chinese customers get a special deal?""

A great challenge

Over the past 20-plus years, Microsoft has always maintained good relations with the Chinese government. Since creating a Beijing office in 1992 and the Microsoft China Co. in 1995, the American enterprise has steadily grown in China, currently employing more than 3,000 full-time workers.

Microsoft founder Bill Gates attaches great importance to meeting with Chinese officials each time he visits China. In 2002, the company became a member of the China Software Industry Association, and signed a memorandum of understanding with the State Development Planning Commission to jointly develop China's largest foreign software cooperation project valued at more than 6.2 billion RMB ($1 billion). At the time, it was China's largest foreign cooperation project in the field of software.

The next year, Microsoft signed an agreement with China's Information Technology Security Certification Center allowing the Chinese government and specified accredited institutes to have partial access to Microsoft Windows source code and related technology information.

Relations between the two parties were further cemented in 2006 when then Chinese President Hu Jintao dined with Bill Gates at his home.

Meanwhile, Microsoft continued to forge relations with China's local governments. Since 2010, it has developed a strategic partnership with China's northeastern city of Jinan. Much of the company's annual global sales of hardware products, such as Xbox and Zune, originate from production in southern Chinese cities such as Shenzhen. It also launched an urban development program four years ago to establish further cooperation with various second-tier Chinese cities.

The crux

But since 2013, Chinese authorities began taking Internet security more seriously, while Microsoft held a tough stance on all issues related to XP and Windows 8. A sweet relationship was bound to sour.

IT expert Zhang Qunying says the crux of problem lies with Microsoft China.

First, it is not easy to run a software business in a country where piracy is rampant. "Microsoft should have adapted a special policy for a special market such as China," Zhang says. "Most of its Chinese market users are government departments. The company's Chinese CEO needed to explain this to the people at Microsoft headquarters."

Instead, Microsoft simply carried out its global policy in China, which included a halt to support and security measures of Windows 7 and XP that many Chinese government departments still relied on. This is the root of Beijing's discontent.

"The Chinese government is hoping to recover foreign companies' extra-national treatment while at the same time seeking greater investments and receiving more tax revenue from them through joint ventures," Zhang says. "But up until now, Microsoft China has proved incapable of convincing its headquarters to make such investments."

By contrast, Intel has factories in various places such as Dalian and Chengdu, contributing much more to China in terms of revenue.

Damaging a relationship is much easier than repairing it, and Microsoft's top priority now is to deal with China's aggressive anti-trust investigation.

The announcement also specified that senior Microsoft staff, including the vice chairman, high-ranking managers, and marketing and finance departments, are personally under investigation.

No more champagne and roses. The romance really is over.

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Queen Elizabeth II with UK PM Boris Johnson at a reception at Windsor Castle yesterday

Anne-Sophie Goninet, Jane Herbelin and Bertrand Hauger

👋 Hej!*

Welcome to Wednesday, where chaos hits Syria, Brazilian president Jair Bolsonaro is accused of crimes against humanity and a social media giant plans to rebrand itself. For Spanish daily La Razon, reporter Paco Rodríguez takes us to the devastated town of Belchite, where visitors are reporting paranormal phenomenons.

[*Danish]

🌎  7 THINGS TO KNOW RIGHT NOW

• Syrian violence erupts: Army shelling on residential areas of the rebel-held region of northwestern Syria killed 13 people, with school children among the victims. The attack occurred shortly after a bombing killed at least 14 military personnel in Damascus. In central Syria, a blast inside an ammunition depot kills five soldiers.

• Renewed Ethiopia air raids on capital of embattled Tigray region: Ethiopian federal government forces have launched its second air strike this week on the capital of the northern Tigray. The air raids mark a sharp escalation in the near-year-old conflict between the government forces and the Tigrayan People's Liberation Front (TPLF) that killed thousands and displaced over 2 million people.

• Bolsonaro accused of crimes against humanity: A leaked draft government report concludes that Brazilian President Jair Bolsonaro should be charged with crimes against humanity, forging documents and incitement to crime, following his handling of the country's COVID-19 pandemic. The report blames Bolsonaro's administration for more than half of Brazil's 600,000 coronavirus deaths.

• Kidnappers in Haiti demand $17 million to free a missionary group: A Haitian gang that kidnapped 17 members of a Christian aid group, including five children, demanded $1million ransom per person. Most of those being held are Americans; one is Canadian.

• Putin bows out of COP26 in Glasgow: Russian President Vladimir Putin will not fly to Glasgow to attend the COP26 climate summit. A setback for host Britain's hopes of getting support from major powers for a more radical plan to tackle climate change.

• Queen Elizabeth II cancels trip over health concerns: The 95-year-old British monarch has cancelled a visit to Northern Ireland after she was advised by her doctors to rest for the next few days. Buckingham Palace assured the queen, who attended public events yesterday, was "in good spirits."

• A new name for Facebook? According to a report by The Verge website, Mark Zuckerberg's social media giant is planning on changing the company's name next week, to reflect its focus on building the "metaverse," a virtual reality version of the internet.

🗞️  FRONT PAGE

"Oil price rise causes earthquake," titles Portuguese daily Jornal I as surging demand coupled with supply shortage have driven oil prices to seven-year highs at more than $80 per barrel.

#️⃣  BY THE NUMBERS

98

For the first time women judges have been appointed to Egypt's State Council, one of the country's main judicial bodies. The council's chief judge, Mohammed Hossam el-Din, welcomed the 98 new judges in a celebratory event in Cairo. Since its inception in 1946, the State Council has been exclusively male and until now actively rejected female applicants.

📰  STORY OF THE DAY

Spanish civil war town now a paranormal attraction

Ghosts from Spain's murderous 1930s civil war are said to roam the ruins of Belchite outside Zaragoza. Tourists are intrigued and can book a special visit to the town, reports Paco Rodríguez in Madrid-based daily La Razon.

🏚️ Between August 24 and September 6, 1937, during the Spanish Civil War, more than 5,000 people died in 14 days of intense fighting in Belchite in north-eastern Spain, and the town was flattened. The fighting began on the outskirts and ended in house-to-house fighting. Almost half the town's 3,100 residents died in the struggle. The war annihilated centuries of village history. The town was never rebuilt, though a Pueblo Nuevo (or new town) was built by the old one.

😱 Belchite became an open-air museum of the horror of the civil war of 1936-39, which left 300,000 dead and wounds that have yet to heal or, for some today, mustn't. For many locals, the battle of Belchite has yet to end, judging by reports of paranormal incidents. Some insist they have heard the screams of falling soldiers, while others say the Count of Belchite wanders the streets, unable to find a resting place after his corpse was exhumed.

🎟️ Ordinary visitors have encountered unusual situations. Currently, you can only visit Belchite at set times every day, with prior booking. More daring visitors can also visit at 10 p.m. on weekends. Your ticket does not include a guaranteed paranormal experience, but many visitors insist strange things have happened to them. These include sudden changes of temperature or the strange feeling of being observed from a street corner or a window. Furthermore, such phenomena increase as evening falls, as if night brought the devastated town to life.

➡️ Read more on Worldcrunch.com

📣 VERBATIM

We still cling to the past because back then we had security, which is the main thing that's missing in Libya today.

— Fethi al-Ahmar, an engineer living in the Libyan desert town Bani Walid, told AFP, as the country today marks the 10-year anniversary of the death of dictator Muammar Gaddafi. The leader who had reigned for 42 years over Libya was toppled in a revolt inspired by the Arab Spring uprisings and later killed by rebels. Some hope the presidential elections set in December can help the country turn the page on a decade of chaos and instability.

🇮🇷🎓  IN OTHER NEWS

Iran to offer Master's and PhD in morality enforcement

Iran will create new "master's and doctorate" programs to train state morality agents checking on people's public conduct and attire, according to several Persian-language news sources.

Mehran Samadi, a senior official of the Headquarters to Enjoin Virtues and Proscribe Vices (Amr-e be ma'ruf va nahy az monkar) said "anyone who wants to enjoin virtues must have the knowledge," the London-based broadcaster Iran International reported, citing reports from Iran.

The morality patrols, in force since the 1979 revolution, tend to focus mostly on young people and women, particularly the public appearance for the latter. Loose headscarves will send women straight to a police station, often in humiliating conditions. Five years ago, the regime announced a new force of some 7,000 additional agents checking on women's hijabs and other standards of dress and behavior.

Last week, for example, Tehran police revealed that they had "disciplined" agents who had been filmed forcefully shoving a girl into a van. Such incidents may increase under the new, conservative president, Ibrahim Raisi.

Speaking about the new academic discipline, Samadi said morals go "much further than headscarves and modesty," and those earning graduate degrees would teach agents "what the priorities are."

Iran's Islamic regime, under the guidance of Shia jurists, continuously fine tunes notions of "proper" conduct — and calibrates its own, interventionist authority. More recently the traffic police chief said women were not allowed to ride motorbikes, and "would be stopped," Prague-based Radio Farda reported.

Days before, a cleric in the holy city of Qom in central Iran insisted that people must be vaccinated by a medic of the same sex "as often as possible," and if not, there should be no pictures of mixed-sex vaccinations.

✍️ Newsletter by Anne-Sophie Goninet, Jane Herbelin and Bertrand Hauger

Thoughts on Facebook's new name? Zuckerverse? Tell us how the news look in your corner of the world: Drop us a note at info@worldcrunch.com!

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