The Review — 28/11/2014 at 13:51

Why China Is Keeping the Heat on Microsoft

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Satya Nadella, take your latest setback in China as a compliment. In the eyes of Chinese leaders, Microsoft (MSFT) isn’t a company struggling to recover frommissteps of the Steve Ballmer era.

Instead, it’s a tech industry heavyweight worth punching to make a point—hence the ongoing campaign against the company and its China operations. In May, the Chinese government announced a ban on installing Windows 8 on new government computers. In July, investigators raided Microsoft offices in the country, and the State Administration for Industry and Commerce said it was examining whether Windows and Office software violated China’s antimonopoly law.

Now the government may be putting more pressure on Microsoft, this time through allegations of tax evasion, in response to talk from Washington about Chinese cyberattacks. Last Thursday, U.S. National Security Agency Director Admiral Michael Rogers told a congressional committee that several foreign governments have hacked into the energy grid in the U.S. While he didn’t identify China as one of the culprits, House Intelligence Committee Chairman Representative Mike Rogers (R-Mich.) did‐and the NSA’s Rogers didn’t dispute that China had indeed hacked its way into U.S. networks.

In a commentary, China Daily columnist Chen Weihua called such talk “fear-mongering about everything related to China” and reminded readers of “the rampant surveillance activities” of the NSA. U.S. tech giants “have been willingly and unwillingly collaborating with the NSA in compromising the privacy of countless people both in and outside the U.S. surfing on the Internet,” he added.

Another way for China to show its displeasure is to smack a prominent American company operating in China. Sure enough, on Sunday, just a few days after Rogers testified to Congress, the Xinhua news agency reported that the government had ordered a U.S. multinational—identified as “M”—that had established a wholly owned foreign subsidiary in 1995 to pay more than $150 million to cover back taxes, interest, and future tax payments. Microsoft is the only company that fits the description, Reuters reported yesterday. In an e-mailed statement to Bloomberg News, Microsoft didn’t confirm it was the company in question.

Microsoft has tried to win over Chinese officials. Last year, when the government wanted tech companies to move beyond Beijing and Shanghai to boost interior provinces, Microsoft announced a partnership with the government of Yunnan, a province in southwestern China not known for being a tech hub, to open an IT academy and an innovation center. As part of the alliance, Microsoft said it would help research and develop software in 18 languages, including Thai, Hindi, and Malay. “Microsoft expects its minor language software to stimulate high-tech education,” Xinhua reported, “turning Yunnan into a new flourishing power in the Chinese software industry.”

Gestures like that don’t seem to count for much now. By picking on Microsoft, the government may be looking to send a warning to the U.S. government. Or it may be trying to take the company down a notch and help local companies with their own operating systems. More than 86 percent of devices connected to the Internet used Windows, the China Daily reported in August, citing data collector cnzz.com, and more than half of China’s computers still run on Windows XP. The Chinese Academy of Engineering’s Ni Guangnan, however, told the People’s Posts & Telecommunications News in August that local operating systems will replace Windows within two years. While Ni said the new software would be available beginning in October, the deadline arrived last month, and he told Chinese media that the government remained determined to break Microsoft’s grip on the market. 

Microsoft isn’t the only U.S. multinational subjected to pressure from the government. Other targets have included Qualcomm (QCOM) and Apple (AAPL).Google (GOOG) got its share of grief, too, including a 2007 investigation of tax fraud, before it decided to redirect search queries outside the mainland in 2010. ”They were just always dealing with the newest fire, recovering from it, and when they were ready to get back to business, then the next thing would come down the pike,” says Mark Natkin, founder and managing director of Marbridge Consulting in Beijing.

Google ultimately gave up because of concerns about security breaches. Still, Natkin says, in most cases “that sort of strategy is remarkably effective when it comes to extracting concessions.”

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