By WANG ZHIPENG

Steve Ballmer with a pocket PC jointly developed by Microsoft and Compaq.

ON June 26, Steve Ballmer, CEO of Microsoft, signed a memorandum with Minister Zeng Peiyan of China's State Development Planning Commission. Worth 6.2 billion yuan, the memorandum mainly covers four aspects:

1) Microsoft will provide domestic Chinese enterprises with software development orders, service outsourcing orders, and embedded software-based hardware export orders;

2) Microsoft will join the commission in organizing and implementing software personnel training programs;

3) Microsoft will strengthen its joint venture and cooperative efforts with China's domestic enterprises, while supporting them in setting up overseas branches and subsidiary companies; and

4) Microsoft will cooperate with units recommended by the commission in important informatization fields.

This memorandum represents the largest software cooperation in China to date.

Microsoft has once more outstripped its rivals, as the memorandum confirms the Chinese government's formal support of the company's overall advancement into the Chinese software industry. Microsoft was for some time at odds with the Chinese government over its excessive pressure as regards copyright piracy. Its failure at the end of last year to win the bid to supply officeware to the Beijing municipal government further estranged the two. Ballmer's trip to China has, therefore, brought Microsoft into a new era of cooperation with the Chinese government. The company's strategy is clear: to trade its technology for access to the Chinese market, and to make use of Chinese human resources.

Microsoft firmly believes in China's potential rapidly to become the world's largest software market. Its business focus is to shift from personal to corporate and government consumption, where piracy will be less of a threat and potential profits greater, but this means that there will be a higher demand for customized software and product localization. The establishment of the Microsoft China Research and Development Center, and the change of name from Microsoft Research China to Microsoft Research Asia indicate China's increasing importance within the company's overall business strategy. In the face of fierce competition from rivals such as IBM, AOL and Linux, Microsoft is ever more aware of the need to utilize Chinese human resources and to implement a localization strategy. On June 27 the company also signed a "Great Wall Plan" agreement with the Chinese Ministry of Education, signifying a 300-million-yuan investment, sponsorship or donation commitment to Chinese educational undertakings within three years. Meanwhile, Microsoft Research Asia has signed agreements with six Chinese universities to run software colleges jointly with them. All of this action on the part of Microsoft is with the ultimate aim of occupying the Chinese software consumer market, and making China its largest software production base by means of the country's skilled but inexpensive human resources.

Minister Zeng Peiyan and Steve Ballmer at the memorandum signing ceremony.

It was in the late 1980s that local software companies began to appear in the PRC, and Microsoft was one of the first foreign software companies to arrive here in the early 1990s. At this time, the overlapping administration of various government departments greatly inhibited the industry's development, as at least 13 ministries and state commissions were directly involved in its policy-making and implementation. The rapid growth of the software industry started in the latter half of 2000, when the Ministry of Information Industry was formally appointed the software industry's regulator. The State Development Planning Commission was made responsible for micro-planning the industry, and earmarked a substantial sum for its development.

On his return from India in February 2002, Premier Zhu Rongji set the Chinese software industry the target of surpassing India within two years. But disagreements arose as to how to accomplish this. Should it be by relying solely on the industry itself, or by calling in outside forces? The signing of the memorandum provides a solution for the time being. The Chinese government prefers this, the latter course of action, and hopes to trade its massive market for technology, and to realize a snowballing development based on others' achievements.

China may wish to emulate India where the software industry is concerned. Today India is the world's second largest software exporter. In 2001 its software market amounted to US$ 8.3 billion, including US$ 6.2 billion in exports. The Chinese software market, on the other hand, amounted to just US$ 2.8 billion in 2000, with exports of US$ 300 million.

From Microsoft's point of view, 6.2 billion yuan is not a huge amount. Once the memorandum is implemented, however, it will considerably spur the development of the Chinese software industry. In the face of increasing competition, domestic software enterprises will have more opportunities for cooperation with foreign counterparts, and thus to utilize their markets, capital, and managerial experience. Software outsourcing, for example, accounts for 40 percent of the world's software market and annually increases by 22 percent. In the US market alone, US$ 60 billion worth of software was outsourced in 2000. The outsourcing market is large in scale, and highly lucrative. Statistics show that India earns from it a gross profit of 40 to 58 percent, or a net profit of 20 to 35 percent. The overall entry of Microsoft into China is bound to stimulate the rapid development of the Chinese software industry.

WANG ZHIPENG is currently studying for a doctorate in economics at the School of Economics and Management, Tsinghua University.