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UNCLAS SECTION 01 OF 02 GUANGZHOU 030810 
 
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SENSITIVE 
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E.O. 12958: N/A 
TAGS: ECON EINV KIPR CH
SUBJECT: Microsoft Growing Rapidly in South China 
 
 
 (U) This document is sensitive but unclassified.  Please protect 
accordingly. 
 
¶1. (SBU) Summary: Microsoft representatives told the Consul General 
September 21 that with the company's rapid growth in Shenzhen and 
elsewhere, they expect sales in South China to surpass those in Hong 
Kong.  Company representatives complained about weak copyright 
enforcement and asked the Consulate to continue to highlight the 
need for improved IPR protection with local government leaders.  End 
summary. 
 
South China: a fast-growing key market for software 
--------------------------------------------- ------ 
 
¶2. (U) The two representatives - Ni Jianbo, General Manager of the 
Branch Office, and Zhong Weidong, Southern Regional Manager of 
Microsoft's branch company in Guangzhou - were bullish on the 
company's overall development and future plans, but more tentative 
about prospects for protecting Microsoft's intellectual property 
rights (IPR) in southern China. South China accounts for about 30% 
of the Microsoft's overall revenues countrywide, of which half comes 
from Shenzhen.  Some of Microsoft's businesses, such as its 
enterprise partnership group, have grown by 200 times since the 
establishment of the Shenzhen branch office in 2005.  Ni and Zhong 
believe Microsoft's sales in South China will exceed that of Hong 
Kong next year, while sales volumes in East China have already 
surpassed those of Hong Kong and are expected to exceed those of 
Taiwan next year.  The Greater China market (mainland China, Hong 
Kong, and Taiwan) is so important to Microsoft that it is one of the 
company's seven key subsidiaries in the world that reports directly 
Microsoft's headquarters in Seattle. 
 
¶3. (U) Microsoft's clients in Shenzhen include China's giant 
telecommunication groups of Huawei Technologies and ZTE (Zhong Xin) 
as well as local governments.  Microsoft established its branch 
office in Shenzhen to provide a quicker response to local clients, 
to save operation costs and to better compete with other software 
companies, such as Oracle, which came much earlier than Microsoft to 
Shenzhen.  Currently Microsoft has three sites in Shenzhen, dealing 
with sales, technical support, research and development and 
training. 
 
¶4. (U) According to Ni and Zhong, Microsoft is building close 
relationships with the local government in Shenzhen.  To demonstrate 
its long-term commitment to Shenzhen, Microsoft plans to upgrade the 
branch office into a branch company, which would then pay tax 
locally instead of to the main office in Beijing, to make more 
investments, and to merge its three scattered office sites into one 
in Shenzhen.  Following a nationwide "cooperation" model with local 
governments, Microsoft is partnering with a local company designated 
by Shenzhen Government to set up a cooperation program called "MSTC" 
(Microsoft Training Center) which helps local governments by 
providing technical support, training, and solutions to e-government 
projects; this also ensures the use of legal software.  In the 
Guangzhou consular district, Microsoft has opened one MSTC in 
Xiamen, Fujian Province, is planning to open one in Hainan next 
month, and has plans to open a center in Guangxi. 
 
Weak IPR enforcement remains a big challenge 
-------------------------------------------- 
 
¶5. (SBU) Ni and Zhong commented that while local governments have 
been making progress in IPR protection, copyright protection for 
software was a low priority for local officials, particularly in 
Guangzhou.  Zhong said local Copyright Bureau officials focused 
mainly on developing the local cultural industry, including 
publishing and audio and video products.  Local government agencies 
have made little effort to enforce the rights of stakeholders in the 
software industry (both domestic and foreign), despite Microsoft's 
lobbying efforts during the past several years.  According to Zhong, 
the main reason behind the relative absence of copyright enforcement 
was that software industry contributes a very small portion of local 
GDP, the majority of which relies on manufacturing.  They also 
thought that officials might be concerned about the impact of 
rigorous enforcement on the local business environment since many 
manufacturers use pirated software.  Local officials often do not 
attend copyright protection seminars or events that industry 
chambers such as the Business Software Association (BSA) or Chinese 
Software Association (CSA) organize.  Both Zhong and Ni said that 
the lack of interest in protecting software copyright puts Guangdong 
at a disadvantage when competing with Shanghai; in addition, lack of 
 
GUANGZHOU 00030810  002 OF 002 
 
 
protection will not help upgrade Guangdong upgrade knowledge-based 
industries. 
 
¶6. (SBU) Zhong, who had previously worked in Microsoft's branches in 
Southwest China for three years, pointed out that officials in those 
areas were more cooperative than Guangdong.  Microsoft was 
successful in getting enforcement action in Southwest China by 
adopting a "top-down" strategy to build relations with local 
provincial and municipal leaders and thus encourage them to order 
local enforcement agencies to take more action.  A similar strategy 
in South China had not been as successful, though Ni acknowledged 
this effort was new.  In Guangxi, Microsoft got a commitment from 
the local Copyright Bureau to take two enforcement cases, starting 
in October.  Zhong commented that most enforcement agencies just 
want a few "showcase" actions they can point to and then do nothing 
further.  Microsoft's goal is to have local agencies do a minimum of 
two-or-three enforcement showcases to achieve successes and hope 
this will encourage them to do more.  At the same time, the company 
also realizes that it is impossible for local government to do too 
many cases, given their limited resources. 
 
¶7. (SBU) Zhong asked the Consul General to urge local government 
leaders in Guangdong to be more cooperative in copyright 
cooperation, since they found "Top-down" strategy is very helpful in 
other areas where they also first encounter officials unwilling to 
cooperate. 
 
Comment 
------- 
 
¶8.  (SBU) Microsoft's experience in South China highlights regional 
differences in China's IPR enforcement.  Enforcement is often 
subject to local protectionism.  Local officials often believe that 
enforcement conflicts with the need to develop the economy in order 
for them to get promoted.  Until they can be persuaded that 
enforcement actually helps development the economy, we will continue 
to have problems such as those described above. 
 
GOLDBERG