Gates in China (pg. 2)

In 2003, Mundie and Gates took a quantum leap forward in China by hiring Tim Chen, who had been running Motorola's China subsidiary. Chen was a superstar, but when he was hired, articles in the Chinese press asked if he, too, would fall victim to the Microsoft "curse."

Chen arrived with entrée to the corridors of power and a practiced understanding of how a Western company could succeed in China. He kept up the blitz of initiatives. Microsoft made Shanghai a global center to respond to customer e-mails. It began extensive training programs for teachers and software entrepreneurs. It worked with the Ministry of Education to finance 100 model computer classrooms in rural areas.

"So with all this work," says Chen, "we start changing the perception that Microsoft is the company coming just to do antipiracy and sue people. We changed the company's image. We're the company that has the long-term vision. If a foreign company's strategy matches with the government's development agenda, the government will support you, even if they don't like you."

Microsoft put its money on the line, even inviting officials to help decide in which local software and outsourcing companies it should invest. So far Microsoft has spent $65 million, and it recently committed to an additional $100 million. Says Chen: "There was synergy, which we formalized, between the need of the Chinese economy to have local software capability and our need for an ecosystem of companies around us using our technology and platform."

At the same time, the Chinese government started thinking more like Microsoft: It required central, provincial, and local governments to begin using legal software. The city of Beijing completed its portion of the project late last year and now pays for software its employees - most of whom never adopted Linux - had previously pirated. (Microsoft won't say how steep a discount it offered the government.)

In another boost for Microsoft, the government last year required local PC manufacturers to load legal software on their computers. Lenovo, the market leader, had been shipping as few as 10% of its PCs that way, and even U.S. PC makers in China were selling many machines "naked." Another mandate requires gradual legalization of the millions of computers in state-owned enterprises. In all, Gates says, the number of new machines shipped with legal software nationwide has risen from about 20% to more than 40% in the past 18 months.

So did Microsoft conquer China, or is it the other way around? Toward the end of Gates' trip, on the sidelines of China's Boao Forum, I sat down again with the Microsoft founder. One of the things I wanted to ask him was how he squares the company's "alignment" in China with its leaders' suppression of free speech on the Internet and what many consider to be their general disregard for human rights. Our conversation, which had been flowing freely, ground to a halt. He said nothing. His silence lasted so long I found myself piping up out of discomfort. "That's a very pregnant pause," I said. "I don't think I want to give an answer to that," he finally replied.

Mundie, however, gamely ventured an answer in a separate interview. He started by talking about the challenges of transforming a socialist planned economy into one based on the market, and noted that never before have leaders anywhere attempted such a huge transition. "Whether it's running a global company or a government," he says, "people have to sit there and make their own value judgments against what they deem to be the greater good all the time. I personally have found the Chinese leaders to be fairly thoughtful about these things. Each society makes choices to protect the rest of society. There are some aspects of that that happen here and in other countries that people would prefer didn't happen. But in the grand scheme of things, they're what people think is required to keep stability." When I asked him if he had discussed any of this with China's leaders, he answered, "No. It's not what they consider to be my field of expertise. Nor do I."

This sort of language doesn't impress Sophie Richardson, an Asia expert at Human Rights Watch. She is distressed that Microsoft shut down the blog of a government critic on its MSN Spaces service in 2005. (Microsoft set up MSN in China with a government-owned investment firm.) "We're just not convinced they have done all they can to push the Chinese government," says Richardson. "Will they say no to initiatives in which they might stand to gain financially but which would oblige them to participate in the repression of rights? I may not have high expectations of [Chinese search company] Baidu as a defender of free speech, but I do of Bill Gates."

Many multinational companies would love to be in Microsoft's shoes. Says Carl Bass, CEO of Autodesk (Charts), the $2-billion-a-year design-automation company: "To do business in China you have to work closely with government." Sean Maloney, who heads marketing at Intel (Charts, Fortune 500), agrees: "You can't do too many investments in China that the government doesn't approve of. You might as well ask them."

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. Although the company's China revenues average no more than $7 for every PC in use (compared with $100 to $200 in developed countries), Gates says those figures will eventually converge. "What we have here is not about me, and it's not about where President Hu went to dinner or anything like that," he says. "It's an institution-to-institution relationship, where we've really found a win-win way of doing things together that will generate a substantial part of Microsoft's growth in the next decade. I don't know any company in the IT industry where things have worked out as well as they have for Microsoft."

And not badly for China either.  

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