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1. What were the main risks faced by Microsoft in both China and India?
2. How did these affect Microsoft's performance?
3. How and for what reasons- did Microsoft adapts its usual business model to China and India?
4. How successful were these adaptions for Microsoft?
5. What lessons can other companies learn from Microsoft's experience in these two emerging economies?
Microsoft in China and India.pdf



Microsoft in China and India, 1993–2007
It was early summer 2007. Craig Mundie, chief research and strategy officer at Microsoft
Corporation, had just completed a transcontinental phone call with Orlando Ayala, Will Poole, Tim
Chen, Ravi Venkatesan (HBS MBA 1992), and Ya-Qin Zhang, all members of the senior management
team overseeing Microsoft’s growth in China and India. A decade ago, Mundie had begun to broaden
Microsoft’s forays into both countries. Now, he continued to mentor the China and India teams.
Mundie saw his role as one that mitigated ventures that others within Microsoft might find too risky
to undertake and thus to try to fill “white spaces” in Microsoft’s offerings. Chen and Venkatesan
headed Microsoft operations in China and India after successful careers with, respectively, Motorola
in China and Cummins in India. Ayala and Poole were Microsoft veterans now focused on middleand bottom-of-the-pyramid products and services, and Zhang headed Microsoft’s research activities
in China.
Mundie had reason to be pleased. Over the past decade, Microsoft had established a successful
footprint spanning research, development, and sales in both China and India, and just a few days
back, on April 19, 2007, Microsoft Chairman Bill Gates had unveiled an ambitious plan for the future.
Addressing the Microsoft Government Leaders Forum in Beijing in the presence of dignitaries like
Nobel laureate Mohammed Yunus, Gates had outlined the Beijing Declaration, which stated
Microsoft’s aim to increase the number of people with access to computers from 1 billion in 2007 to
2 billion by 2015. It had been 31 years since Gates’s founding dream for Microsoft, “a computer on
every desk and in every home.”
Microsoft had grown its China and India revenues threefold in the past three years. China and
India had won the “best large subsidiary” and “best emerging subsidiary” awards, respectively, at
Microsoft’s annual global sales meeting in 2006. More importantly, government as well as local
partners had become engaged in both countries. Mundie had leveraged his earlier experience at
Microsoft and his background in designing technology policy to recognize the importance of the
government and a range of partners in each country. He had joined the company in 1992 to grow
Microsoft’s non-PC business. Mundie soon realized that most of the business opportunities in this
area—television, gaming, and software for cell phones—were within regulated industries and
government engagement would be critical for success. Prior to this, as Mundie would later mention,
“Microsoft was a young and relatively naive company that didn’t care much about presence in
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Microsoft in China and India, 1993–2007

Sailing into Stormy Waters (1993–1998)
Around 1993, there was a formal attempt by Microsoft to enter China; prior to this time, pirated
Microsoft products had spread willy-nilly across the country. Richard Fade, then vice president of
Microsoft’s Far East Operations with headquarters in Tokyo, had focused on product localization and
on combating piracy. Localization—for example, varying the way text was presented and making it
easier to enter information in local languages—had raised the penetration rate for Windows in Japan
from 18% in 1993 to 41% in 1994. Meanwhile, annual losses due to piracy were estimated to be
around $1.2 billion in Japan, and Microsoft initiated an aggressive and successful public relations
program targeted at large Japanese companies. The important question was whether the same two
levers would lead to similar success in China or whether the company would face other significant
challenges in the Middle Kingdom.

Major Issues in China
Until 1998, China represented only a minor sales subsidiary for Microsoft. The on-the-ground
issues were quite lost to Redmond. Ayala, who along with Mundie was one of the first executives to
visit China, would later say, “If you squinted and looked at it, China would look like the U.S. or
Europe or Japan. . . . Hey, there were judges, laws, etc., but in practice there was a lack of
transparency, a lack of preparedness in dealing with business problems, and we had no way of
recognizing it.”
Product localization in China was one of the first complicated issues. The ideographic script used
in the People’s Republic of China (PRC), referred to as the “simplified” Chinese character set, had
over 7,000 commonly used characters originally created with brush and ink, while Taiwan and Hong
Kong used the “traditional” character set with 13,000 characters. Thus, products had to be localized
separately for the PRC.
China then had a piracy rate of 98%, the highest in the world. Almost the entire PC-installed base
in the PRC had the mostly pirated English version of Microsoft DOS together with one of the many
Chinese shells. There were several regulatory, legal, and market-based initiatives to control piracy.
These included major raids and Microsoft’s signing of a licensing agreement with a company called
China Great Wall Company. There was also a memorandum of understanding (MOU) between the
U.S. and Chinese governments in January 1992. None of these measures met with material success.
BusinessWeek described Microsoft as “working behind enemy lines.”
There were other challenges. Most of the business in China was managed by state-owned
enterprises (SOEs), and selling software to the ministries and the SOEs was a very complicated
process. Several major local PC manufacturers were at least partially government run. Finally, key
software engineers recruited from leading government-owned universities often left to start their
own companies.


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Despite this, China and India together accounted for less than 5% of worldwide Microsoft
revenues, and growth in sales of legal PC-based software in these two countries trailed sales of other
technology products like cellphones. On what products and services could Microsoft place its bets
profitably to fulfill the spirit of the Beijing Declaration? Equally important, how could Microsoft rally
together its product, research and development (R&D), and sales organizations across Redmond,
China, and India to achieve this goal?

Microsoft in China and India, 1993–2007


One of the first major decisions Fade had to make in China dealt with the localization of the
English version of Microsoft’s best-selling Windows 3.1. Based on Microsoft’s past experience with
large and complicated software development, Fade realized that choosing a local Chinese partner for
the localization exercise would be a tough one. There were only a handful of Chinese software
vendors capable of participating in such an exercise. They were quite cost competitive, but they
would need much hand-holding, and it was unclear whether any of them would remain committed
to a single foreign software producer. The alternative was to use Microsoft’s established software
development facility in Taiwan to create localized products for the PRC. Considering all the factors,
Fade chose the latter option.
Microsoft Chairman Gates got a frosty reception when he arrived in Beijing in March 1994 to
launch the localized version of Windows, dubbed P-Win. In meetings with officials, he argued that
the marketplace, not governments, should set standards. But President Jiang Zemin advised Gates to
spend more time in China and “learn something from 5,000 years of Chinese history.’’
Gates took Jiang’s advice. In September 1995, he took an extended vacation in China with his wife
and fellow billionaire Warren E. Buffett. He rode a bicycle in Beijing, flew a kite at the Great Wall,
explored caves containing Buddhist shrines along the old Silk Road, and took a boat on the Yangtze
River. The trip helped Gates realize the magnitude of China’s computing challenge and why
Microsoft needed to work closely with the government.
However, the situation soon got more complicated. Around 1998, there was a global wave of
legislation compelling government agencies, and in some cases government-owned companies, to
use open-source, or free, software. This movement started in Brazil and France, and the Chinese
government soon joined in. An article in the New York Times on July 7, 2000 reported that the Chinese
government was developing a version of Linux. Security concerns played a big part in Beijing’s
calculus. Some alleged that Microsoft could use its Windows software to gather intelligence
information, though no evidence was forthcoming. Additionally, Chinese interest in Linux was
driven by commercial considerations. The Chinese government had attempted to build its own
operating system for more than a decade in anticipation of China having the world’s third-largest
installed PC base by 1999.
Microsoft sailed into stormy waters. Perhaps its nadir was the release by its former general
manager, Juliet Wu, of a high-profile tell-all memoir of her negative experiences as a woman in
China’s high-tech market, Flying Against the Wind: Microsoft, IBM and Me. In 2000, Wu had become a
household name in China. The book alleged that Microsoft charged high prices and was not
committed to investing in China. Subsequently, Microsoft went through five general managers in
seven years. This period was also one of mixed fortunes for Microsoft with government deals. In
2001, Microsoft was awarded a contract by the Shanghai municipal government. However, the
following year, the Beijing municipal government rejected a Microsoft bid and awarded a contract for
2,000 desktop operating systems to Red Flag Linux, a local Linux developer backed by the

“Hindu Rate of Growth” in India
All during this period, as Microsoft was struggling to find its feet in China, it paid almost no
attention to the other large emerging market, India, which continued to represent only a small sales
subsidiary for the company. Ayala visited India in 1995 on a fact-finding mission and ended up
spending 45 days in the country to come up with a plan to “move faster, open five offices, and invest

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Taught by Matt Allen, from 11-Jul-2011 to 31-Dec-2011. Order ref 92360.
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The Going Gets Tough in China


Microsoft in China and India, 1993–2007

Meanwhile, Indian software firms, following an offshore model, had emerged gradually on the
world stage, supported by a growing software development capability. However, the domestic
industry remained tiny. India had one-fifth of the PC shipments of China, though a lower piracy rate
of 70%. There were no sizable product development firms. As Mundie would aptly describe, “India
at this time was renting its IQ and not creating IP [intellectual property].”

Initiating the Long March (1998–2002)
Rebooting Microsoft China
Around 1998, Gates and Steve Ballmer deputed Mundie, then the CTO of Microsoft, to “go
digging in, into China.” Mundie realized, “We could not be successful in China while operating from
Japan with an American heading the operations” and started building relations at the highest levels
of government in Beijing. Soon Redmond insiders called him “Secretary of State for Microsoft,” a
term they picked up from The Economist magazine. The first meeting with government leaders was
not easy. For every request to help reduce piracy, the representatives would ask what Microsoft
could do for China. Mundie realized that it was time for action and that he was “trying to reconstruct
an airplane in flight.”
In its first major initiative in China, in November 1998, Microsoft announced that it would open a
research lab in Beijing to focus on basic computer science research. The company’s second
international facility and its first in Asia, Microsoft Research Asia (MSRA), was devoted to research in
areas such as multimedia, Internet technologies, and speech recognition. Within seven years, the
MSRA, headed by Ya-Qin Zhang, attracted more than 180 researchers and around 200 graduate
students from local universities. However, contrary to popular belief, the China lab did not have a
cost advantage over the U.S. Though salaries were lower in China, cost of infrastructure and travel
was much higher than in the U.S. The MSRA lab reported to Rick Rashid, senior vice president for
research at Microsoft, formerly a professor of computer science at the Carnegie Mellon University
(CMU). Rashid viewed the Microsoft Research labs as “equivalent to any top university computer
science department” and held that the publication quality of MSRA researchers was comparable to
that of the MIT, CMU, and Stanford computer science departments. Another distinguishing feature of
Microsoft Research labs was that technologies were generally commercialized in-house, and there
were very few spin-offs. Traveling back to the airport at the end of one of his visits to China in 1999,
Mundie commented to Zhang, “At this stage, MSRA and R&D was one of the few things going right
for Microsoft in China.”
In comparison to the R&D initiatives, sales in China for Microsoft were still very modest, and
Mundie realized that, over the long term, Microsoft would need to become an active player in
creating the IT ecosystem in China. “We had to impress upon the Chinese leaders that Microsoft
could help China’s transition from a manufacturing economy to a knowledge economy,” he would
later say. The company signed a $750 million MOU with the National Development Reform
Commission in June 2002. Also in June 2002, Microsoft signed the “Great Wall Plan,” an MOU meant
to foster its cooperation with Chinese universities. With the Chinese government strongly favoring

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in research in India.” As a result of this visit, new sales offices were opened, but not much happened
on the R&D front until much later. In a lighter vein, Venkatesan would later say, “Microsoft India in
those early years continued to languish at the Hindu rate of growth,” an expression commonly used to
refer to the stagnation of the Indian economy in its socialist years of 1950 to 1980, when the annual
growth rate was a low 3.5%.

Microsoft in China and India, 1993–2007


joint ventures for multinational companies, Microsoft also made plans to invest over $62 million in
local Chinese companies.

Around 2002, Mundie began to focus on India, an economy that was growing very rapidly. On the
surface, China and India had several similarities: a large population, a GDP growth rate among the
fastest of the largest emerging economies, price-sensitive customers, and high levels of piracy.
Moreover, like China, India had primarily been a sales subsidiary for Microsoft until the India
Development Center (IDC) was set up in the southern Indian city of Hyderabad in 1999. The key
question for Mundie was whether the early lessons learned in China could be applied in India or
whether India would need a very different playbook.
One of the unique challenges that India offered was that the country lacked depth and penetration
in its domestic IT infrastructure, even compared to China. Even insiders like Kiran Karnik, president
of the Indian software industry association NASSCOM (National Association of Software and Service
Companies), expressed concern that the domestic IT market was not growing fast enough to keep up
with the rest of the world. A second big challenge that Microsoft faced in India was that the
functioning of the central and the state governments was quite different from that in China. As in
China, the Indian states had a fair degree of economic autonomy. However, unlike in China, both the
central government and many of the state governments in India were governed by multiparty
coalitions, with the governments changing quite often. Microsoft, in fact, faced serious concerns in
the area of government engagement in India and in an early setback had to recall around 200,000
copies of Windows 95 from the country because a pixel map showed Kashmir as a disputed area and
not part of India proper. The company had faced a similar situation in the PRC earlier when Taiwan
was not shown as part of the map of the PRC. A third significant challenge that Microsoft faced in
India was the need for software and applications written in local Indian languages. Though English
was the lingua franca for educated Indians in the cities, over 95% of Indians (many of whom could
speak English) used their local language more than English in their work and personal life.

A New Order Emerges (2002–2007)
Mundie realized that Microsoft would need to win over not just the government(s) but also other
key constituencies—customers, IT majors, developers, and the broader IT ecosystem. Moreover, the
company would have to keep a close eye on competitors such as IBM, Google, and Yahoo!, all of
which were investing aggressively in China and India.

Winning Over the Internal Organization
The new vision for China and India could not be supported by the old, low-profile sales
subsidiary structure. “We needed both scale and stature in China and India,” noted Mundie.
Important changes were made to both the field organizations and to the corporate teams involved
with China and India.
In 2003, Microsoft appointed a new chairman for the Greater China region. Timothy Chen was the
former president of Motorola China. Motorola was the largest foreign company in China in terms of
local revenue at that time. His appointment was considered a big success for Microsoft and gave the
company the stature it needed in government and industry circles. In addition to being the chairman


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Taught by Matt Allen, from 11-Jul-2011 to 31-Dec-2011. Order ref 92360.
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Awakening to India


Microsoft in China and India, 1993–2007

Under Chen’s leadership, Microsoft China went through a major restructuring exercise. In 2003,
Greater China became a separate region for Microsoft, independent of the erstwhile Asia Pacific
region managed out of Singapore. Chen’s presence also steadied the top management attrition at
Microsoft China, as he brought in executives with significant China as well as international
experience and made sure they stayed. He also ensured that Microsoft’s top leadership was deeply
involved in supporting the China business. In addition to Chen, two out of Microsoft’s top seven
senior-most leaders (Mundie and Kevin Johnson, who was responsible for worldwide sales and
services) were now deeply connected to the China operations through an advisory board comprising
themselves and 10 other senior managers at Redmond.
Having gone through the experience of organizational change in China, Mundie wanted India “to
fast-forward through a similar exercise.” Venkatesan, who led Cummins Engine in India between
1999 and 2004, was brought in as the chairman of Microsoft India. Venkatesan was a member of the
Executive Council of NASSCOM and the major Indian trade association, the Confederation of Indian
Industry (CII). This move also triggered a series of major initiatives for the company. After a lot of
organizational introspection, in 2006, Microsoft India, like its Chinese compatriot, became an
independent subsidiary reporting directly to Redmond, and in 2007 Venkatesan was also designated
a corporate VP.
In addition to changes to the field organization, a new corporate team was put in place to work
closely with Mundie and the China and India field teams. This team was jointly led by Microsoft
veterans Orlando Ayala, senior VP, Emerging Segments Market Development Group, and Will Poole,
corporate VP, Market Expansion Group. Born and raised in a farming village in Colombia, Ayala was
reminded of his own life experiences as he traveled through rural China and India. “Success in life is
sometimes all about someone giving you that one key break,” he would say, continuing “we at
Microsoft want to provide that critical break to millions around the world.” Poole, on the other hand,
was erstwhile head of the worldwide Windows Client Business Group in Redmond. The duo came to
be known as “Two-in-a-box” and subsequently came to colead a single integrated team called the
Unlimited Potential Group. The name of this team was to reflect their mission—enabling millions of
people around the globe to realize their potential through technology. There was little organizational
precedence of anything like this at Microsoft, where the field teams were traditionally organized by
geography and the business groups by technology.

Winning Over the Government
In 2002, Microsoft announced the Government Security Program, or GSP. This was the result of
intense discussions over two years between Microsoft and the Chinese and other governments.
Under this program, Microsoft committed to sharing the source code of its Windows line of products
simultaneously with around 60 governments around the world, a move designed to address concerns
about the security of the operating system. In February 2003, the China Information Technology
Security Certification Center signed the first agreement to participate in Microsoft’s Government
Security Program. In addition, Microsoft continued to announce fresh commitments to China’s digital
future and in April 2006 announced multiple initiatives—contract manufacturing, outsourcing, and
investments in training and education—worth around $800 million each year for the next five years.
In fact, Microsoft’s engagement with the Chinese government was reaching new levels. President Hu
Jintao attended a U.S. state dinner sponsored by the governor of Washington at the Gates residence
after he toured the Microsoft Redmond campus in 2006.


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Taught by Matt Allen, from 11-Jul-2011 to 31-Dec-2011. Order ref 92360.
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of Microsoft China, Chen was designated a corporate vice president, a rank indicating the importance
that Microsoft placed on getting this right.


In India, the government was still quite sympathetic to open-source software. The president of
India, A.P.J. Abdul Kalam, a respected technocrat and the father of the Indian missile program,
recalled a conversation with Gates in May 2003. “I made a point that we look for open-source codes;
our discussions became difficult, since our views were different,” he said. Similar sentiments were
often echoed at the state level. In 2007, the southern state of Tamil Nadu announced it would install
6,500 Linux systems at village government offices, or panchayats. Microsoft tried to win over the
Indian government by using its “Chinese recip...

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The strategic success of Microsoft in two of the biggest emerging markets China and India, can
be credited to Craig Mundie,the chief strategic officer of MS....

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