It is no secret that US-China relations have been strained in recent months, largely as a result of China’s increasingly wide trade surplus and what the US views as the inadequate revaluation of the Chinese yuan. But President Bush has two other gripes: China’s counterfeiting of Hollywood movies and Microsoft software.
US pressure on China to stamp out software piracy was likely behind the Chinese government’s new ruling this week, which dictates that all PC manufacturers in China must install authentic operating system software before the machines leave the factory. Imported computers must also come with software. The government gave no detailed list regarding the type of operating system required, but dictated that software producers should provide a favourable price for PC manufacturers.
Until recently, many PCs were sold in China with no operating software installed, a practice that was criticised for encouraging consumers to buy pirated copies of software such as Microsoft’s Windows operating system.
Ranjit Atwal, PC analyst at Gartner explained to OPI+: "Illegal software is generally still a problem in maturing markets where the cost of the operating system as opposed to the PC is still high, so the option of pirated software is more likely."
Undoubtedly, Chinese regulators have a tough task ahead. Stamping out software piracy in China has been likened to erasing drugs in the US. Pirated software in the country is copied and sold by software imitators; loaded onto PCs by hardware dealers without authorisation; or sold online without authorisation. According to the International Intellectual Property Alliance (IIPA), China’s piracy rate remains at 96 per cent of all software sold – only 4 per cent is legitimately licensed. The IIPA estimates that the piracy of business software totalled $2.67 billion in 2002.
According to the government, PC makers and software producers will be required to report sales to the Ministry of Information every February. Those that do not or that install pirate software will be penalised.
A drastic move to protect intellectual property is required if China’s burgeoning technology industry, not to mention its software industry, is allowed to mature. Many of the world’s top PC players have moved to China to benefit from the cheap components and labour, and there is pressure to adhere to international standards. Dell, the world’s largest PC maker, bought $16 billion worth of components and products in China last year and purchases are expected to rise to $18 billion in 2006, the company’s chairman Michael Dell said on a recent trip to Shanghai.
Des Wong, president/CEO of Sino Strategies Group and all-round China expert believes the new laws are a good thing all round. He told OPI+: "IP protection is improving in China, but it has to overcome the inertia of decades of no protection. IP laws are good for everyone as China itself prepares to invent/develop new technical standards and patents and will have much more to lose over time."
The new ruling will not affect the big players such as Dell, Hewlett-Packard (HP), China-based Lenovo and Taiwan-based Acer, which normally have software already installed. It is the smaller, local PC manufacturers in China – of which there are hundreds – and the individuals that make computers that the government is targeting.
"The big multinational companies would produce products with software already installed," said Atwal. "A lot of them put it on at the point of manufacture before they send it out to the distribution centre, largely because it is cheaper to do it this way. It is the smaller, local manufacturers – the white box guys – that the Chinese government is trying to get a grip on to combat piracy levels. It basically is showing a willingness to work with the US to provide an environment that US corporations can work in."
Eager to enhance its brand overseas, Lenovo already reached an agreement last November with Microsoft to ship all its PCs with Microsoft’s Windows software. In-house analyst at Lenovo Adrian Horne told OPI+: "In China, through the agreement with Microsoft, all Lenovo-branded PCs will feature the operating system pre-installed. In addition, the two companies agreed to jointly promote software legalisation drive in China. Joint efforts will include education programmes in Lenovo’s 5,000 stores to increase consumer awareness of the value of genuine software and to increase understanding regarding software copyright issues, system security, privacy protection and virus prevention… A small number of machines are also shipped with [open source software] Linux."
Other PC manufacturers looking for opportunities to become real global players are also expected to comply with the new regulations. Taipei-based Acer has a similar agreement with Microsoft. "Microsoft’s operating system is always pre-installed in our PCs, therefore the decision in China does not affect Acer," Henry Wang, spokesperson for the company, told OPI+. China-based TCL Group, which mainly makes televisions and mobile phones, has also signed an agreement with Microsoft to pre-install Windows on its PC lines.
But how will the rules work in practice? It is as yet unsure how severe the penalties will be. "The question is, how will the government increment this law on the PC makers- asks Atwal. "It will be hard to impose. But when the law comes out, those that dabble may stop, leaving it to those that use pirated software as a criminal activity."
Wong is equally hesitant. "Like any other law, its effectiveness depends on whether enforcement resources can be committed at city and village levels. It’s a very good start, the right law to put on the books, but old customs and habits may die hard."