Perhaps tariffs only scratched the surface, what are the challenges in the Chinese market?

Original Article Title: When it comes to tariffs, China is a special case
Original Author: @stevesi
Original Translation: zhouzhou, BlockBeats

Editor's Note: This article discusses the significant challenges that U.S. tech companies face in China. Despite the attractiveness of the Chinese market to foreign companies, issues such as inadequate intellectual property protection, significant government intervention, and rampant piracy make conducting business in China exceptionally difficult. Companies like Microsoft have tried various methods but have always struggled to break through the complex barriers of the Chinese market. The article emphasizes that while tariffs are obvious, the real issues in China lie in soft restrictions, regulatory mazes, and cultural differences, calling for a deeper understanding and discussion of the challenges in the Chinese market.

The following is the original content (slightly reorganized for better readability):

There has been much discussion about how the U.S. can benefit from China's powerful manufacturing sector, and tariffs are often the focus of international trade debates. However, what is often overlooked is how difficult it is for U.S. companies to enter the Chinese market and establish a sustainable business—especially in the service and intellectual property sectors.

Tariffs are just the tip of the iceberg. Beneath the surface lies a vast and complex network of "soft barriers," regulatory requirements, and cultural differences that make it nearly impossible for U.S. companies to enter this market fairly and sustainably.

Having worked at Microsoft for 15 years and lived and worked in China, I have personally experienced all of this. These experiences, compared to any tariff dispute, are much more challenging and insightful.

Over the years, I have been involved in many activities in China related to cooperation and combating piracy.

Microsoft's first attempt in Asia was to enter the Japanese market in the late 1980s. This was not easy. We faced some technical barriers, such as the lack of a UNICODE standard, strong local preferences for domestic products, and government policies that overtly and covertly favored Japanese companies. In many ways, this was not much different from the "Buy American Products" policy we see in the U.S.

But through perseverance, respect for local customs, and significant investment in product localization, we eventually succeeded. Japan's deep-rooted respect for intellectual property played a key role. By the mid-1990s, Microsoft Office was the most profitable business in Japan, with both enterprise users and ordinary consumers loving the product, as well as our customized distribution and software experience for the Japanese market.

Windows 7 Launches in Japan.

However, the situation in China was completely different.

From the very beginning, we encountered a series of complex issues. Early on, a certain version of Windows was even completely banned from sale simply because some of the localization work was done in Taiwan. And that was just the beginning. We responded earnestly time and time again: we built a large local development team, developed a widely-used Input Method Editor, established cutting-edge R&D centers, and strictly adhered to all regulations for doing business in China—even hiring locals as CCP representatives in our office.

Nevertheless, we still hit a wall time and time again.

Piracy was the most obvious and frustrating challenge. While software piracy is a global issue, the scale in China was staggering. About 90% of Microsoft products in China were pirated. Imagine, a country with 200 million personal computers generating revenue similar to Italy, which had a quarter of the computer count and a "mere" 50% piracy rate.

We often consoled ourselves in the past, believing that these users, although currently using our products for free, would eventually be willing to pay for them because they liked our products, and as soon as the government began to truly value intellectual property, our revenue would increase.

Take a walk through those bustling computer markets, and this problem becomes even more evident. There are five or more floors filled with computers—from pre-built to DIY setups, everything you could ask for. You could choose a system, and they would assemble it for you on the spot.

After assembly, they would present you with a software menu. Once you made your selection, you would soon receive a custom-made disc containing all the software suites you wanted—Windows, Office, Photoshop—along with a serial number in a text file in the root directory, sometimes even including a few pirated movies as a bonus. The whole package cost only 100 Chinese Yuan, about $12 USD at the time.

Time and time again, we pleaded with government officials in meetings. Over long banquets and countless toasts of baijiu, we discussed cooperation, innovation, and the value of intellectual property. But the response remained consistent: the government always cited poverty as the reason, claiming they couldn't afford genuine software, while they themselves drove in black Mercedes vehicles, feasted at luxurious restaurants in high-end Ferrari showrooms.

Eventually, some officials began to express their attitude more candidly: "We do not agree with your so-called concept of intellectual property," they told us, "we believe knowledge should be disseminated and shared."

In theory, this is a noble idea—open source advocates have similar views—but in reality, it is merely a rationalization for plagiarizing and reselling our work without any compensation.

In Windows (later Office), we gradually introduced stronger "anti-piracy" measures, only to find that users simply switched to using old versions of the software that were easier to crack—versions that were not only easier to pirate but also more vulnerable to hacker attacks. We would showcase our designs and plans to the government before release, but still faced strong resistance. They told us that our "approach" did not meet market demand—such as a simple registration wizard.

So you would see warnings of "Unregistered Windows" popping up on airport flight information screens. The checkout counters in my supermarket still run on Windows XP, released a decade ago, simply because they are unwilling to pay for the new version. PC manufacturers began shipping without pre-installed Windows, openly declaring that they were doing so to comply with U.S. antitrust laws.

And the problem goes far beyond software. Companies in various industries in the U.S. and Europe—including pharmaceuticals, fashion, and publishing—are all facing similar dilemmas. I remember visiting a large pharmaceutical factory on the outskirts of Shanghai. Tech people may be more familiar with Foxconn and device manufacturers, but the scale of the pharmaceutical industry is actually larger. Officials said these factories were producing for Western companies, but everyone knew that some of the products would be resold in the local market, and the companies that developed these products would not receive any reward.

Even consumer goods were not spared. Once, while hiking in the rain with my Microsoft China colleagues, I noticed that each of them was wearing the same North Face jacket as me. But while my clothes remained dry, theirs were already soaked—turns out, they were wearing knockoffs made in the same factory, with the exact same logo, but using inferior materials.

I once firmly believed that we could find a successful path in China. I supported expanding local R&D, gave speeches everywhere, led the team to expand, and always held on to hope, believing that like in Japan, we could eventually achieve difficult but true success. However, as time went on, I gradually realized: compromises know no bounds, and a truly sustainable long-term business model simply does not exist.

We are not alone, Google has exited China, and Meta has been nearly entirely blocked. Even in this era of cloud computing and subscription software, which is more difficult to pirate, Microsoft's revenue from China is still less than 1% of its global total revenue. Even Apple—among the few American success stories in China—faces significant pressure from government intervention and local competition. Automotive manufacturers like Ford have already retreated from the market, and BMW and Volkswagen hold only half the market share they did a few years ago.

When it comes to fair trade, people often focus on tariffs. Tariffs are obvious, quantifiable, and politically convenient. However, in China, tariffs are far from the biggest obstacle. The real challenges are much harder to measure: soft restrictions, regulatory mazes, cultural differences, and the ever-changing definitions of fairness and property rights.

Yes, every country has its own form of protectionism—including the United States. The relationship between the European Union and U.S. tech companies is also fraught with friction. But over the past few decades, we have found solutions in many regions. In China, after 25 years of effort, we are still waiting for a substantive breakthrough for the tech industry to operate here.

So, when we discuss international trade, don't just focus on tariffs. The real story—especially in China—is much more complex and much more critical.

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