Hu Jintao to Meet With Microsoft, Boeing

Monday, April 17th 2006, 10:05 am

By: News On 6

SEATTLE (AP) _ Chinese President Hu Jintao will kick off his visit to the United States this week by meeting with two major corporations that embody both the difficulties and the opportunities for U.S. companies in China.

Microsoft Corp. believes that, after more than a decade of efforts, it is on the cusp of a breakthrough in China's vast potential market, where it has traditionally been hindered by widespread software piracy.

But even as Microsoft is winning Chinese government backing to crack down on piracy, the software maker and its competitors have come under fire for aiding government censorship efforts as they try to break into China's lucrative online market.

``Everybody sort of has this issue of, `How do you balance the sort of civil liberties aspect with the sort of real world that's the market out there,''' said analyst Charlie Di Bona with Bernstein & Co.

Meanwhile, Boeing Co. has won pledges for big airplane orders that could help boost diplomacy efforts, although some say the company's potential there is limited by strict regulation of Chinese airlines.

``Everyone wants the market to deregulate, but it's happening slower than expected,'' said Richard Aboulafia, analyst with the Teal Group.

The nation's largest exporter also is seeing stiffer competition in China from rival Airbus SAS, raising concerns in part because so much business is at stake. Boeing believes China will require 2,600 new airplanes over the next 20 years.

``The Chinese market is probably going to be as strong as any single country in the world over the next 20 years, ... so it's certainly one that Boeing wants to continue to be dominant in,'' said aviation analyst Paul Nisbet with JSA Research.

Nisbet credits Boeing with astute sales and marketing efforts in China, but he said the company also is benefiting from both U.S. and Chinese eagerness to address a growing trade imbalance. The United States has a $202 billion trade deficit with China, and big purchases of Boeing airplanes help tip the scales back a bit.

At a meeting between U.S. and Chinese officials last week, China pledged to complete a previous 150-plane commitment by buying 80 narrow-body 737-700 and 737-800 airplanes worth $5.2 billion at list prices. The order has yet to be finalized, and airlines typically negotiate discounts.

Still, Aboulafia said he thinks the potential could be greater if there were looser restrictions, allowing more people to more easily start up airlines and buy planes.

``The fact that the Chinese government is placing these orders shows how close they are,'' said Aboulafia, who believes India is more promising in part because it's a more open market.

Robert Laird, Boeing's vice president for China sales, insists Chinese airlines, not the government, are making fleet purchasing decisions.

Redmond-based Microsoft has had a presence in China since 1992, but Tim Chen, who overseas Microsoft's China operations, says it has only been in the last couple years that the company has succeeded in efforts to curb piracy.

The Chinese government has said it will crack down on illegitimate software use, and three major computer makers have said they would begin loading legitimate copies of Windows onto some of the computers sold there.

``China wants to be regarded as a mature player in the world stage, and to do so it has to respect intellectual property law,'' said Roger Kay with Endpoint Technologies Associates.

Such regulation is important to Microsoft because the market for Windows and other products is growing saturated in much of the developed world, leaving Microsoft hungry to boost sales in areas such as China and India. But Di Bona said that, despite the high-profile promises, he thinks it will still be some time before Microsoft realizes significant revenue from the pledged changes.

Meanwhile, Microsoft, Yahoo Inc., Google Inc. and others are also eager to break into China's promising Internet market, which boasts approximately 100 million Web users. But the companies have come under fire for working with Chinese government officials who want to police such activities and censor free speech.

Microsoft says it must obey local laws in countries where it operates, and says it believes that it is better to offer these tools even with the limitations than not to offer them at all.

Boeing and Microsoft also both take advantage of manufacturing in China, but to a much lesser degree than other companies. Boeing produces parts for its 737s and other airplanes there, although Aboulafia said he thinks the amount of work is small compared to other parts of the world. Instead, he thinks Airbus and Boeing's production efforts there are meant to serve more as a scare tactic.

``China's real value is that it pressures the unions and politicians back in the United States and Europe,'' he said.

Microsoft outsources production of its Xbox game console, computer mice and other hardware to Chinese manufacturers. Still, analysts say the more noteworthy element of the company's work in China is a research and development center located there.

Among other things, the research center is playing a central role in developing technology for Microsoft's online advertising platform, one of the company's key initiatives for competing with the likes of Google and Yahoo.