Corporate Fraud in Chinese Company: Welcome to Capitalism
India, China and African Economic Development

Software Piracy in China

Cultural Considerations and Software Privacy in China

Some say it's just part of the collectivist culture in China that emphasaizes sharing within groups and society while others point to the high cost of buying American software. Why not copy it and install it into computers so everyone benefits and costs are kept in check? Yesterday I blogged about corporate fraud in Chinese companies. Today I address the equally troubling fact that elements of Chinese culture in the form of software piracy may be infecting an otherwise successful movement away from traditional state-owned enterprises to corporatized Chinese entities.

From an economic perspective, software piracy cheats the U.S. economy and companies like Microsoft out of hundreds of millions of dollars of revenue, Chinese products and that in turn cheats the U.S. government out of needed tax revenue. Already the biggest market for cars, cell phones, and commodities like iron ore, China is on track to surpass the U.S. as the world's largest PC market in 2012, according to International Data Corporation, the   premier global provider of market intelligence, advisory services, and events for the information technology, telecommunications and consumer technology markets. This year, the market research firm projects PC unit shipments in China are likely to increase 12 percent to 71 million units, just shy of the 75 million units in the U.S.

Microsoft is one company deeply concerned about its lost PC sales in China due to software piracy. In an address to employees at the company's new Beijing offices, CEO Steve Ballmer said Microsoft's per PC sold in China is only about a sixth of the amount it gets in India. He noted that Microsoft's total revenue in China, population 1.3 billion, is less than what it gets in the Netherlands, a country of fewer than 17 million.

On a global basis, Microsoft's revenue in China is close to $2 billion. For the fiscal year ended June 30, 2010, Microsoft reported U.S. revenue of $36.2 billion out of a world-wide total of $62.5 billion. The company has historically tried a collaborative approach with Chinese officials, developing an agreement to require Chinese PC makers to ship their products with legitimate copies from factories. For its part, the Chinese government acknowledges the problem but says it is taking steps to improve the situation. Among other measures, the government has ordered all state institutions to buy licensed software.

The Business Software Alliance, an industry advocacy group, estimates 78 percent of the PC software installed in China in 2010 was pirated, down from 86 percent in 2005. That's progress, albeit grudging progress. At this pace it will take about five years to get the rate down to 50 percent and at least another ten to come close to eradicating the problem.

If China wants to be seen as an equal partner in the international marketplace it must come to grips with its unethical software piracy practices. These practices cheat U.S. companies like Microsoft out of revenue it deserves and the U.S. government out of tax revenue. It instills a culture that cheating is OK, at least when it is others' products that are being pirated. The tradition of software piracy that adds to a corrupt business environment may be showing up in other areas such as the increasing number of cases of fraud committed by Chinese companies and questions about the reliability of financial statements produced by corporate China.

The software privacy problem may solve itself over time as China becomes a leader in software development. However, we must realize that the country's ability to assume a global economic leadership role in the future may occur on the backs of U.S. software developers that see its products pirated and intellectual property rights stolen. The Chinese government must realize that software piracy is not a very responsible way to act for a country that aspires to be the world's largest global economy. It's time for the Chinese government to recognize its global social responsibilities and play by the same rules as all industrialized nations.

  Blog by Steven Mintz, aka Ethics Sage, June 2, 2011