China’s reaction to NSA surveillance gives Microsoft reason to worry

One month after former NSA contractor Edward Snowden revealed the U.S. government’s secret electronic intelligence gathering program to the world, new reports show that some Chinese government organs are discarding their foreign-made tech products in favor of domestic alternatives. While this is bad news for all U.S. tech firms, it is likely particularly worrying for Microsoft, a company that was reportedly heavily involved in the National Security Agency program, and one whose field of dominance, software, has become a focal point for Chinese calls to switch to domestic competitors.

American tech companies and the Chinese government have long had a complicated relationship. Numerous U.S. Internet firms, including Facebook and Twitter, are outright banned in the People’s Republic. Others, like Google, entered the Chinese market, only to later withdraw over concerns about censorship and cybersecurity. Still others, such as Apple, have stayed and found success only to face a blistering spate of government-direct criticism aimed at certain aspects of their in-country operations.

One major theme underpinning all of these trials and tribulations is the belief amongst Chinese officials that U.S. tech companies are Trojan Horses for American political values. The information leaked about Prism, a U.S. National Security Agency program that utilizes these companies to collect electronic data both domestically and internationally, appears to confirm these claims. In Microsoft’s case, the most recent reports in the Guardian say that the NSA had access to email on Outlook.com and Hotmail before encryption, and that the company worked with the government to allow access to its cloud storage service SkyDrive. Microsoft has maintained that it only provided access to its systems when required to do so by court order.

mschinaAll of these are prompting many in the Chinese tech industry to ask the question:  if the Chinese government is so wary of the presence of American tech companies, why does it allow them to control many of the country’s tech-related markets? As a recent China Daily article notes: “to ensure the security of information, [industry] insiders and experts are calling on the Chinese government and enterprises to use domestic software.”

Calls for a switch to domestic software are one thing, but is anyone in China actually heeding these calls? Yes, at least according to a recent Sina Tech piece. In a July 4 article, Sina Tech, a respected online industry publication, cites unnamed “industry insiders” in revealing that Snowden’s disclosure of Prism has led some state-owned enterprises and government offices to replace foreign tech products with domestic alternatives.

A few unconfirmed reports do not a trend make. Still, such news is hardly likely to comfort Microsoft executives. Consider the following: 1) Prism has increased Chinese distrust of American tech companies; 2) Microsoft was reportedly the first U.S. tech company to participate in Prism and, according to newly leaked documents, “collaborated closely with the National Security Agency and FBI;” and 3) Chinese media reports on calls for the use of domestic tech have focused on software, an area where Microsoft is particularly dominant in the country.

Alarm bells need not be ringing on Microsoft’s campus just yet. Chinese officials and media outlets have been known to threaten major retribution on American enterprises in the wake of significant diplomatic incidents. Remember the time China threatened to sanction Boeing for its connection to U.S. arms sales to Taiwan? Well, the sanctions never came, tensions cooled, and Boeing sales to China continue to boom.

Will Microsoft enjoy a similar reprieve? Most likely, if the prior patterns are any indication.

It’s not all good news for the Redmond-based tech giant, though. Prism has clearly highlighted the ramifications of Chinese dependence on American technology. Even if the short-run impact on U.S. tech companies is negligible, this incident provides the Chinese government with a powerful incentive to nurture the development of homegrown competitors. In short, then, though there may be little for Microsoft executives to worry about today, tomorrow is an entirely different story.

Editor’s Note: contextChina is a Seattle-based media company following the growing impact of China on the Pacific Northwest across business, technology and policy. You can follow contextChina on Twitter @contextchina.

Photo by Gen Kanai via Flickr. 

  • Guest

    I’m sure the prospect of the Chinese Government pirating less software has MS’s management team terrified.

    • Robert O’Brien

      Interesting point. Yes, it is true that most of the Microsoft software in use in China is pirated – an estimated 90 percent. That being said, the Chinese government pledged in 2011 to switch to licensed software in all of its offices, a development which MSFT applauded. Moreover, they have already completed the transition in central government organs. Considering the fact that the government is the most likely party to switch to domestic software first, this development (domestication of software in China) would indeed be bad news for MSFT.

      Thanks for your feedback!

    • Reality_Check

      Terrified is the right word. Both Bill & Steve have said on several occasions that they much prefer users use pirated MS software over non-MS software. Simply because the users of pirated MS software stay in the MS users group. Once those users move to Linux & e.g. LibreOffice they are lost forever because those users quickly figure out that MS products have very limited to no added value over their free Open Source counter parts.

      And about the switch by the Chinese government to licensed MS software, I suggest you go have a look to see what they are actually using (hint: continuous roll-out of Red Flag Linux on the desktop & server, non-licensed MS and a tiny amount of licensed MS). Contrary to the US where the focus on “shareholder value” (see Ballmer’s last reorg memo) results in short term behaviour, the Chinese typically focus on decades ahead. A little bit of lip service and a few million spent on MS licenses to make MS/US Government happy is a typical Chinese strategy while they look at other options that benefit the Chinese more than some foreign entity. And do realize that those options do not include buying commercial software from US corporations.

      • http://www.techmansworld.com/ Michael Hazell

        Ubuntu has gotten really good lately, and even better than Windows in some cases. I’d would much rather see China switch to Linux than Windows. Maybe that’ll make Microsoft think twice about how it does with the US government.

  • Guest

    Are you kidding, several governments are in the process of seriously exploring other options. France, Germany, Switzerland, Japan, China feel deeply threatened by the revelations. Just wait for it, sooner or later they will all switch to their own government approved Linux distros. Think about it, would you still trust American software companies if you were a foreign government? Economically this will be a HUGE setback.

    • panacheart

      Some of the countries you mention have been exploring Linux in government for years because it’s a way for governments to save money on licensing. China has always been worried that the Windows OS has back doors that only MS knows about.

      By the same token the US has always been worried that hardware from China has exploits and hacks built in. I watched a documentary once on the NSA and the DOD’s process for checking hardware, and in some cases they found exploits built into motherboards and other components.

      So, I don’t think China ever trusted American Software companies, or visa versa.

      • Guest

        You are right, particularly on China. The manipulation and lack of trust is bilateral here, no doubt. As for the other countries, France, Germany, and Switzerland are now considering to introduce new legislature demanding open source software on government PCs. The EU is going to prohibit storing ANY data on EU citizens overseas in the cloud. Germany, previously relying heavily on MS, is talking about switching everything over to a government Linux, tested and compiled in Germany. Moreover, the people in those countries are really disturbed by these revelations and demand such actions from their leaderships. I also think there’s a qualitative difference between hacking a few targeted motherboards vs scanning ALL communication of a country, as the NSA currently does to their ally Germany. Economically this will be a huge blow to American companies. Not to mention that it is utterly unconstitutional what these agencies are doing to us Americans. I just wish the collaborating companies had the balls to challenge these agencies in court instead of caving like weasels. They deserve everything that’s coming to them.

        • panacheart

          Totally agree, especially that the NSA activities are completely unconstitutional. I’m less critical of MSFT, Google and others. We have no idea what kind of strong arming went on between them and the NSA. Gag orders, threats of IRS audits, loss of huge government contracts, loss of CIA protection overseas.

          It’s that concept that should scare us all. If large corporations like Miicrosoft and Google are unable to stand up to the US government, then what hope do the rest of us have?

  • ujur

    I think you are mistaking Microsoft for Huawei and ZTE and Chinese government for US government which suspected the 2 Chinese companies are spying for the Chinese government but could not provide any evidence yet. .