Will The New China Strategy Drive Microsoft Corporation Growth?

  • Microsoft sold MSN China to its local partner as it is reconsidering its current China strategy.
  • Despite a tough operating environment, Microsoft plans to re-think its strategy in an attractive Chinese market.
  • One of the strategies is to focus on small but performing assets and dispose underperforming ones.

Microsoft (NSDQ:MSFT) disclosed last month that it has sold its web portal operations in China, MSN China to their local partner, Xichuang Technology (Beijing) Co. The financial terms of the transaction were not disclosed.

The transaction was no surprise to the market. Microsoft has announced earlier this year that they plan to shut down their MSN China portal, though the company’s officials did not provide any explanation. It is reasonable to assume that the reason why Microsoft decided to quit on the web portal is because of China’s tight regulatory environment. Other US technology companies including Alphabet Inc-C (NSDQ:GOOG), Amazon (NSDQ:AMZN) and eBay (NSDQ:EBAY) have had similar experiences in China.

China Strategy Version 2.0

Microsoft’s exposure in China began more than 20 years ago when Microsoft founder Bill Gates sent some sales manager into China from Taiwan. Since then, the company has built up the brand in various channels. The company has undertaken restructuring efforts, which primarily includes disposing off non-performing assets and focus on profitable core operations to improve its overall profitability.

Also Read: Microsoft Corporation Is Closer To Its 'Cloud First Mobile First' Dream

One of the strategies in China is to shift from being an online services company to offering Windows 10 products. In addition to that, they are also looking to offer cloud services and computing service, which are an attractive market for them. It is further noted that China’s contribution was less than 10% of revenues over the last few years. Since China has a population of around 1.4 billion, it would be a massive market for Windows 10 products and Cloud computing services.

    Twelve Months Ended June 30,
   
    2016   2015
Revenue    
Productivity and Business Processes  $26,487    $26,430
Intelligent Cloud 25,042   23,715
More Personal Computing 40,460   43,160
Corporate and Other -6,669   275
  Total revenue  $85,320    $93,580
   
Operating income (loss)    
Productivity and Business Processes  $12,461    $13,359
Intelligent Cloud 9,358   9,871
More Personal Computing 6,142   4,667
Corporate and Other -7,779   -9,736
  Total operating income (loss)  $20,182    $18,161

Source: Microsoft 2016 Annual Report

As shown above, the cloud computing division was a $25 billion revenue business in 2015, where it has modestly grown by 6% from the prior year. Conversely, the personal computing segment has declined by 6% year-on-year.

As such, it is also timely to be aggressive on its Personal Computing space in China, notably the Windows 10 platform. According to a study, the majority of Chinese PCs are using an older Microsoft Windows version and the current Windows 10 adoption rate is slow. Additionally, it has also experienced piracy issues in the past.

Recently, the company established a joint venture with state-owned China Electronics Group Corp. for government agencies and institutions to expand the adoption of Microsoft Windows 10. If the company can sell legitimate versions of Windows 10 to the government and eventually private corporations, the company would be able to capture significant revenues in the Chinese market and consequently improve its overall personal computing business. As reported, Microsoft plans to sell Windows 10 for 1 billion devices in 2018.

Further, for the company, capturing this market would also enhance their chances on offering cloud-computing services to their clientele base. It is noteworthy to mention that Microsoft is one of the leaders in cloud computing having various data centers in the world. A strong Chinese penetration could also strengthen Microsoft’s mobile competitiveness against Apple (NSDQ:AAPL) and Alphabet.

Product-Centric Focus

The company is following a textbook example of gaining a competitive advantage through focus. Instead of offering various products, the micro focus on products with good potential could possibly provide them gains in the Chinese market. They have also partnered with Chinese companies including Baidu (NSDQ:BIDU) and other leading Chinese companies including Tencent Holdings, Xiaomi and Lenovo to further increase the adoption rate of its Windows 10 platform.

However, the transition to a different strategy in China should provide Microsoft a deeper perspective on dealing with the Chinese environment. Among the obstacles is a regulatory environment that has been hostile towards US technology companies. It probably would have not only relied on its Chinese partners to deliver them the necessary market share but also regularly evaluate the competitive and regulatory Chinese landscape. After all, the Chinese market has been a difficult puzzle for them that even Microsoft founder Bill Gates was not able to solve in the past.

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