Microsoft president talks ‘tech Cold War’ with China, which accounts for 2% of company’s revenue

Microsoft President Brad Smith speaks last year at a Town Hall Seattle event. (GeekWire Photo / Kevin Lisota)

Microsoft President Brad Smith speculated last month that the U.S. and China were on the verge of a “Tech Cold War.” Even as the countries signed phase one of a trade deal this week, Smith doubled down on that prediction Wednesday during a speech in Seattle.

“Increasingly in Washington, Brussels, Berlin, Paris, and Beijing itself, people are asking: ‘Are we heading toward a new Cold War? A tech Cold War?’ That is one of the questions the 2020s will answer,” Smith said.

The Microsoft executive spoke at the U.S.-China Series, a bilateral relations conference hosted by the Washington State China Relations Council.

Smith cited an unnamed senior U.S. government official to whom he posed that question last week. The official gave a sobering response: “Well, I think we’re already in one.”

From the U.S. Commerce Department’s restrictions on Chinese telecom giant Huawei to China’s plans to “rip and replace” all non-Chinese computing equipment in three years, industry observers have clocked several tech-specific power plays in the ongoing trade war that go far beyond the tit-for-tat tariffs between the world’s two largest economies.

Microsoft has a turbulent history with China that long predates the ongoing spat.

“It’s not hard to find Microsoft software in China and even in Chinese government institutions. It’s a lot harder to find Microsoft software that Microsoft has been paid for,” Smith said to knowing laughter. “This has been part of the reality for two or three decades.”

Rampant piracy is just one reason that Microsoft has struggled to crack into the Chinese market. Although 18 percent of the world’s population lives in China, it accounts for just 1.8 percent of Microsoft’s global revenue, Smith said. He cited Apple, and to a lesser extent Qualcomm and Intel, as the only U.S. tech companies that have made significant inroads into the Chinese market.

“There have been times when American tech companies, Microsoft included, have failed to appreciate that Chinese consumers may simply want something different from consumers in the United States and other places,” Smith said.

At Microsoft Research Asia in Beijing. (GeekWire File Photo)

Today China is beefing up homegrown technology and further heightening the so-called Great Firewall of China. Meanwhile, the U.S. Treasury announced new, tighter restrictions on multinational technology investment deals.

“Both nations make it harder for tech companies from the other country to access its local market,” Smith said. Even with the phase one trade deal, he continued, “It would be naive to think that this will change any time soon.”

Those new regulations from the Committee on Foreign Investment in the U.S. are a particular bugaboo for tech companies such as Microsoft, whose products and applications can fall into a gray area between humdrum consumer goods — like cloud computing software that can help Starbucks expand into the Chinese market — and software with sensitive national security or human rights implications, such as facial recognition software that can be wielded as a tool of mass surveillance.

“We will not provide every service to every country in the world,” Smith said, holding up global human rights principles as a Microsoft core commitment. “We’ve got to not only stand for the protection of people’s rights, but we have to implement effective protections to safeguard people’s rights.”

For example, Microsoft has not provided consumer e-mail for Chinese customers for more than a decade because of privacy concerns. Microsoft’s facial recognition software is likewise restricted from the Chinese market.

But even while walking a fine line, Smith was bullish on the importance of intellectual cooperation between the two 21st century superpowers.

Where U.S. patent applications once dwarfed China, today China files more patents than the U.S.

“The two largest engineering populations in the world are in China and the United States,” Smith said. Even as the U.S. blacklists certain Chinese universities, which can complicated matters for teams at Microsoft Research, Smith argued that basic research on topics like machine learning and quantum computing must be published for the sake of scientific advancement. Those roots also go deep for the Redmond, Wash.-based company. In 1998, Microsoft founded the first commercial software research office in China.

“[There has been an] explosion of innovation in China,” Smith said. “One of the things that we at Microsoft have long appreciated is the enormous ingenuity of the engineering population of China.”

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