China’s Software Piracy Crackdown Hits Snag : Technology: Turns out the country’s biggest user of illegal software is the Chinese government itself.

China’s promise to crack down on computer software pirates is being hindered by the country’s biggest user of illegal software: the Chinese government itself.

Last February, after months of negotiation and a U.S. threat to impose more than $1 billion in tariffs on Chinese imports, China agreed to impose stiff penalties to shut down the manufacturers of pirated goods including software.

Five months later, Chinese government officials concede that little progress has been made. The main reason, Chinese computer industry executives say, is that the government’s authority to carry out the crackdown is sapped by the rampant use of pirated software by government agencies and by state-owned companies.

“Many government agencies still use pirated software,” said Sun Yanfeng, an executive at the China Software Alliance, an industry group of 12 Chinese software companies formed in March to help carry out the anti-piracy crackdown.

Sun said there were no statistics to quantify the use of pirated software by the Chinese government and government-owned companies, the latter of which account for more than 50% of China’s total economic activity.

Anecdotal reports, however, paint a portrait of government offices and government-owned companies that routinely buy or borrow one program, sometimes legal and sometimes not, and then make numerous illegal copies.

“If a government agency buys a disk legally and copies it 50 or 100 times, nothing will happen to them,” said Zhe Zhemin, deputy director of the state-run China Computer Software and Technology Service Corp. “The state has instructed government agencies to buy legal software, but since it doesn’t appropriate money for the purchases it can’t stop the copying.”

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Zhang Zhongyu, deputy general manager of the Beijing Giant Software Co., a commercial software distributor, agrees that the problem stems from a lack of government funds appropriated specifically to buy legal software.

“It is unrealistic for government agencies to invest large amounts to buy legal software,” Zhang said. “Strictly speaking, even Zhongnanhai is using pirated software.” Zhongnanhai is the walled-off compound in Beijing where the top Communist party leadership works and lives.

Zhang said that at least three Chinese government agencies--the State Statistics Bureau, the Railways Ministry and the Ministry of Electronics Industry--are exceptions to the rule and have bought legal software from his company.

U.S. software companies attempting to sell their product in China have a firsthand view of the Chinese government’s purchases and use of software, legal and otherwise.

Microsoft, for example, is expanding aggressively in China and claims to have captured 85% of the legal market for applications software. Its 200 authorized dealers in the country include both state- and privately-owned companies and include government ministries on their client lists.

“No ministry has been buying software totally legally,” said Bob Lu, Microsoft’s marketing manager in China. “Some are using no legal software at all.”

These reports notwithstanding, February’s anti-piracy pact did require China’s government agencies to allocate funds to buy software at the full legal price.

“All public, private, not-for-profit entities using computer software shall provide resources sufficient to purchase legitimate software,” the agreement states.

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Pirated programs account for about 95% of software bought and used in China each year, Lu estimates. The Software Publishers Assn., a leading trade group in the U.S., puts the number even higher, at 98%, and estimates that China has the highest piracy rate in the world, above 95% in Russia and 92% in Thailand.

U.S. software makers lost $8.08 billion in worldwide sales in 1994 to illegally copied software, the trade group says.

Suo Laijun, a spokesman for the State Copyright Administration, the main government agency responsible for cracking down on software pirates in China, said the government hadn’t studied how widespread its use of pirated software is.

“We haven’t conducted concrete investigations,” Suo said.

Suo conceded, however, that Beijing’s anti-piracy program hasn’t progressed much since February.

“So far, no concrete measures have been taken,” he said. “The administration is working on a plan to regulate and put the software market in order.”

All foreign software companies attempting to expand in China, including Oracle, Novell and Lotus along with Microsoft, have a stake in the Chinese government’s success in cracking down on software pirates.

All agree, though, that given the government’s extensive use of illegal software, any purge will have to start with the government itself and with the 370,000 state-owned commercial enterprises across China.

“These companies are the biggest potential customer base in China,” Lu said. “We want very much for the government to help us to have stricter law enforcement for government-owned companies.”

Tighter enforcement of the anti-piracy agreement is also very much in China’s interests, industry executives say.

Eventually, the executives say, Chinese software companies themselves will find it impossible to survive, much less to thrive, in an environment rife with pirates.

“Definitely China will clean up the software market,” said Zhang Yisong, an engineer in the software division of the Ministry of Electronics Industry in Beijing. “If not, it will be difficult for domestic software [companies] to survive.”

Still, the cleanup seems far away. Five months after the anti-piracy pact, bootleggers in the capital’s high-tech Haidian district are still peddling CD-ROM disks crammed with 200,000 yuan ($24,100) worth of computer software for just 50 yuan ($6).

The deals are apparently irresistible, even for those officially charged with resisting them.

Microsoft and other U.S. software companies trying to pry into China’s software market are in a frustrating spot. The market for computers is growing by 40% annually. That should translate into booming growth in software sales too. As long as piracy is prevalent, though, there’ll be no concomitant software boom.

As part of its own anti-piracy program, Microsoft is stressing the value to its customers of the “after-sales services” that only legal buyers of the software get--such as access to its telephone hot line to answer questions, and help offered during follow-up visits to dealerships.

Microsoft sees one growth market: foreign companies doing business in China who, fearing a visit from the Chinese anti-piracy regulators, are buying the legal versions instead.

Until the regulators regulate themselves, though, that market may take a while to blossom.