China has always been a problem for Microsoft. With much higher software piracy rates and a less mature enterprise sector than other major international markets, Microsoft has had a hard time reaching its potential in China. However, Microsoft has made a series of announcements in the past three months that will finally give China a place among the company’s top international markets:

  • Making China one of the first countries where Windows 8 and the Surface tablet were commercially available (late October).
  • Officially launching Office 365 and Windows Azure cloud services in China through partnership with 21ViaNet, an Internet data center player in China.
  • Forming a partnership with HTC, Nokia, and all three Chinese mobile operators to make the Windows Phone 8 available (December).

I see these moves as positive steps to help Microsoft better engage with Chinese customers, especially in the enterprise market. There are two key opportunities here:

  • A strong developer ecosystem will help Microsoft serve Chinese enterprises’ mobile strategies. Alhough iOS and Android dominate the market for smart mobile devices in China, both platforms have very limited enterprise ISV developer and SI ecosystems there. A number of large Chinese enterprises have recently told me of their interest in moving to Windows 8 tablets and Windows Phone 8 devices because they believe that they are better supported by Microsoft direct resources and ISV partners.
  • Cloud services will target the vast SMB market. With the estimated rate of software piracy among Chinese SMBs exceeding 80%, it has always been challenging for Microsoft to access this market. But the availability (since November) of Office 365 brings an affordable cloud solution that will allow SMBs in China to enjoy better email, productivity, and collaboration solutions from Microsoft. Moreover, the fact that the Shanghai municipal government is the first customer in China to use Office 365 demonstrates the government’s growing efforts to curb piracy and improve cloud service adoption in China.

In spite of the positives and the new excitement for Microsoft in China, challenges remain for the software giant in this market:

  • Developing comprehensive cloud service bundles for Chinese SMBs. As the first leading global IT vendor making public cloud services available in China, Microsoft has a competitive edge — but it also needs to learn how to create the right cloud offerings for Chinese customers. Office 365 is an appealing solution for fast-growing companies, especially start-ups in the Internet and media industries, while early adopters for Windows Azure are likely to be smaller ISVs and technology companies. However, the vast number of SMBs with low IT maturity will also expect cloud services to help them with solutions beyond just Office 365 and Azure. Microsoft needs to leverage its platform to extend its cloud solutions — perhaps offering a Dynamics cloud solution in China — and possibly other third-party applications to maximize the potential.
  • Recruiting the right channel partners with properly designed incentive programs in lower-tier cities. Many customers in China’s lower-profile cities have preferred local partners because they know customers well and can better support them locally. Accurately identifying and recruiting these potential partners is not easy — and other MNC competitors are eyeing the same limited number of partners in these smaller cities. Making Microsoft their preferred partner will require more channel managers on the ground as well as carefully designed channel incentive programs. Microsoft will also need to remember that local governments and state-owned enterprises have a much larger impact on IT spending in lower-tier cities and adjust their channel and broader go-to-market strategies accordingly.

Microsoft is addressing China’s cloud and mobility markets in a way that other multinational brands are not and brings many intriguing strengths to the table. Nevertheless, putting the right solutions in front of the right set of customers through the right channels is not at all easy in China’s massive and dynamic market. Microsoft has started with some aggressive steps to pull a strong lineup of solutions together; now it needs to execute.