Microsoft Makes a Location Bet on China's Tropics

TAIPEI ( TheStreet) -- When Beijing people tire of the cold, dry, winter wind or spring dust storms that follow, a lot of them get on a three-hour flight to China's southernmost province of Hainan for a tropical vacation.

Most major tech companies go the other way, siting R&D centers around Beijing or its central China peer Shanghai to draw the country's top talent and stay close to clients. Intel ( INTC) runs an R&D center in Shanghai, for example, and tech media said Apple ( AAPL) was looking at the same city for its own. Sony Ericsson opened its center in Beijing.

The thing about Hainan is that it's generally just a tourist area. Few are its famed universities or science parks. A tech firm's clients might literally be on the beach but not in positions to make deals or test products.

Then, on April 7, Microsoft ( MS) said it had picked the holidaymaker's province off the coast of Guangdong province for its first "innovation center" in China.

Microsoft signed a memorandum of cooperation with the Hainan provincial government to set up its center. Microsoft hasn't disclosed project details such as scale and cost but said it had agreed to put the thing in Hainan's "international information industrial zone." The American software giant would use it to work with the province on developing IT technology, train software talent and take another whack at China's stubborn copyright protection problem, among other things.

After reading Microsoft's statement online about the innovation center, I wondered, at first, if Bill Gates just finds Puget Sound too cold.

"The Hainan government and Microsoft China today announced comprehensive collaboration to enable Hainan in its ambition to become the 'Hawaii of China,' transform Hainan into an international tourism destination and a powerhouse of software development," Microsoft says in a news release on its Web site.

So it's going to design an operating system for daiquiri blenders and minibars? Hainan is not a powerhouse of software development. Local officials have said for years they want the province to become an international tourist destination.

"By partnering with world-leading IT companies like Microsoft, Hainan can leverage innovative technologies to upgrade and enhance industries including tourism, real estate, transportation, maritime and agriculture, and accelerate Hainan's transformation into an international tourism island," the Communist Party's provincial committee Secretary Luo Baoming was quoted saying in the news release.

That's even more confusing. Is Hainan province looking for new ocean-facing Windows to operate local resorts?

Analysts who follow IT in China confess they'd need to call support on why Microsoft has gone so far southward. But Mark Natkin, managing director with the Beijing-based market research firm Marbridge Consulting, guesses the software titan is looking to steady its long-term relations with the Chinese government.

"They may have been offered an incentive, but may also be doing it as part of their larger government relations strategy," Natkin says of Microsoft.

Incentives shouldn't be that hard to come by if you're Microsoft, so the second reason would make more sense. Given China's elephantine market size, its online population estimated at around half a billion and aggressive gadgetry spending in the nation's second-tier cities, Microsoft would want to stay in the mix.

Stable government relations may prompt the government to consider Microsoft when making purchasing decisions (please, Big Brother, no MacBook Pros). If the copyright protection initiative takes following research in Hainan, Microsoft could gain big by controlling piracy of operating system CD ROMs.

In plain code, that means tourists might have to hunt harder in the public markets and on street corners for $1.50 illegal copies of Windows.

When Hotmail, Outlook or Bing search engine get caught in a political dispute over censorship, Microsoft will want the government on its side as well so it doesn't lose the China market as fallout from the dispute of the day. Otherwise, it might go the way of Google ( GOOG) in 2010, when it alleged hacking in China and as a result nearly gave up use of its local search engine Google.cn.

Keeping up relations with authorities in China often means going places that they want to develop, not where you want to develop. Chinese officials tend to send such cooperative foreign firms out west to cities at the edge of impoverished deserts or mountain ranges. Hainan is not such a bad lot.

China also may be out to pick pieces of Microsoft's brain. The news release touts its software service outsourcing and cloud computing, calling them the means for governments and companies to get more competitive, "accelerate economic transformation" and build "more connected" cities."

And finally, a tourism tie-in: At Hainan's signature annual event, the Boao Forum for Asia attended by regional state and business leaders, Microsoft demonstrated the integration of a Hainan tourism Internet portal and Bing Travel, a "space-time tunnel."

At the time of publication the author had no position in any of the stocks mentioned.

Ralph Jennings is on LinkedIn.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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