Domestic software developers beat mega-rival Microsoft to win a 2 million yuan (US$240,000) deal with the provincial government of Shanxi, in north China, the First Finance and Economy Daily reported on Wednesday.

It is the second sales setback in China for the US software giant in as many months. A US$3.5 million deal that it came within a hair's breadth of clinching with the Beijing municipal government was cancelled in late November amid complaints that local governments are not buying enough domestically developed software.

The First Finance and Economy Daily quoted Sang Guoping, an official with the Shanxi Government Procurement Center, as saying that four homegrown software venders shared the deal for 7,000 sets of operating systems, office and antivirus software applications.

Sang said Microsoft bid on the project with its Windows and Office software, but failed.

The paper reported that Microsoft confirmed it had been informed of the Shanxi decision, but refused to comment further.

"The price of Microsoft software is much higher than its domestic rivals," said Sang. The quotation given for Windows was 990,000 yuan (US$120,000) per 1,000 sets, and for Office 1.2 million yuan (US$145,000), prices two to three times higher than the domestic products.

"The price is an important factor. Besides, the government should give homegrown products preferential treatment in procurement according to law," Sang added.

China's Government Procurement Law went into effect on January 1, 2003. It includes general guidelines for choosing between foreign and domestic products, but the central government has yet to provide a precise definition of domestic software.

Industry watchers believe that that decision may come out by the end of this year. They believe it likely that products and services will be required to contain at least 50 percent local added value to qualify.

Government procurement of software is a touchy issue in China. Last month, the Beijing municipal government came under fire for damaging China's nascent software industry when it announced that Microsoft had won a 30.0 million yuan (US$3.5 million) contract.

If the contract had not been canceled 10 days later, it would have been the second major China procurement victory for Microsoft, which concluded an office software agreement with the Tianjin municipal government in October.

Critics of government software purchases from overseas companies argue that such decisions can deal a fatal blow to the domestic software industry, since government purchases are the lifeline of the infant industry.

However, others say government procurement alone cannot support the domestic software industry and may ultimately harm homegrown software developers in competitive markets.

(China Daily December 9, 2004)