A significant beneficial message was released for the software industry at the beginning of 2011, with the formal distribution of a Basket of Measures to Further Boost the Software and IC Industry (Guofa [2011] No. 4) by the State Council. Commonly known as the New Document 18 within the circle, the emergence of this Document 4 has caught wide attention from society.

 

 

In June 2000, the State Council issued a Basket of Measures to Boost the Software and IC Industry (Guofa [2000] No. 18). Together with the accompanying preferential policies and measures, Document 18 has played a key role in promoting the software and IC industry.

 

After the issuance of Document 18, supported by state policies, the software and IC industry of China grew up quickly in size and technology, offering a great boost to the national IT industry. According to the statistics of the Ministry of Industry and Information Technology (MIIT), by the end of 2010, the income from the software business was 1,336.4 billion Yuan, 31% more than in the previous year. There were four companies having of on annual income more than 10 billion Yuan respectively and the scale of the software industry was more than ten times larger than in that 2001, with an annual increasing rate of 38% on average, accounting for 18% (from 6% in 2001) of the electronic information industry.

 

But, compared with international advanced levels, a few problems exist in the software and IC industry, such as, the weak basis of the industries, the weak innovation and self-development of the companies, the low level of application and development, and the less-than-perfect industrial chains. After these ten years of fast development, it comes to a critical period for the software industry to grow bigger and stronger, which requires continuous policy support.

 

On January 12, 2011, Premier Wen Jiabao convened a conference of the Standing Committee of the State Council to study and arrange the policies and measures to further encourage the software and IC industry. The conference commented that the software and IC industry was the emerging national strategic industry, and constituted an essential basis for the national economy and the social IT construction. It decided six policies and measures for the industries, namely: (a) to strengthen the support to the investment and financing; (b) to strengthen the support to the R&D; (c) to provide tax preferences; (d) to strengthen the cultivation and introduction of talents; (e) to strictly implement the IPR protection system for software and ICs, and crack down on various infringements according to law; and (f) to strengthen the efforts to guide and regulate the market. The decision was deemed as a warm up for the issuance of Document 4, for which the software industry had long waited.

 

As expected, the good news soon came. On January 28, 2011, the State Council issued the Several Policies to Further Encourage Software and Integrated Circuit Industries, the so-called “Document 4”, so as to further optimize the environment for the development of software and IC industries, to improve the quality and level of their development, and to grow a number of powerful and influential leading companies. Document 4 again clarifies that software and IC industries are national strategic emerging industries, and constitute an essential basis for the national economy and the social IT construction. It encourages the industries from seven perspectives, namely, public finance and taxation policies, investment and financing policies, R&D policies, import and export policies, talent policies, IPR policies, and market policies. It continues to improve incentive measures and clarify the policy orientation. It is significant in that it optimizes the environment, enhances the innovation, and improves the quality and level of development of the industry. Industrial insiders said that from the range of policy preference in Document 4, the country intended to promote the software and IC industries to further depths.

 

Regarding to this point of view Minister of MIIT, Miao Wei, said that that 12^th Five-Year Plan placed the software industry at an important position. At the first year of the 12^th FYP period, the issuance of a Basket of Measures to Further Boost the Software and IC Industry indicates that the state highly values software and IT services. Software companies should take good advantage of this strategic period of opportunities, and attempt to leapfrog development from innovation and competition.

 

In the annual working conference of the national software associations on February 27, 2011, Director of the Software Service Department, MIIT, Chen Wei briefed on the development thinking for the software service sector during the 12th FYP period, together with a detailed interpretation of the newly issued Document 4.

 

Mr. Chen believed that many entry points were available to interpret the document under the new situation. “This document is our present starting point. We should look further. What are our opportunities and challenges, from the global development of software and IT technologies? The next 10 to 20 years are a critical and precious timeframe for Chinese software and IT service industries to break through the monopoly of foreign multinationals. This is a historical chance in general.” Mr. Chen stressed.

 

“Document 4 is not long, and divided into eight chapters, seven categories of policies, and 34 sections. The central spirit is to continue with the policies of Document 18, which is the main argument or theme. Why is Document 18 emphasized here? Because it has been successful. Document 4 includes policies to govern the software, IT and IC industries with respects to their new tendencies, new features and new laws. It also considers how to connect with Document 18,” said Mr. Wei. “What are the key points? First to greatly promote the software and IT service industries to grow bigger and stronger; second to grow industrial leaders; third to promote industrial and technological innovation; fourth to promote the combination between manufacturing, study, research and application; and fifth to build a stronger basis for industrial development. Centered on this thinking, we proposed the key points for our work in 2011.”

 

 

“The eight chapters and seven categories of polices need be studied and analyzed one by one, and landed finally,” Mr. Chen stressed repeatedly. “To ‘land’ means that these preferential policies are actually applied to the industries and provide strong policy support to eligible enterprises. This is what we will do.”

 

Mr. Chen further noted, “For the public finance and taxation policies, we have adjusted our policies under the general tendency that software products become more network and service oriented. The adjustments are centered on taxation policies. Document 18 provides that software companies will be entitled to a tax rebate of any VAT tax above 3%. For income tax, startups will be entitled to business income tax exemption in the first two years immediately after they begin to profit, and to a 50% deduction in three years thereafter. Major software companies within the state plan framework will be entitled to no more than 10% business income tax. After the first five years, the business income tax is generally between 15% and 15.6%, and (due to the policy), the tax rate is reduced by 5% or 5.6%. This indicates great support from relevant authorities to the software and IT service industries. In the past, less than 200 major software companies would be approved every year within the state plan framework. 186 were approved in 2009, and 240 in 2010. We reached a consensus with the National Development and Reform Commission, the Ministry of Finance, the State Administration of Taxation, the Ministry of Commerce and the Ministry of Education that Document 18 would come to an end by 2010, and a new document would come into being in 2011, to develop a new situation. According to the consensus, 240 major software companies would be approved as long as they meet the criteria. The addition of nearly 60 companies builds a very good basis for the next stage of development of the software industry.”

 

“A highlight of Document 4 is that it take into consideration of the sales tax, which was never before. Since the sales tax is concerned mainly with service providers, we propose that an approved software company, which engages in software development and testing, information system integration, consultation and operation maintenance, will be exempted from the sales tax, and offered simplified procedures. This is a very significant policy,” said Mr. Chen. “For the landing of the public finance and taxation policies, we will connect with the State Administration of Taxation in a landing study of the sales tax, income tax, and VAT. We will also strengthen our communication and cooperation with our peers in other departments.”

 

In addition, another highlight of Document 4 is the investment and financing policies. For it, Mr. Chen explained, “First, Document 4 clearly requires using the funds within the budget of the central government to support technical advancement or renovation projects of the companies. Second, much more support will go to large software companies, which, however, was not clearly shown in Document 18. The state encourages and supports software companies to integrate industrial resources, and clearly requires related ministries and commissions and local governments with respects to institutional barriers to the M&A of software companies. Large software companies are encouraged to integrate resources, to grow bigger and stronger, and to merge with or acquire other companies, reorganize themselves and go public. Third, Document 4 includes policies for innovative investment funds and equity investment funds, re-stating that companies may raise funds by issuing stocks, bonds etc. This constitutes a natural continuation of Document 18. Fourth, as a new point, Document 4 supports and guides local governments in establishing a compensation system against loans risks and in perfecting the IPR pledge registration system. It clearly requires policy-based and commercial financial institutions to support major projects and to create credit lines suitable for software industry development. This is the great support of Document 4 in finance and investment to software companies.”

 

 

Regarding the IPR policies, Chen Wei said, “We have made our best efforts in this respect since the second half last year. IPR policies are further strengthened in Document 4. First it encourages copyright owners to register their software works, and support software and IC companies to apply for IPRs in foreign countries according to law. Financial support is also available for eligible companies. Second it serves software companies by vigorously developing the IPR service industry. Third it strictly implements the mechanism to protect IPRs, and cracks down on IPR infringements according to law. The central government has devoted many resources into it. State organs and governmental departments take the lead in using authorized software copies. It is the cornerstone of the software industry that IPRs be respected, and the value of software to be sufficiently affirmed. The software industry can hardly develop if unauthorized copies are not restricted. The promotion of the use of authentic software provides a solid value basis for the software market. Particularly, we should strengthen our efforts in protecting software copyrights and IC layout designs in the networking environment. We should develop and apply technologies to protect software copyrights on networks, and to protect the IPRs in software products and IC products. Fourth it promotes the pre-installation of authentic operating systems, and requires government departments to take the lead in this respect. We have had many experiences and learned our lessons from the past. In the ’90s we all used WPS (the office software developed by Kingsoft), and it was very easy to use. But it soon exited the market. Why? Because Microsoft Windows was coming. When we review it, we see that Microsoft used a marketing strategy to ship free copies of the Windows with computers. It forced WPS out of the market within a short period of time. Microsoft has always said that the Chinese government does not pay attention to IPRs. We have had talks with it. We say that it was Microsoft that originated the current situation. It should be responsible for the history of the Chinese software market. It broke the cornerstone for the development of the industry. As the use of authorized software copies has been promoted, WPS reappears in our governmental office systems, and is still very good.” to no more than 10% business income tax. After the first five years, the business income tax is generally between 15% and 15.6%, and (due to the policy), the tax rate is reduced by 5% or 5.6%. This indicates great support from relevant authorities to the software and IT service industries. In the past, less than 200 major software companies would be approved every year within the state plan framework. 186 were approved in 2009, and 240 in 2010. We reached a consensus with the National Development and Reform Commission, the Ministry of Finance, the State Administration of Taxation, the Ministry of Commerce and the Ministry of Education that Document 18 would come to an end by 2010, and a new document would come into being in 2011, to develop a new situation. According to the consensus, 240 major software companies would be approved as long as they meet the criteria. The addition of nearly 60 companies builds a very good basis for the next stage of development of the software industry.” “A highlight of Document 4 is that it take into consideration of the sales tax, which was never before. Since the sales tax is concerned mainly with service providers, we propose that an approved software company, which engages in software development and testing, information system integration, consultation and operation maintenance, will be exempted from the sales tax, and offered simplified procedures. This is a very significant policy,” said Mr. Chen. “For the landing of the public finance and taxation policies, we will connect with the State Administration of Taxation in a landing study of the sales tax, income tax, and VAT. We will also strengthen our communication and cooperation with our peers in other departments.” In addition, another highlight of Document 4 is the investment and financing policies. For it, Mr. Chen explained, “First, Document 4 clearly requires using the funds within the budget of the central government to support technical advancement or renovation projects of the companies. Second, much more support will go to large software companies, which, however, was not clearly shown in Document 18. The state encourages and supports software companies to integrate industrial resources, and clearly requires related ministries and commissions and local governments with respects to institutional barriers to the M&A of software companies. Large software companies are encouraged to integrate resources, to grow bigger and stronger, and to merge with or acquire other companies, reorganize themselves and go public. Third, Document 4 includes policies for innovative investment funds and equity investment funds, re-stating that companies may raise funds by issuing stocks, bonds etc. This constitutes a natural continuation of Document 18. Fourth, as a new point, Document 4 supports and guides local governments in establishing a compensation system against loans risks and in perfecting the IPR pledge registration system. It clearly requires policy-based and commercial financial institutions to support major projects and to create credit lines suitable for software industry development. This is the great support of Document 4 in finance and investment to software companies.” Promoting the Use of Authorised Software Regarding the IPR policies, Chen Wei said, “We have made our best efforts in this respect since the second half last year. IPR policies are further strengthened in Document 4. First it encourages copyright owners to register their software works, and support software and IC companies to apply for IPRs in foreign countries according to law. Financial support is also available for eligible companies. Second it serves software companies by vigorously developing the IPR service industry. Third it strictly implements the mechanism to protect IPRs, and cracks down on IPR infringements according to law. The central government has devoted many resources into it. State organs and governmental departments take the lead in using authorized software copies. It is the cornerstone of the software industry that IPRs be respected, and the value of software to be sufficiently affirmed. The software industry can hardly develop if unauthorized copies are not restricted. The promotion of the use of authentic software provides a solid value basis for the software market. Particularly, we should strengthen our efforts in protecting software copyrights and IC layout designs in the networking environment. We should develop and apply technologies to protect software copyrights on networks, and to protect the IPRs in software products and IC products. Fourth it promotes the pre-installation of authentic operating systems, and requires government departments to take the lead in this respect. We have had many experiences and learned our lessons from the past. In the ’90s we all used WPS (the office software developed by Kingsoft), and it was very easy to use. But it soon exited the market. Why? Because Microsoft Windows was coming. When we review it, we see that Microsoft used a marketing strategy to ship free copies of the Windows with computers. It forced WPS out of the market within a short period of time. Microsoft has always said that the Chinese government does not pay attention to IPRs. We have had talks with it. We say that it was Microsoft that originated the current situation. It should be responsible for the history of the Chinese software market. It broke the cornerstone for the development of the industry. As the use of authorized software copies has been promoted, WPS reappears in our governmental office systems, and is still very good.”

 

Chen Wei also commented that it was easy to find measures from the past of the Chinese government that to promote the use of authentic software has been our consistent policy. It is one of our basic industrial management duties that we hold fast to.

 

On February 26, 2010, Beijing saw the opening of the fourth plenary session of the Joint Inter-Departmental Conference to Promote the Use of Authorized Software in Enterprises. It was resolved that since the work had basically completed in promoting authentic software in large state-owned enterprises (SOEs), foreign companies, and private companies, the conference would, by continuing to stick to the principle of starting from reality and proceeding step by step in 2010, promote the use of software in companies in banking, insurance and security industries, foreign companies, public companies, and other companies that meet the required conditions and operational rules. It would also begin to do the same in medium-sized enterprises in a planned, step-by-step, proactive and prudent manner. Moreover, it would enhance the administrative enforcement and the internal/ external publicity work, and establish a mechanism to reward and subsidize companies using authentic software.

 

On October 18, 2010, the State Council specially issued the Circular on the Use of Authorized Software in Government Organs. The main tasks included two goals, and one promotion and one improvement. The goals were that the special inspection and corrective action on the central government organs concerning the use of authentic software would be completed by the end of May 2011, and the special inspection and corrective action on provincial, municipal (prefectural) and county government organs would be completed by the end of October 2011. The promotion was to vigorously promote the use of authorized software copies in companies. The improvement is that through the special actions that last about half a year, the environment for software copyright protection would be greatly improved, as the government departments consolidate and complete their work on the use of authorized software, and establish a longer-term mechanism for the software budgeting, purchase and use and the management of state-owned software assets.

 

On October 19, 2010, the meeting of the Standing Committee of the State Council resolved to crack down on IPR infringements and the making and selling of fake and inferior goods. It emphasized the use of authorized software in government organs. It required governmental departments to include the cost of authentic software into their budgets and manage state-owned software assets, and to purchase office computers pre-installed with authentic operating system, and to only use authentic products in software updates. They should fix the supervision responsibility and carry out special inspections regarding the above. Their staff should take the lead in using authentic software.

 

On October 27, 2010, the General Office of the State Council issued the Program on the Special Action against IPR Infringements and the Making and Selling of Fake and Inferior Goods. The Program stated that following the approval of the State Council, the state would initiate a nationwide special action to crack down on IPR infringements and the making and selling of fake and inferior goods since October 2010, in order to protect IPRs and maintain a faire and orderly market. As one of the major jobs of the Program, government departments were required to use authentic software.

 

In November 2010, the General Administration of Press and Publication, the National Copyright Administration, and the Work Group of Pornography and Illegal Publications urgently issued the Circular on the Special Action against IPR Infringements and the Making and Selling of Fake and Inferior Goods, and the Further Work to Promote the Use of authorized Software, requiring local departments and agencies to strengthen their regulation of printing and copying enterprises, and books, software, and audio/visual products in the press, publication and copyright administration areas, to use more efforts in cracking down on network-based piracies, and to cause government organs and enterprises to use authorized software. The Circular required that the administrations of press, publication and copyright, together with administrations of industry and information technology, finance, commerce, industry and commerce, and general offices, should supervise and inspect the use of authorized software in government organs, and ensure the special inspections and corrective works to complete on central state organs by the end of May 2011, and on provincial, municipal (prefectural) and county government organs by the end of October 2011. It also required the concerned administrations to gradually promote the use of authentic software in medium to small-sized enterprises, on the basis of the authentic software use in large enterprises. The administrations of press, publication and copyright should cooperate with the administration of industry and information technology, and the department of commerce in urging computer manufacturers to pre-install authentic operating systems into their out-of-factory computers. They should also work with the administrations of industry and commerce, and the department of commerce, in fighting against making and selling and distributing through networks pirated software copies.

 

On December 12, 2010, the Ministry of Finance issued the Circular to Further the Use of authorized Software in Government Organs. The Circular requires financial departments to take actions to include the cost of authorized software into the budget of the government organs.

 

Now, Document 4 states again to further the use of authorized software and try to establish a long-term mechanism to support this policy. Any computers, including mainframes, servers, micro computers and notebook computers, which are sold in the country, must be pre-installed with authorized software, and any computers pre-installed with software copies are forbidden on the market. All the policies and measures should be implemented to cause government organs to use authorized software. The cost of software purchase will be included into the budget of the government organs, generic software must be centrally purchased, and the management of software assets is to be strengthened. The concerned administrations should work vigorously to guide enterprises and social public into using authentic software.

 

According to the statistics of the National Copyright Administration, by the end of 2010, there had been 31 central government organs which purchased 19,827 sets of authorized software copies (including 13,657 sets from foreign companies, and 6,170 sets from domestic companies), which included 523 sets of operating system, 17,113 sets of office software, and 2,191 sets of anti-virus software. The purchase amount was 22.11 million Yuan, which included 18.32 million Yuan for foreign software products, and 3.79 million Yuan for domestic software products.

 

The software industry generally believes that Document 4 will help develop a wider market space for software companies that own IPRs. Document 4 also gives out a clear message that the Chinese government has been taking a number of refined measures, to turn the tide on the seriousness of piracies on the domestic market.

 

 

It is noteworthy that Document 4 first proposes the anti-monopoly work. It states that the state will further regulate the software and IC market, strengthen its anti-monopoly work, and crack down on any misuse of IPRs to exclude or restrict competition, or any misuse of market dominance to compete unfairly. It calls on industrial societies and associations to work to create a good environment for the development of the industries. It also requires accelerating the drafting of relevant technical or service standards, to promote the competition on the software market on a fair basis, and to protect the legal rights and interests of consumers. “Document 4 states to regulate the software market, strengthen the anti-monopoly work, and promote fair competition on the software market. Currently some foreign multinationals, relying on their market advantages, compete unfairly in software compatibility. We will investigate and collect evidence according to the complaints from the software industry,” said Chen Wei.

 

However, different opinions have been raised from different fields. Some media commented that foreign companies monopolized and controlled the market in a complicated and easily manipulated manner. Detailed regulations were needed as to how to define monopoly, how to enforce the anti-monopoly work, and which department should be responsible.

 

A spokesperson from the Business Software Alliance (BSA), which represents the interests of foreign software companies, told our journalist that as an advocate of the global software industry, the issuance of Document 4 was very encouraging. It clearly provided for specific IPR policies, including the enhancement of the protection over copyright in the networking environment, the pre-installation of authorized software, the use of authorized software in government organs, and the enhancement of the management of software assets. These measures would benefit the healthy and sustained development of the Chinese software industry. Also, Document 4 removed the provision in Document 18 that “Domestic software systems will be preferred in the purchase program of the state for major projects and major application systems that receive investments from the state.” This made Document 4 more suitable for the international environment, to create a freer competitive market for software companies, and to help companies improve their use of IT technology in a faster and better manner. This responsible person also wished that these new measures would be put into practice as soon as possible, so that software companies could benefit from it quickly.