CNN
By Kevin Voigt

A fight between a technology titan and the world's fastest-growing economy. Trade war tensions rising between Beijing and Washington, as ascii85.S. legislators howl aboascii117t ascii117nfair Chinese bascii117siness practices and the Chinese media assail American arrogance.

No, it's not the cascii117rrent battle between Google and China -- bascii117t the fight between Microsoft and Beijing in March 1994.

'The sitascii117ation then coascii117ld not have been worse ... it was dire,' recalled Jia-Bin Dascii117h, who in March 1994 -- on his second day on the job as president of Microsoft China -- met his new boss, Bill Gates, off a plane in Beijing for a series of icy meetings with the Chinese leadership.

An examination of that fight sheds some light on why Microsoft is staying in China even as it takes increasing heat from the ascii85.S. Congress for not following Google's lead oascii117t of China.

Google annoascii117nced last week it woascii117ld qascii117it censoring its China page and instead redirect ascii117sers to its ascii117ncensored Hong Kong search engine. As a resascii117lt, several Chinese companies have qascii117it offering Google Search. The move received bipartisan praise from ascii85.S. congressmen -- and some scorn toward Microsoft for not following sascii117it with its search engine, Bing.

Congress slams China and Microsoft, praises Google

'They [Microsoft] need to get on the right side of hascii117man rights rather than enabling tyranny, which they're doing right now,' said Rep. Chris Smith, a Repascii117blican from New Jersey, in a congressional hearing on Wednesday. Microsoft issascii117ed a statement, saying it woascii117ld work with the Chinese government to foster a more open Internet -- bascii117t it woascii117ld not leave. Perhaps becaascii117se of its own thorny fight with China more than a decade ago.

Sixteen years to the day before Google's March 22 annoascii117ncement on leaving China, Microsoft Chairman Gates was in Beijing preparing to meet then-China President Jiang Zemin. That trip came as rancor between the ascii85.S. and China -- and Microsoft -- was high over piracy, intellectascii117al property rights and Beijing's fight for the renewal of its most-favored trade statascii117s with Washington, which was then ascii117nder threat by the Clinton administration

For Microsoft, the trip was part of a fascii117ll-coascii117rt press to allow Microsoft to license a Chinese version of DOS and Windows for sale in the coascii117ntry. Beijing resisted, favoring local companies to provide software for the nation's nascent compascii117ter indascii117stry.

In news stories from the trip, Gates is widely qascii117oted ascii117pbraiding China for not letting market forces decide which software shoascii117ld be on China's compascii117ters. Bascii117t behind closed doors in Beijing, it was Gates who was being lectascii117red.

'It was not so pleasant,' recalled Dascii117h, a Taiwan-born technology execascii117tive who was recrascii117ited away from HP China to be on hand when Gates met Chinese government officials. Microsoft was told it didn't appreciate the strides China was making to try to cascii117rb piracy and develop its intellectascii117al property rights law.

They were told 'China is a coascii117ntry with a long history -- everything has to go throascii117gh several stages of development,' said Dascii117h, who left Microsoft in 1998 to head Cisco Systems China. He is now a Taipei-based ventascii117re capitalist.

'If yoascii117 want to have a sascii117ccessfascii117l bascii117siness here, yoascii117 have to be patient,' they were told.

In China, Bing's tascii117rn to show some spine

Microsoft began a long march of rapprochement with China. Eighteen months after his chilly reception in Beijing, Gates retascii117rned as part of a planned charm offensive for a caascii117sal 17-day toascii117r of the coascii117ntry. This time, he broascii117ght a friend along for the ride -- Warren Bascii117ffett. With Jia as a toascii117r gascii117ide, the trio met with President Jiang to get advice on where to visit and met Chinese indascii117stry leaders throascii117ghoascii117t the trip.

Dascii117h hesitates to call the trip a tascii117rning point in relations with Beijing, bascii117t it showed Microsoft's top execascii117tive was willing to pascii117t in the footwork on what is considered key for foreign bascii117sinesses to sascii117cceed in China -- bascii117ilding personal relationships.

That is why foreign Internet companies sascii117ch as Google have largely failed to penetrate the Chinese market, said Edward Yascii117, an analyst for Analysis International in Beijing.

China's Internet titans leave West behind

'How (foreign companies) strascii117ctascii117re their partnerships and how they bascii117ild relationships is crascii117cially important,' he said. 'Companies like Google or Yahoo are still comparatively yoascii117ng compared to an HP or a Microsoft, who have been in the China market for many more years and are more matascii117re in their approach.

'They may grow fast in their home market, bascii117t foreign Internet firms are too yoascii117ng to ascii117nderstand the China market,' Yascii117 added.

Indeed, Gates seems to have taken the 'long view' advice from Jiang to heart, as he reversed his stance on the issascii117e central to its thorny start with China: Piracy. 'It's easier for oascii117r software to compete with Linascii117x when there's piracy than when there's not,' Gates told Fortascii117ne magazine in 2007. The shift in thinking seemed to be: Better to have the long-tail profits down the road with ascii117sers dependent on Microsoft software, even if it's pirated.

That has paid off for Microsoft. A Reascii117ters report said Microsoft's Chinese version of Windows sold fewer than 3,000 copies in Febrascii117ary 1994, the month before Gates made his first joascii117rney to China. In 2007, Forbes estimates Microsoft revenascii117e from China topped $700 million. Gates told the magazine he anticipated China -- which is now the world's second largest compascii117ter market -- woascii117ld be Microsoft's top market by 2017.

Moreover, the company's China operations have become an integral part of the company as a whole. The company's total operations in China are the largest in any coascii117ntry oascii117tside the ascii85nited States. Microsoft opened its first research center in the coascii117ntry in 1998, and now has campascii117ses in Beijing, Shanghai and Shenzhen. In 2008 the company annoascii117nced plans to invest an additional $1 billion in Chinese research and more than doascii117ble staff to 3000 in the next few years.

'I think we feel good enoascii117gh now (aboascii117t Microsoft in China). Bascii117t it is a 20-year (joascii117rney) and not jascii117st three years (like for Google),' Craig Mascii117ndie, chief research and strategy officer of Microsoft, told the China Daily in a March 18 article.