Key facts
- Microsoft has closed at least 15 offices and joint ventures in China in the last five years.
- The company considered exiting China in 2023 due to geopolitical risks and low economic return.
- Microsoft's China business now primarily serves Chinese companies needing Western technology for international operations.
- Access to China's engineering talent and providing Western AI models to Chinese firms are key reasons for staying.
- U.S. export controls have impacted Microsoft's ability to conduct advanced technology research in China.
Microsoft has significantly scaled back its operations in China over the past five years, closing at least 15 offices and joint ventures, according to corporate filings and company sources. The tech giant considered a full exit in 2023, with some executives feeling the company was taking on too much geopolitical risk for insufficient economic return, though no current plans to leave the market exist.
China accounted for only 1.5% of Microsoft's global revenue in 2024. The erosion of trust between Washington and Beijing, coupled with China's push for domestic software since 2017 and U.S. export controls on advanced technology, have impacted Microsoft's lucrative AI and cloud businesses in the country. Other U.S. tech firms like Apple and Tesla are also reassessing their exposure to China.
Microsoft ultimately decided to maintain a presence to service Chinese companies such as TikTok owner ByteDance, which require Western technology for managing overseas operations and complying with foreign regulations. The company also values access to China's engineering talent. Former China head Alain Crozier noted Microsoft has cultivated deep government relationships, allowing it to navigate geopolitical challenges.
The company's engagement with China dates back to the 1990s, involving compliance with censorship requirements. However, revelations of U.S. firms aiding government surveillance led to increased suspicion of Western technology. Microsoft's attempt to cater to the Chinese government with Windows 10 China Government Edition did not yield the expected results, as new procurement guidelines favored domestic systems.
Despite challenges with the state sector, Microsoft found a new avenue in the private sector, assisting firms like ByteDance and Shein in managing data for international operations and providing access to Western AI models like OpenAI's. This business of helping Chinese firms go global has become Microsoft's largest China-linked venture, though sales remain small globally. Analysts question its sustainability due to competition from domestic AI models like Kimi.
Political pressures have also affected Microsoft's ability to retain talent. U.S. export controls restrict Chinese-based engineers' access to cutting-edge technology, leading Microsoft to relocate some research operations and talent to labs in Vancouver, Singapore, and Tokyo. However, the company has struggled to convince many engineers to leave China, with only about a third of 1,000 offered relocation opportunities in 2024 accepting.