Microsoft Retreats from China: AI-Driven Strategy of 'Reduction Instead of Withdrawal' - Reuters

[Mexico City = Shim Young-jae, Special Correspondent] Microsoft (MS) is scaling back its operations in China. The simultaneous pressures of the Chinese government's preference for domestic software and U.S. export controls on advanced technology have led to the closure of at least 15 branches and joint ventures in China over the past five years. Although there were considerations to withdraw completely from the Chinese market, Microsoft has shifted its strategy to selective retention by finding revenue sources in cloud and artificial intelligence (AI) businesses targeting Chinese companies like ByteDance that are expanding overseas.

Reuters reported on the 13th (local time) that Microsoft considered withdrawing from the market due to an internal assessment that the geopolitical risks were excessively high compared to the economic benefits gained from its operations in China in 2023. A source familiar with the matter emphasized that there are currently no plans to withdraw from China.

The significance of Microsoft's business in China is already small. According to Microsoft, in 2024, China accounted for only 1.5% of the company's total revenue.

The changes affecting Microsoft's business in China have occurred simultaneously from both the U.S. and China.

According to five sources interviewed by Reuters, China has been expanding the use of domestic software since 2017. The Chinese government believes that domestic products are more secure in terms of safety and that their quality competitiveness is catching up with Windows and Office.

On the other hand, U.S. export controls on advanced technology have made it difficult for Microsoft to expand its profitable AI and cloud businesses in China.

According to Reuters, a Microsoft spokesperson did not respond to inquiries regarding internal discussions about its business in China. However, they stated that they operate in a regulatory environment that applies to all overseas suppliers and that they maintain their commitment to the Chinese market.

Microsoft explained that the situation of its business in China reflects market competition, regulatory demands, and technological trends.

Chinese Government Market Strategy Fails... Windows Can't Surpass 'Safety and Trust' Threshold

The relationship between Microsoft and the Chinese government dates back to the early 1990s.

According to Reuters, Bill Gates, co-founder of Microsoft, first visited China in 1994 and met with then-President Jiang Zemin. Since then, Microsoft has invested jointly with the Chinese government and startup incubators and has worked to build relationships with the Chinese Communist Party by accommodating censorship requirements.

Alan Crozier, former head of Microsoft China, told Reuters that the relationship Microsoft built with the Chinese government was among the deepest in the tech industry. However, the atmosphere began to change around the mid-2010s. As it became known that U.S. companies supported overseas government surveillance from Washington, distrust of Western technology grew in China.

In response, Microsoft launched a version of Windows 10 for the Chinese government.

According to Reuters, Satya Nadella, Microsoft’s CEO, directly negotiated with Chinese Ministry of Finance officials to promote the product's launch. Although several government agencies adopted it, Crozier explained that it did not spread to the extent the company had hoped.

Around 2017, the Chinese government also introduced new procurement guidelines for purchasing 'safe and reliable' services.

According to Microsoft, no products among foreign operating systems, including Windows, have been recognized by the Chinese government as meeting these policy criteria.

The use of products is not outright banned. Paul Triolo, a China technology policy expert at DGA-Albright Stonebridge Group, explained to Reuters that technology personnel using products that do not meet the criteria must undergo additional security checks and approvals, among other reviews.

An analysis of six public procurement guidelines for computer systems issued by the Chinese government between December 2023 and May 2026 revealed that five of them did not recommend Microsoft products. The remaining one included Windows 10 for the Chinese government but specified that it would be subject to 'additional management requirements' without further explanation.

Capturing Chinese Companies Going Overseas Instead of Government

The new breakthrough for Microsoft, which has been pushed out of the Chinese government market, has come from the overseas expansion of Chinese private companies.

According to Reuters, one of the main reasons Microsoft ultimately decided to stay in China is that it has built a profitable business supporting overseas operations of Chinese companies like ByteDance.

ByteDance, which owns TikTok, and ultra-low-cost fashion retailer Shein are operating major businesses targeting Western consumers. According to two Microsoft officials, these companies use Microsoft's Azure cloud to manage data in compliance with overseas regulations.

Microsoft is reportedly supporting Chinese corporate clients to exclusively utilize models from Western AI companies like OpenAI that do not provide services directly in China through Azure.

By the mid-2020s, the business supporting Chinese companies expanding overseas has grown to become the largest segment of Microsoft's China-related business. However, the two officials noted that it remains small compared to the company's global revenue.

There are also questions about sustainability.

According to Reuters, this AI business relies on external suppliers like OpenAI. If Chinese companies do not use Western AI models, the need to utilize Azure diminishes.

The competitiveness of domestic Chinese AI models is increasing, and prices are becoming much cheaper. Reuters explained that if Chinese companies use models like Kimi, they would not need to use Azure.

China Remains Important for Securing Global AI Talent

Another reason Microsoft has not completely left China is talent.

According to Reuters, Microsoft believes it needs a local presence to continue accessing world-class engineering talent in China.

Since the 1990s, Microsoft has been hiring engineers to develop commercial products while also establishing Microsoft Research China to focus on advanced technology research, playing a crucial role in nurturing Chinese tech talent. Among those from this research institute are senior personnel from AI companies SenseTime and DeepMind.

However, U.S.-China tensions are shaking the talent strategy as well.

U.S. export controls on semiconductors and AI models have restricted Microsoft engineers in China from accessing cutting-edge technologies.

Brad Smith, President of Microsoft, stated to U.S. lawmakers in 2023 that they do not conduct research on sensitive technologies, including quantum computing, in China.

According to Reuters, Microsoft has also considered closing its research labs in China. However, it ultimately chose to relocate some key personnel to other regions.

Since the U.S. began to restrict AI exports, the research organization now known as Microsoft Research Asia has opened labs in Vancouver, Canada, Singapore, and Tokyo, Japan.

The relocation of personnel has not been as easy as expected. According to Reuters, Microsoft offered relocation opportunities to 1,000 top engineers to the U.S. and three other Western countries in 2024, but only about one-third accepted.

Microsoft confirmed that it offered relocation opportunities to employees at that time but did not disclose specific details.

According to two officials, many senior engineers have moved to Chinese universities or tech companies where they can stay close to their families while continuing to conduct top-level research.

In the past, Microsoft was relatively successful in defending against talent poaching by Chinese competitors. According to Crozier, the turnover rate, which was about 17% in the mid-2010s, has been reduced to below 10% by expanding new businesses like ByteDance support and global work opportunities.

'Not Withdrawal, but Selective Retreat... The Role of China's Business Changes

Microsoft's strategy in China has changed significantly since 2010.

At that time, when Google was trying to withdraw from China due to censorship and cyberattack issues, Bill Gates and then-Microsoft CEO Steve Ballmer expressed that Google was overreacting.

Thirteen years later, in 2023, Microsoft itself considered withdrawing from China.

However, according to a comprehensive report by Reuters, what Microsoft has chosen is not a complete withdrawal but a strategy to shift the focus of its business. The past strategy of securing the Chinese government as a major technology client has weakened. Instead, providing Azure and Western AI technologies to Chinese companies expanding overseas and accessing Chinese engineering talent has become the key reason for maintaining local operations.

Crozier noted that while there are difficult days due to the geopolitical situation, there has been no crisis that could be called a crisis in the Chinese business.

He mentioned that there may be changes in the scale of personnel and the technology developed locally, but "the fact that we will bring technology for China and Chinese companies has not changed at all."

This content is provided for general informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online promotions, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets. Crypto assets are highly volatile and may result in loss. The availability of WEEX services, products, and related events may vary by region. You are responsible for ensuring that your participation is in accordance with applicable local laws and regulations.