Microsoft once saw China as unthinkable to leave. Now it is quietly retreating
The company considered exiting China in 2023 and has since shut offices and moved research talent abroad. Yet profitable customers such as ByteDance and the need to retain access to Chinese engineers are keeping Microsoft in the market.
Microsoft once regarded the idea of leaving China as unthinkable.
In 2010, Google was preparing to pull out of the country over concerns about censorship and cyberattacks. The decision was welcomed by democracy activists, but not by Bill Gates or Microsoft's then-CEO Steve Ballmer, who suggested Google was overreacting.
Five years later, Microsoft's relationship with China looks considerably more complicated. At least 15 Microsoft branch offices and joint ventures in China have been closed over the past five years, according to corporate filings, while the company has been pursuing what five people familiar with its operations described as a gradual retreat.
Microsoft considered leaving China altogether in 2023, when some executives concluded that the company was taking on too much geopolitical risk for too little economic return, according to one of the people. The company has no current plans to exit, however. China accounted for just 1.5% of Microsoft's global revenue in 2024.
The deterioration in relations between Washington and Beijing has taken a toll on Microsoft's business, the five people said. Since 2017, China has increasingly promoted the use of domestic software, which Beijing considers more secure and whose quality has become increasingly competitive with Windows and Office. At the same time, U.S. restrictions on advanced technology exports have made it harder for Microsoft to expand its lucrative cloud and AI businesses in China.
The internal debate over Microsoft's future in China has not previously been reported.
Other major U.S. technology companies with significant Chinese operations are also reassessing their exposure as geopolitical tensions rise. Apple plans to manufacture in India most iPhones sold to Americans by the end of 2026, while Elon Musk last month denied reports that Tesla was considering separating its China business.
Microsoft ultimately decided to remain because it had developed a profitable business serving Chinese companies that need Western technology to operate internationally, according to three people familiar with the matter. The company also believed that maintaining a presence in China was important for access to the country's highly skilled engineering workforce, two of the people said.
Microsoft had also built one of the technology industry's deepest relationships with the Chinese government, said Alain Crozier, who previously headed the company's China operations.
"Because of the geopolitics … some days it's a little bit harder, but we never had a crisis," Crozier told Reuters.
A Microsoft spokesperson declined to address questions about the company's internal deliberations but said the company operates in a regulatory environment that applies to international suppliers and remains committed to the Chinese market.
The company said the state of its China business reflects a combination of market competition, regulatory demands and technological trends.
ByteDance did not respond to questions about its relationship with Microsoft.
Microsoft's engagement with the highest levels of China's government dates back to the early 1990s. Gates made his first of many visits to China in 1994, when he met President Jiang Zemin, who advised the Microsoft co-founder to study Chinese history.
Microsoft subsequently made extensive efforts to build ties with the ruling Communist Party. It co-invested in startup incubators with the government and complied with censorship requirements that Google ultimately found unacceptable.
By the mid-2010s, however, China had grown increasingly suspicious of Western technology, particularly after revelations that U.S. companies had helped Washington conduct surveillance abroad. That was especially problematic for Microsoft because many of China's largest companies are state-owned or maintain close ties to the government.
Microsoft responded with Windows 10 China Government Edition, a version of its operating system whose release was personally negotiated between CEO Satya Nadella and Chinese finance ministry officials, according to a person familiar with the matter.
The product was adopted by several government agencies but failed to gain the traction Microsoft had hoped for, said Crozier, who ran the company's China operations until 2021.
Around the time of the Windows announcement in 2017, the Chinese government introduced new procurement guidelines for what it described as "safe and reliable" technology services. Microsoft has said that no foreign operating system, including Windows, has been considered compliant with those policies.
That did not amount to an outright ban on foreign products. But it subjected technology administrators who used them to additional scrutiny, including more security checks and approval requirements, said Paul Triolo, a Washington-based China technology policy expert at DGA-Albright Stonebridge Group.
Reuters reviewed six Chinese government computer-system procurement guides published between December 2023 and May 2026. Five did not recommend Microsoft products. The sixth included Windows 10 China Government Edition but said its use was subject to "additional management requirements," without elaborating.
China's technology and finance ministries did not respond to questions about the impact of the regulations on Microsoft's business.
The deterioration in U.S.-China relations has also undermined the confidence of American companies operating in China. Only 52% of respondents to the American Chamber of Commerce in China's latest business climate survey said China was a top global investment priority, down from 62% in 2019.
Microsoft's effort to become a major technology supplier to the Chinese government did not produce the results it had hoped for. But the company found another source of growth in the private sector.
Companies such as ByteDance and ultra-fast-fashion retailer Shein have major businesses serving Western customers and rely on Microsoft's Azure cloud to manage data in accordance with foreign regulations, according to two company sources.
Microsoft also provides Chinese enterprise customers with access through Azure to Western AI models from companies such as OpenAI, which do not directly serve the Chinese market.
By the middle of the 2020s, helping Chinese companies operate internationally had become Microsoft's largest China-linked business, according to three people familiar with the company's operations. Two of them stressed that the business remained small by Microsoft's global standards.
There are also questions about how sustainable Microsoft's AI business in China will be. It relies on third-party providers such as OpenAI, while Chinese companies can increasingly turn to domestic AI models such as Kimi, which are becoming more competitive with Western alternatives while remaining considerably cheaper.
OpenAI and Shein did not respond to questions.
Microsoft has played a major role in developing China's technology workforce since the 1990s.
Alongside hiring engineers focused on commercial products, it established Microsoft Research China, which concentrated on advanced technologies. Its alumni include senior executives at AI companies such as SenseTime and DeepSeek.
But geopolitical pressure has increasingly affected Microsoft's ability to retain that talent.
U.S. export controls on advanced chips and AI models have restricted the access of China-based Microsoft engineers to cutting-edge technology. Microsoft does not conduct research into quantum computing and other sensitive technologies in China, company President Brad Smith told U.S. lawmakers in 2023.
Microsoft considered shutting down its research operation in China but ultimately decided instead to relocate some of its top researchers, according to two people familiar with the matter. Since the U.S. began tightening restrictions on AI exports, Microsoft Research China, now known as Microsoft Research Asia, has opened laboratories in Vancouver, Singapore and Tokyo.
The company has nevertheless struggled to persuade developers to leave China.
In 2024, Microsoft offered 1,000 top engineers the opportunity to relocate to the United States and three other Western countries. Only about one-third accepted, according to the sources.
Microsoft confirmed that it offered transfer opportunities that year but declined to provide further details.
Many senior engineers instead left for Chinese universities and technology companies, where they could continue conducting advanced research while remaining close to their families, the sources said.
Microsoft had previously managed to fend off aggressive recruiting efforts by Chinese competitors. Its attrition rate stood at roughly 17% in the mid-2010s, although Crozier said the company eventually reduced it to below 10% by expanding businesses such as its work with ByteDance and offering employees opportunities to work globally.
"There is up and down in terms of the number of people and maybe some of the things that were developed over there," Crozier said. "But we never change one inch of the fact that we will bring technology into China … for China, for Chinese companies."
Microsoft's experience illustrates the narrowing space available to U.S. technology companies in China. The country remains too important to abandon outright, yet increasingly difficult to serve as it builds its own technology ecosystem and Washington places tighter limits on the technologies American companies can provide.
The result is an uneasy middle ground. Microsoft is retreating from parts of its former footprint while maintaining businesses that still benefit from China's role in the global economy. For a company that once saw leaving China as unthinkable, staying has increasingly become an exercise in deciding what is still possible.
