China Revenue Only 1.5%! Why Microsoft Closed 15 Outposts But Still Won't Leave

Microsoft (MSFT-US) once considered exiting China an unimaginable option, but as U.S.-China geopolitical tensions have intensified, China has pushed for technological self-reliance, and U.S. export controls have restricted the development of artificial intelligence (AI) and cloud services, the software giant has gradually shrunk its footprint in China in recent years. However, the AI boom and the overseas expansion needs of Chinese enterprises have led Microsoft to keep a window open to the Chinese market.

Reuters' review of corporate documents found that Microsoft has closed at least 15 subsidiaries and joint ventures in China over the past five years. Five company sources described Microsoft's current approach as a 'retreat' strategy. The company even discussed whether to exit China in 2023, with some executives believing the geopolitical risks were too high and the economic returns too limited.

Microsoft ultimately decided not to leave and currently has no plans to exit. The Chinese market accounted for only 1.5% of its global revenue in 2024, but Microsoft still profits by serving Chinese companies like ByteDance and Shein that are expanding overseas, while maintaining access to China's top engineering talent.

Losing Government Market, Saved by Chinese Firms Going Global

Microsoft's relationship with the Chinese government dates back to the 1990s. Co-founder Bill Gates first visited China in 1994, and the company subsequently established startup incubation centers in partnership with the government and complied with local censorship rules, building unusually deep political and business ties for a foreign tech firm.

However, after revelations that U.S. companies assisted the U.S. government in monitoring foreign governments, China's distrust of Western technology gradually increased. Microsoft launched a 'Windows 10 Government Edition' negotiated personally by CEO Satya Nadella with Chinese finance ministry officials. Although adopted by some government agencies, its market performance fell short of expectations.

Since 2017, China has promoted the procurement of 'safe and reliable' domestic software, and foreign operating systems like Windows have never been listed as compliant products. Reuters reviewed six government computer system procurement guidelines issued between December 2023 and May 2026; five did not recommend Microsoft, and the only document that included Windows 10 Government Edition required additional management controls.

After being blocked from the government market, private enterprises became Microsoft's second lifeline in China. Companies like ByteDance and Shein, which target Western consumers, need to manage data via Azure cloud and comply with overseas regulations. Microsoft also provides Chinese firms with AI models from Western suppliers like OpenAI through Azure. By the mid-2020s, assisting Chinese companies in going global had become Microsoft's largest China-related business, though it still represents a small share of its global sales.

The sustainability of this business is also in question. Domestic Chinese AI models like Kimi are increasingly approaching Western products in capability but at much lower prices. If Chinese firms switch to local models, they may no longer need Azure.

Advanced Technology Restrictions and Accelerating Talent Drain

Beyond revenue, talent is another key reason Microsoft chooses to stay in China. Microsoft Research Asia has long cultivated Chinese tech talent, with alumni including senior executives at AI firms such as SenseTime and DeepSeek.

However, after the U.S. imposed export controls on advanced chips and AI models, Chinese Microsoft engineers' access to cutting-edge technology has been restricted. Microsoft considered closing the research institute but ultimately chose to transfer some top talent overseas and has since established research hubs in Vancouver, Singapore, and Tokyo.

In 2024, Microsoft offered 1,000 top engineers the opportunity to transfer to the U.S. and three other Western countries, but only about one-third accepted. Many senior engineers instead moved to Chinese universities or tech firms, where they could continue high-level research while staying close to their families.

Alain Crozier, Microsoft's former head of China, said geopolitical factors sometimes make operations more difficult, but the company has never faced a true crisis. While Microsoft's strategy in China has shifted from aggressive expansion to cautious contraction, it continues trying to balance risk, talent, and the globalization needs of Chinese enterprises.