Microsoft is fine avoiding China as U.S. considers national security implications, CEO Satya Nadella says

Microsoft is not focused on China as a domestic market, though the company has notable Chinese customers with operations outside the world’s second most-populous country, CEO Satya Nadella said on Wednesday.

“We are mostly focused on the global market ex-China,” Nadella told CNBC’s Jon Fortt during Microsoft’s Ignite conference in Seattle. “A lot of the Chinese multinationals operating outside of China are our bigger AI customers, perhaps.”

Microsoft provides artificial intelligence services to electric vehicle maker Li Auto and consumer electronics company Xiaomi, among others.

Nadella’s remarks come as business leaders gather in San Francisco alongside U.S. President Joe Biden and China’s President Xi Jinping. The world’s two biggest economies have a fraught business relationship, particularly when it comes to technologies like networking equipment, semiconductors and internet services. In October the U.S. Commerce Department said it would impose additional export restrictions on AI chips for China.

Microsoft has a more visible presence in China than some of its peers. Meta’s Facebook and Instagram apps don’t officially work in China, nor does Google’s search engine. Amazon closed its online marketplace in China in 2019.

According to Microsoft’s web page about its presence in China, the company has operated there since 1992, including through its largest research and development center outside the U.S. The Bing search engine has been accessible in China since 2009.

For a few months this year, following the launch of an AI chatbot in Bing, it became the top desktop search engine in China. However, Beijing-based Baidu has since reclaimed leadership, according to StatCounter data. Earlier this week, Microsoft’s advertising division announced a partnership with Baidu.

Still, Nadella acknowledged on Wednesday that the U.S. government has important restrictions to follow when it comes to doing business in China.

“It’s clear that the United States has a particular set of policy decisions that they’re making on what it means to both have trade and competition and national security,” Nadella said. “Obviously, we are subject to what the USG decides” and will be compliant, he added.

Just over half of Microsoft’s sales in the third quarter came from clients in the U.S. The U.S government uses Microsoft Azure cloud services and Microsoft 365 productivity apps.

While Microsoft doesn’t rely on China for much revenue, the company has depended on the country for manufacturing, in part for its Surface PCs.

“At least for us, today, the majority of our business is in the United States and in Europe and in the rest of Asia, and so we don’t see this as a major, major issue for us, quite frankly, other than any disruption to supply chain,” Nadella said.

Microsoft has recently encountered some challenges in China.

In August, LinkedIn stopped operating its InCareer app for professional users in mainland China, citing “fierce competition and a challenging macroeconomic climate.” The move came two years after Microsoft announced plans to shut down a localized version of its main app for users in China.

Last year, China reportedly told its government agencies and government-backed companies to turn in PCs from foreign countries and replace them with machines made domestically and running local operating systems. That came after Microsoft developed a special version of its Windows 10 operating system for the Chinese government.

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