More than two decades of efforts by Microsoft to put down roots in China may soon bring a partial pay-off, if it succeeds in steering through the purchase of TikTok’s US business.
But as relations between the US and China rapidly deteriorate, the software company’s long-term bet on the Chinese market is also facing its most uncertain period yet.
Microsoft’s involvement in the Chinese tech world, dating from its creation of a research centre in Beijing in the late 1990s, has left it with important personal connections. Zhang Yiming, the founder of ByteDance, the company that owns TikTok, worked at Microsoft, though only for a few months before he left to join a start-up.
That was not unusual at the time: Microsoft’s research lab was known within China as an incubator for entrepreneurs in the late 1990s and 2000s, who then went on to propel the country’s tech explosion. The company has nurtured talent from Yin Qi, the founder of facial recognition giant Megvii, to Lin Bin, the co-founder of mobile phone maker Xiaomi.
Back then the freedom and global platform that Microsoft offered for cutting-edge computer-science research was unprecedented in China. Microsoft Research had the pick of the country’s best PhD graduates.
“All the pre-existing connections between ByteDance and Microsoft meant there were lines of trusted communications that could be taken advantage of,” said a former Microsoft China executive, who added that Mr Zhang was close friends with the former Microsoft vice-president Harry Shum, whose protégé Ma Weiying was head of artificial intelligence at ByteDance until last month.
Microsoft also worked on building connections with China’s political elite. The company’s founder Bill Gates was one of the few foreign executives to meet three Chinese presidents in a row, beginning in 1995, around the time Microsoft entered China. Five years ago President Xi Jinping visited Microsoft’s headquarters in Redmond, Washington, where he praised the company for “driving forward the development of China’s ICT industry”.
In July, Microsoft was the sole US company invited to a televised entrepreneurs’ summit with Mr Xi. The closeness of the relationship has made it a sore point for some in the Trump administration. Peter Navarro, the White House trade adviser, has attacked the idea of Microsoft buying TikTok and raised questions about how the US group managed to keep its search engine Bing alive on the Chinese internet, saying: “We know that there’s some fishy stuff going on there.”
As well as Bing, which is the only foreign search engine consistently available in China, and which censors Chinese search results but says this is limited to users in mainland China, Microsoft owns two of the three major unblocked foreign platforms containing user-generated content. These are LinkedIn, the professional networking website, and GitHub, a code-sharing site for developers. The third is the reviews system of Amazon’s website.
Rebecca Mackinnon, director of Ranking Digital Rights, noted that Microsoft had taken down its blogging platform in 2005 after being criticised for removing the blog of a Chinese journalist. She added that it also “didn’t roll out a Chinese version of Outlook (its email service). They’ve avoided that deliberately.”
Ms Mackinnon said the company was strict in its geographic ringfencing of data because of EU regulatory attention, and was unlikely to let Chinese government requests pose a threat to US data. As for its China operations, “they are making more effort to minimise the risks for Chinese users. A Chinese company has fewer options”.
Protecting users from Beijing will be trickier now with the passing of Hong Kong’s national security law, which gives the region’s authorities broad powers to surveil political dissidents. In July, Microsoft said it would pause responding to Hong Kong authorities’ data requests.
Microsoft’s research in China, arguably its strongest asset over the past two decades, has also included collaborations with researchers at China’s military-controlled National University of Defense Technology.
The company’s management of its research staff is very light. Limiting research collaborations is “a really tough question — research is a very liberal environment in itself”, said a second former Microsoft China executive. “People might question [research collaborations] but from the point of view of our researchers, they want to work with the best partners they can find in their field,” the executive added.
But while Microsoft has a strong position in China — about 90 per cent of the personal computers in the country use the Microsoft Windows operating system, and until recently many government websites only ran correctly on the Internet Explorer browser — it has not benefited much financially. A long battle against software piracy, which has involved many years of delicate diplomacy with Chinese law enforcers, has yielded only minor victories.
“It’s not hard to find Microsoft software in China and even in Chinese government institutions. It’s a lot harder to find Microsoft software that Microsoft has been paid for,” Brad Smith, Microsoft’s president, said earlier this year. He put the scale of Microsoft’s China business at only 1.8 per cent of its global revenue.
Microsoft’s global shift of focus to its Azure cloud services has also faced difficulties in China, where the cloud sector has high barriers to entry for foreign players. Although some executives wanted to pull the lossmaking cloud division out of China, chief executive Satya Nadella vetoed the decision, according to a Microsoft consultant.
“China has a memory like an elephant: once you pull out it’s very difficult to get back in,” the consultant said. Microsoft declined to comment on the matter.
Nevertheless, Microsoft is keen to maintain both its research base in the world’s second technology superpower and to continue to cultivate the good relationships that, in part, brought TikTok to the negotiation table.
In December last year Microsoft launched its China Alumni Network, with a WeChat post titled “Once a Microsoftie, Always a Microsoftie!”. “Microsoft’s alumni can be a positive ambassador and messenger to the China-US relationship,” said Zhang Yaqin, president of the Chinese search group Baidu.
The second former Microsoft China executive added: “The soft power of Microsoft in China is immense. For the most part, Chinese employees leaving have a soft spot for Microsoft.”
But the company will have to tread carefully with ByteDance, avoid the impression that it is taking advantage of a forced sale, and potentially even offer to sell some of its China assets in return, according to two people close to the situation.
So far it has faced little anger from Beijing or from Chinese nationalists at its mooted deal. “The prevailing view is the Chinese government won’t retaliate as much as they did over Huawei,” said Rui Ma, author of a forthcoming book on ByteDance.
How long Microsoft can navigate the growing political division — and whether it can maintain and eventually profit more from its technology base in China — are another matter. Mr Gates and Mr Nadella have a “global mindset”, according to the former Microsoft China executive. But he added that it has been “severely tested by the current politics of the US” and that bosses in Redmond may be wondering what their long-term strategy for China is.
Another former Microsoft China executive noted that the company’s good relationships “are not going to change the future of China”, which is bent on swapping foreign technology for domestic alternatives.