Microsoft's three-decade history with China under the microscope ahead of potential TikTok acquisition

Microsoft's relationship with China has come under scrutiny amid ongoing discussions for the tech conglomerate's potential acquisition of the dance video app TikTok.

As trade talks between the United States and China continue to crumble amid the global coronavirus pandemic, which emanated from the Chinese city of Wuhan, the issue of data stealing has surfaced as a point of contention for the Trump administration.

At the top is the White House's push for either an all-out ban or the forced sale of TikTok – the seemingly innocuous dance video app owned by the Beijing-based ByteDance, used by more than 100 million Americans – that has been painted by the White House as a serious national and cybersecurity threat. While TikTok is preparing to launch a legal challenge in response to Trump's executive order – which gave the parent company 90 days to divest its U.S. operations – Microsoft is still leading the charge to purchase.

But it is far from smooth sailing, as some experts have expressed concern that the Bill Gates-founded tech conglomerate's long and tight relationship with Beijing may do little to make Americans' personal information safer.

"Microsoft's ties in China is as tight as it gets in terms of an American tech company's presence and influence in China," Nina Xiang, an expert of Chinese technology and venture capital, and founder of the Hong Kong-based artificial intelligence monitoring firm China Money Network, told FOX Business. "It's not the most beholden to China in terms of revenue, but Microsoft has been an inspirational role model of sorts for China's tech scene since day one."

Curating concord and clout with Beijing over almost three decades has been at the center of its success in the tightly controlled country, which is likely to boost – but potentially complicate – its TikTok bid. Unlike other major U.S. tech companies who refused to toe the line, the Washington state-headquartered enterprise has managed to find workarounds and strike a delicate balance – and as a result, China accounts for around 10% of Microsoft's estimated $125 billion annual revenue, according to an appraisal by FactSet published earlier this year.

Yet Microsoft President Brad Smith claimed in January that the country comprises less than 2%, standing at about $2 billion, of the company's global revenue. The company doesn't publish China sales in its financial filings.

Nonetheless, its story is a long and seemingly stable one. Microsoft first moved into China's fray in 1992, aiding the government in its quest to engineer computer systems, institute unique adaptations of Windows operating mechanisms in keeping with the Chinese Communist Party's (CCP) stringent censorship regulations. It currently employs around 6,000 people in China.

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Six years after entering the Chinese market, Microsoft established "Research Asia" – the largest research institute for basic and applied computer research outside of the U.S. – which the company touts as having "incubated many popular applications and technology projects based on its own technology accumulation and research innovation."

And in 2017, Microsoft launched a customized variant of its Windows 10 software tailored for Chinese government use, complete with local encryption aimed to address "issues that matter" to its government customers, the company stated, according to the Wall Street Journal.

The following year, Microsoft announced the opening of a second China lab, this time in Shanghai, with the specific aim of developing artificial intelligence (AI) in partnership with the state-owned Chinese firm INESA.

Moreover, the company last year came under scrutiny for its work with a Chinese military-operated university. Three papers published between March and November were co-written by academics from both the Microsoft Research Asia and those connected to China's National University of Defense Technology, which is domineered by China's leading military wing, the Central Military Commission. The Financial Times pointed out that one of the papers depicted a new AI modality "to recreate detailed environmental maps by analyzing human faces, which experts say could have clear applications for surveillance and censorship."

Furthermore, Microsoft enables the CCP to censor Bing, its search engine, in China, to continue operating in the large market. By contrast, Google yanked its search engine a decade ago over censorship woes and, in ensuing years, has continued to pull various search and cloud efforts – including the development of potential cloud services for China. Bing is currently the only international search engine with a slice of the market share in the country.

The Microsoft-owned LinkedIn also has a prominent – albeit censored – presence in China and has secured a stake as a popular social media platform among the many millions of professionals. The likes of Facebook, on the other hand, have long been blocked.

Thus while most foreign entities have scrapped cloud endeavors in China, Microsoft offers a thriving service under the Azure operating platform "physically separated" for that market alone. Azure is facial recognition technology, which utilizes top-notch, cloud-based face algorithms to detect and determine human faces in pictures, perceived emotional recognition, and facial verification. China also happens to be the global leader in mass surveillance, of which facial recognition plays a pivotal part. In addition, Microsoft's Xbox console was the first such video game apparatus that got the green light for sale in the world's most populous nation, which was again cultivated through a joint venture, Bloomberg reported.

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And according to multiple insiders in the Chinese business arena, Gates is also something of an idolized public figure in the country of 1.4 billion – with his books top-sellers and his foundation highly respected in conjunction with the tech company he brought to life.

President Xi Jinping visited the Microsoft headquarters in Redmond on an official trip to the U.S five years ago, where he was received by Gates and his wife at a time when human rights abuses were emerging as a hot-button issue for the Obama administration. In February, Xi wrote a personal letter of thanks to Gates for his cooperation and support during the outbreak of the novel coronavirus, officially termed COVID-19.

Ticker	Security	Last	Change	Change %
MSFT	MICROSOFT CORP.	430.98	+7.52	+1.78%

And over recent months, as the coronavirus has swept through almost every pocket of the planet and claimed more than 800,000 deaths worldwide, Microsoft's relationship with China has continued to flourish with a documented 500% increase in Microsoft meetings, calls and conferences via its Teams app in China.

Even so, Microsoft's rapport with the CCP hasn't been without its share of difficulties. Flagrant piracy of its Windows software and Office productivity applications has stopped the company from making even greater forays in the massive market. And at one point in early 2019, Bing was briefly blocked by the government. The reasons behind the halt remain unclear – leading some to speculate it was being used as collateral given that Washington was, at the time, boosting its drive against Chinese 5G tech frontrunner Huawei.

Microsoft's Smith has since come to the defense of Huawei, last September condemning President Trump for what he deemed unfair treatment of the telecom giant. The company has also criticized the administration over its immigration policies, yet at the same time fostered solid ties with the government and has continued to work with the U.S. Immigration and Customs Enforcement (ICE) in its implementation of such controversial protocols.

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So certainly, the business stakes are high given its government funding.

When rival Google declined to bid on a cloud-computing contract with the Department of Defense, Microsoft scored a win over fellow competitor Amazon – securing the $10 billion Pentagon agreement.

And in terms of TikTok, Microsoft remains a top choice, at least in China – even though Trump's critique and security claims have been met with anger and dismissal by the CCP. TikTok insists that despite its Chinese ownership, its user data for Americans is stored only in the U.S.

Derek Scissors, a China-focused resident scholar at the American Enterprise Institute (AEI), highlighted that TikTok's value would fall in November if the U.S imposes restrictions on its use, hence Bytedance has an incentive to sell before then.

But for any company to make a victorious acquisition, it will need to prove its national security and antitrust musters are up to scratch with both governments.

"TikTok is essentially a backdoor that the Chinese government can exploit at any time. It's really more of a latent threat rather than an immediate one because it's about what TikTok could ultimately be used for or how it could be leveraged by the CCP," explained Karim Hijazi, CEO of cybersecurity firm Prevailion. "An acquisition by Microsoft could reduce the threat, but it won't entirely eliminate it. Microsoft will also need to carry out a full security audit of TikTok's codebase to find out if there are any built-in backdoors or other vulnerabilities that could be exploited by the CCP."

Microsoft is reported to be developing a game plan on how to detach operationally from the Chinese parent ByteDance once a buying agreement has been reached in a sale that is predicted to cost between $40 billion and $50 billion and boost Microsoft with a swell of over 100 million relatively young users.

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Yet Trump himself has publicly advocated for another major U.S tech company – California-based Oracle – to score the sale. Reuters reported this week that ByteDance is in talks to divest its Western operations, which could potentially set the stage for either Microsoft or Oracle to receive a minority stake in assets.

Microsoft declined a request for further comment.

"For Tiktok sale, it's a highly fluid situation. But the end result may be two – either it's banned outright, or it's sold to another company," Xiang added. "Obviously, the latter is a better option for Tiktok. But whatever the result, the implications of this will go much further and longer than this sale."