Microsoft's next big policy battle could be over its ties to China, as a GOP adviser calls on the tech titan to divest its Chinese holdings amid TikTok talks (MSFT)

• Microsoft confirmed the company is exploring a deal to buy TikTok's operations in several countries including the US.
• President Donald Trump has threatened to ban the app over concerns including national security. Those concerns could affect Microsoft's bid.
• White House trade adviser Peter Navarro on Monday questioned Microsoft's relationship with China, suggesting the company should divest its Chinese holdings.
• China is home to Microsoft's largest R&D center outside the US, and its ties to the country run deep, Chinese technology entrepreneurship expert Duncan Clark said.
• Are you a Microsoft employee? Contact this reporter via encrypted messaging app Signal (+1-425-344-8242) or email (astewart@businessinsider.com).
• Visit Business Insider's homepage for more stories.

Microsoft's ties to China will be under the microscope as the company attempts to purchase viral video app TikTok's operations in several countries including the US from Chinese parent company ByteDance.

Microsoft on Sunday confirmed its interest in TikTok, disclosing CEO Satya Nadella has had discussions about the bid with President Donald Trump, who has threatened to ban the app in the United States over concerns including national security.

White House trade adviser Peter Navarro on Monday questioned Microsoft's relationship with China, suggesting the company should divest its holdings in the country. Navarro said that the Chinese government and military are Microsoft customers, but it was unclear if he was calling on the company to stop doing business there entirely. 

What is clear: Microsoft's connections to China run deep, and its dealings in the country could be a big part of the discussion as the company tries to negotiate its TikTok purchase amid the Trump administration's escalating tensions with China. Microsoft declined to comment for this story.

Microsoft does more research and development in China than anywhere outside the US.

Microsoft's has had a long presence in and close connections with China, Duncan Clark, an expert on Chinese technology entrepreneurship, told Business Insider. Then-CEO Bill Gates first opened an office in Beijing, China in 1992. Microsoft China now has more than 6,000 employees, and the company does more research and development in China than anywhere else outside the US.

The links between Microsoft and China have been strained of late. As Microsoft President Brad Smith late year wrote the US and China are on the brink of what he called a "tech Cold War," and earlier this year revealed Microsoft gets just 1.8% of its global sales from China, which in turn accounts for 18% of the world population.

But Microsoft is also perhaps the "least controversial" large, foreign tech company operating in China, Clark said.

Google, for example, pulled out of China many years ago, unwilling to censor its search engine in compliance with local regulations — and, years later, found itself embroiled in controversy when it was revealed that it was working on Project Dragonfly, a censored search engine that would allow it to return to China. Google said in 2019 that Project Dragonfly was no longer in the works. 

Microsoft, by contrast, has been operating a censored version of Bing in China, almost uninterrupted for the last several years. Similarly, Microsoft offers its Azure cloud platform in the country in partnership with a local Chinese operator.

'Links are much tighter than people think'

When Chinese President Xi Jinping made his first visit to the US, he first stopped in Seattle and met with technology-industry CEOs including Microsoft's Satya Nadella and visited Microsoft's headquarters. China's previous president, President Hu Jintao, had dinner at Gates' house in 2006.

Microsoft has long been a "training ground" for Chinese technologists, Clark said, and technology and engineering graduates from top Chinese universities often aspire to work in Redmond. 

Microsoft also funded a technology-industry graduate school near its Seattle-area headquarters called the Global Innovation Exchange, a partnership between Seattle's University of Washington and Tsinghua University, often called "China's MIT." Microsoft President Brad Smith personally helped to broker the partnership.

Many Microsoft alumni run top Chinese companies. ByteDance's own founder Zhang Yiming had a brief stint at Microsoft, Bin Lin worked for Microsoft for nearly a dozen years before becoming president and cofounder of Chinese electronics giant Xiaomi, and former executive Qi Lu – who used to be Satya Nadella's supervisor and was a candidate for his job – was chief operating officer of Chinese tech giant Baidu until 2018.

"Links are much tighter than people think," Clark said. "Those conversations are pretty easily had."

Got a tip? Contact this reporter via email at astewart@businessinsider.com, message her on Twitter @ashannstew, or send her a secure message through Signal at 425-344-8242.

SEE ALSO: If Microsoft buys TikTok, it could be hailed as a 'hero' for saving the app as President Trump threatens to ban it. Here's why analysts say a deal might make sense.

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