LinkedIn Social Network leaves China, but Microsoft stays

While other tech giants, such as Google and Facebook Inc.

— have largely stayed out of China, Microsoft’s search engine Bing and its cloud-based business software remain. In addition, the Windows operating system still dominates in China.

LinkedIn said it had made the decision to close in China after it was “facing a significantly more challenging work environment and increased compliance requirements.” Those same factors could cause Microsoft to withdraw other products in China, said Paul Triolo, head of global technology policy practice at Eurasia Group, a political risk consultancy.

“What’s the benefit?” he said. “If you went to China 10 years ago hoping to see some liberalization around censorship, you were willing to be patient and get a foothold. That calculus doesn’t seem to be getting any better in the short term.”

Weeks before LinkedIn announced its withdrawal from China, Microsoft was reminded by Beijing to follow the rules in China. In September, Microsoft President Brad Smith spoke with Xiao Yaqing, the head of China’s Ministry of Industry and Information Technology, discussing Microsoft’s expansion into China, according to a statement from the ministry.

Chinese officials want Microsoft to increase its investment in China’s digital and automation industries, but also want the company to comply with regulations, according to a person familiar with the matter.

Microsoft declined to comment on LinkedIn’s decision this week. It did not immediately respond to requests for comment about its meetings with Chinese officials.

Since opening an office in China in 1992, Microsoft has been working to gain a foothold in the country. Despite setbacks in the country, such as pirated software, the company has tried to take the long-term strategic vision, former Microsoft China executives said.

China remains a small part of Microsoft’s business, contributing less than 2% of total global sales, Mr. Smith said in September.

LinkedIn had some success in China, with over 50 million users there, making it the website’s third largest market after the US and India. Still, LinkedIn remains a small part of Microsoft’s overall business, generating about 6% of the company’s total revenue in its most recent fiscal year.

For a social network like LinkedIn, international growth is often the biggest source of new user growth, said Dan Morgan, portfolio manager at Synovus Trust Co., an investor in Microsoft. A departure from China could lead to a drop in sales and subscriber numbers, he said.

China has tightened restrictions on technology in recent years and LinkedIn has become a target along with other leading companies. In recent months, LinkedIn has informed some China-targeted human rights activists and journalists that their profiles contain banned content and that they have been blocked in China.

When LinkedIn launched its Chinese version in 2014, the company said it understood that it had to comply with the demands of the Chinese government, but that it was worth it.

“While we strongly support freedom of expression, we have taken this approach to create value for our members in China and around the world,” wrote Mohak Shroff, senior vice president of engineering at LinkedIn, referring to the decision to launch the to enter the Chinese market. . Mr. Shroff made the comments in a blog post Thursday announcing the withdrawal from China.

LinkedIn would not comment outside of the blog post.

An tightening regulatory landscape for algorithms, data collection and processing has increased the challenges facing Microsoft and other multinational companies operating in China.

Cars today offer high-tech features and collect a wealth of data to train algorithms. As China ramps up control over new technologies, WSJ looks at the risks to Tesla and other global brands that now need to keep data in the country. Screenshot: Tesla China

The Chinese authorities this year introduced draft rules that oversee the use of algorithmic recommendations. Once those rules are in effect, Microsoft’s search engine, Bing, may have to adjust its algorithms should regulators demand it after an assessment, Carly Ramsey, head of the Greater China political and regulatory risk team at consultancy Control Risks.

Bing, which launched in China in 2009, could be more sensitive to new restrictions, analysts say. It is a distant third in the search engine market in China with a market share of less than 4%, behind domestic rivals of search engines Baidu, with an 82% share, and Sogou, with a share of more than 7%, according to Statcounter.

In June, Bing’s presence in China came under criticism in the US when it was discovered that the search engine was blocking results worldwide for the iconic “Tank Man” image linked to the 1989 Tiananmen Square massacre. At the time, Microsoft accused the bloc of ” accidental human error” and fixed the image.

Another growing company for Microsoft is Teams, its video conferencing and workplace collaboration product. At the start of the pandemic, between late January and early March in 2020, Microsoft said it had seen a 500% increase in meetings, phone calls and conferences conducted through Teams in China.

Still, Microsoft faces stiff competition in this area. Chinese tech giant Tencent Holdings Ltd.

TCEHY 1.80%

and Zoom video communication Inc.

ZM -0.26%

Ltd. runs popular video conferencing tools in China.

Where Microsoft is unlikely to backtrack in China is in the company’s core business cloud services, said Brad Reback, an analyst at Stifel Financial Corp.. Microsoft operates its cloud operations in China, including cloud computing service Azure and business application suite Office 365. , through a partnership with China’s 21Vianet Group.

In contrast to Azure’s strong position elsewhere, Microsoft is lagging far behind the Chinese leaders in the country’s cloud computing market. Alibaba Group Holding Ltd

, Huawei Technologies Co. and Tencent were the top three suppliers in China’s cloud computing market last quarter, according to researcher Canalys. Microsoft’s Azure had a 2% market share in China in the second quarter of the year versus Alibaba’s 34% share, according to data from Canalys.

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