"The Onset of the 'Cloud Cold War': The Day Microsoft Excluded Chinese Engineers from DoD Projects"

1. Introduction

"Chinese-based engineers were maintaining the cloud for the U.S. Department of Defense." An article published by TechCrunch on the 19th (U.S. time) reported that Microsoft acknowledged this fact and declared that going forward, they would not involve engineers based in China in Department of Defense (DoD) related work. This comes in the wake of an investigative report by ProPublica and strong criticism from the U.S. Congress and the Department of Defense. Microsoft explained that "Chinese-based engineers were accompanied by a 'digital escort' and did not have direct access to the system," but suspicions regarding national security are not easily dispelled.TechCrunch

2. Origin: ProPublica's Investigative Report

In early July 2025, ProPublica published a long-form article titled "The China‑Based Engineers Who Keep the Pentagon Online," revealing that trouble tickets for the Azure Government Secret/Top Secret environment were being routed to support centers in Dalian and Shanghai, China. According to the article, an internal project called "Red Riser," which stemmed from the U.S. military's department, started in 2019, and Chinese-based staff were acting as "remote hands" to solve problems with limited authority.

This report quickly sparked outrage on social media, with people questioning, "How could they entrust operations to a foreign, rival nation?" This led to Republican Senator Tom Cotton demanding an explanation from the Pentagon in a letter.The Economic Times

3. Microsoft's Policy Shift

Less than ten days after the issue came to light, Microsoft announced a complete overhaul of its cloud support system.

• DoD-related tickets will be labeled **"US Persons Only"** and handled only by staff in the U.S. or NATO allied countries

• Employees based in "OFAC-designated countries" like China, Russia, and Iran will have their access rights blocked both physically and logically

• The support lines for Azure Government and commercial Azure will be completely separated, and cross-training will be prohibited

The company emphasizes "prioritizing trust in the defense sector," while simultaneously reassigning approximately 300 Chinese-based engineers to other projects. Although this raises concerns about temporary delays in cloud SLAs (Service Level Agreements), the U.S. government has indicated a policy to tighten security conditions in future contract renewals, effectively limiting options.ReutersThe Times of India

4. Reactions from the Pentagon and Congress

On the 18th, Secretary of Defense Pete Hegseth announced "a reevaluation of all cloud contracts within two weeks." The relationship between the DoD and Microsoft, which had previously been strained over the JEDI project, is once again tense, and lobbying activities by AWS and Google Cloud are intensifying. Senator Cotton harshly criticized at a Senate Armed Services Committee hearing, saying, "China is not just a support role but an inside-outsider." The Democratic side also continues bipartisan condemnation, accusing Microsoft of prioritizing labor cost savings over national security.Reuters

5. Reception in China

On Weibo, the Chinese version of X, nationalist reactions were prominent, with comments like "Microsoft is pandering to the U.S." and "Will they move jobs to India next?" Meanwhile, voices of concern from the IT industry noted that "Chinese engineers are being deprived of the right to work in the global market." Beijing-based cybersecurity researcher Zhang Kai stated, "U.S. sanctions were expected, but it has become urgent for Chinese IT companies to secure human capital."

6. Voices on Social Media—X, Reddit, LinkedIn

• On X (formerly Twitter), policy analyst Joel Thayer sarcastically posted, "Digital escort? It's like creating an alibi," garnering over 20,000 likes.X (formerly Twitter)

• On Reddit/r/cybersecurity, a comment likening the situation to "Fox guarding the henhouse" topped the weekly topics.Reddit

• On LinkedIn, recruiters from U.S. defense contractors simultaneously reposted "seeking Azure specialists residing in the U.S.," causing the job market to "heat up rapidly."

7. Expert Perspectives—Cybersecurity and Supply Chain

Professor Graham Allison of Harvard Kennedy School pointed out that "the monolithic nature of the cloud supply chain is now an illusion." The essence of cloud operations is **"24/7, 365 days a year, some operation center on Earth is monitoring the connection,"** but its advantages and risks are two sides of the same coin. This issue highlighted the "collision area" between global operations seeking cost efficiency and national security demanding confidentiality.

8. Restructuring Engineering Systems and Impact on Competitors

Microsoft is reportedly planning to establish a new "Azure Government Cyber Center" in San Antonio, Texas, to consolidate support bases within the U.S. Competing AWS GovCloud already has a large facility in the same state, boasting "8,000 security-cleared personnel." Google is expanding its "Assured Workloads in Japan" model, announced in 2024, for U.S. defense, turning "geopolitical risk response" into a business opportunity.

9. Acceleration of U.S.-China Technology Decoupling

This case is also a symbolic event where the "talent supply chain" of engineers is being divided. Following semiconductors, AI chips, and quantum technology, cloud operations are also undergoing "decoupling." The Chinese IT industry is exploring "third-country bases" as "enclaves," with R&D centers being established in Malaysia and Vietnam. Meanwhile, the U.S. is strengthening inward investment reviews (CFIUS) and adopting a **"zero-distance principle"** that says "neither secondment nor presence is allowed."

10. Conclusion—Corporate Governance in the Digital Cold War Era

The U.S.-China confrontation is entering a phase where it demands a reorganization of the very organizational structure of multinational corporations. Microsoft's decision this time demonstrates that companies cannot survive by merely pursuing shareholder profits and development efficiency. Going forward, unless companies establish a system that can document in real-time "who from which base touched which code" and withstand external audits, they will not be able to win defense and public sector projects—a new era is truly beginning.