Microsoft to Shift Hardware Manufacturing Out of China by 2026

Microsoft plans to manufacture the majority of its new hardware products outside of China starting in 2026, amid escalating U.S.-China trade tensions and growing pressure on American tech giants to diversify their supply chains, according to a report by Nikkei Asia.

The move marks a significant acceleration in the broader trend of “de-risking” from China, as U.S. firms seek greater supply chain resilience in the face of rising geopolitical uncertainty and tariff threats.

Microsoft has reportedly instructed several of its suppliers to prepare for relocating production of Surface laptops and data center servers, including components and assembly, to locations outside of China starting next year.

“This is a broad initiative covering parts, components, and assembly for new products,” one supply chain executive told Nikkei. “The goal is to have full production moved outside China by 2026 at the earliest.”

Microsoft currently ships about 4 million Surface devices annually, including laptops and tablets. The company has already shifted a significant portion of its server manufacturing out of China since 2024 due to the sensitive nature of the equipment, and now requires at least 80% of server components to be sourced from outside the country.

Additionally, Microsoft is working to expand Xbox production in alternative regions, though complete relocation is not yet mandated. “Assembly Is Easy, Components Are the Challenge”.

While relocating final assembly is relatively straightforward, reconfiguring the deeper layers of the supply chain, especially at the component level, is far more complex.

“Transitioning assembly is one thing, but shifting component production is radical and incredibly difficult, especially on a timeline like 2026,” said one executive at a Microsoft supplier. “We'll have to see how realistic this ambition is.”

Other U.S. cloud computing giants are following similar strategies. Amazon Web Services (AWS) has begun reducing reliance on its long-time Chinese supplier SYE for sensitive AI server components. However, completely replacing Chinese suppliers is challenging.

“These are experienced suppliers with competitive pricing and proven track records. Replacing them is not easy,” a source close to the discussions said.

Despite political pressures, Chinese manufacturers remain central to global hardware ecosystems. Their high-quality output, scale, and cost-effectiveness make them difficult to replace entirely.

Firms like Victory Giant Technology, a major printed circuit board supplier for Nvidia, have expanded their operations into Southeast Asia, including Thailand and Vietnam, in response to client demand for China-free production options.

To mitigate risk, major tech firms are ramping up investment in Southeast Asia.

Google, for instance, has asked suppliers to significantly scale up server capacity in Thailand. According to two sources, one systems manufacturer has built four new facilities there, effectively doubling production capacity for Google’s cloud infrastructure. “An entire local ecosystem is forming around Google’s supply needs in Thailand,” one of the sources said.

These moves come after Beijing tightened export controls on rare earth elements and battery materials, prompting the U.S. to threaten 100% tariffs on Chinese goods starting in November.

While strategic shifts are underway, some reliance on Chinese production is likely to persist, particularly for low-cost passive components like resistors, capacitors, and inductors, which are manufactured at immense scale in China.

“As component makers, we’ve been asked to offer alternatives outside China,” said an executive at a Japanese electronics manufacturer. “But for components that cost a fraction of a cent and are needed by the millions, moving production outside China isn’t always feasible.”

This isn’t the first time U.S. firms have sought to move away from China, a similar trend began under former President Donald Trump in 2018 when punitive tariffs targeted networking equipment.

However, analysts note that this is the first instance where tech giants are setting aggressive targets not only for final assembly, but also for critical subcomponents such as printed circuit boards, cables, connectors, and materials like fiber optics, signaling a deeper decoupling from China.

Executives also cite growing geopolitical risks in the Taiwan Strait as a further motivator for reducing dependence on the Greater China region.

As the deadline looms, all eyes are on whether Microsoft, and others, can achieve a supply chain transformation that has eluded the tech sector for over a decade.