Microsoft (NASDAQ:MSFT) recently signed a memorandum of understanding with Chinese tech giant Xiaomi to work closely in the cloud, artificial intelligence, and hardware markets. Xiaomi plans to launch new smartphones, laptops, and smart devices -- which will be tethered to Microsoft's Azure cloud platform -- for international markets.

The two companies are also discussing the possibility of integrating Microsoft's Cortana into Xiaomi's Mi AI smart speaker, and integrating other Microsoft technologies -- like Bing, Edge, Skype, and its AI technologies -- into other Xiaomi products. The partnership could help Xiaomi expand beyond China, and help Microsoft plant firmer roots in the Chinese market.

Microsoft's offices.

Image source: Microsoft.

This isn't the first time Microsoft has partnered with Xiaomi, one of the largest smartphone makers in China and India. Back in 2015, Microsoft tested out Windows 10 Mobile on Xiaomi devices, then launched an official ROM for Mi 4 owners.

The following year, Xiaomi started pre-installing Microsoft apps on its devices, and Microsoft sold about 1,500 of its patents to Xiaomi -- presumably to shore up its defenses as it launched smartphones in new markets.

Understanding Microsoft's moves in China

China's market is often hostile to foreign companies that don't partner with domestic companies. Chinese regulators banned Windows 8 on government computers in 2014, citing security issues, then raided Microsoft's offices in an antitrust probe.

After Microsoft teamed up with Xiaomi, the regulatory heat faded. Over the following two years, Microsoft strengthened its ties to the Chinese tech sector via new partnerships with Lenovo and Huawei.

Last year, Microsoft launched a new version of Windows for the Chinese government, "Windows 10 China Government Edition," to address the government's security concerns. The OS, which Microsoft developed with the state-owned China Electronics Technology Group Corporation, ensures that all of its data remains within the country.

With the Chinese market now deemed friendly again, Microsoft will likely try to expand Azure's presence in China, which has been a tough market for Amazon (NASDAQ:AMZN) Web Services (AWS) to crack.

AWS is only present in two Chinese regions and four availability zones, compared to five regions and 17 availability zones in the U.S. Amazon sold parts of its cloud business in China last year for $301 million, indicating that it's struggling against local leaders like Alibaba (NYSE:BABA).

Why Xiaomi is an ideal partner

Xiaomi is mainly known as a smartphone maker, but it also sells mobile accessories, audio devices, smart TVs, various home appliances, wearables, and even connected shoes. It also launched the Xiaomi IoT (Internet of Things) platform, a dedicated platform for creating and connecting IoT devices, which attracted 400 hardware partners.

Xiaomi's smart home products.

Image source: Xiaomi.

Last November, Xiaomi claimed that the Xiaomi IoT platform is now the largest IoT hardware platform in the world with over 85 million connected devices. Baidu (NASDAQ:BIDU), which owns the top search engine in China, also teamed up with Xiaomi last year to work on new IoT and AI-driven technologies. Some devices on Xiaomi's IoT platform already use Baidu's DuerOS virtual assistant.

Baidu is also one of Microsoft's key partners in China. Baidu's open source autonomous driving platform, Apollo, uses Azure as its preferred cloud platform.

Therefore, it wouldn't be surprising to see Xiaomi, Baidu, and other Chinese companies tether their next-gen products and services to Microsoft's Azure instead of AWS or Alibaba Cloud.

The key takeaways

Microsoft made smarter moves into the Chinese market than rivals like Alphabet's Google and Amazon. Google's abrupt departure from China in 2010 left the door wide open for Baidu, while Amazon failed to stop Alibaba before it dominated the Chinese e-commerce and cloud markets.

Meanwhile, Microsoft remained essential in China, since Windows was still the top PC operating system in the country. Top tech companies like Xiaomi, Lenovo, Huawei, and Baidu soon realized that using Azure was an attractive alternative to using Alibaba Cloud, which would merely strengthen the "Amazon of China."

It's unclear when we'll see Xiaomi launch its first devices powered by Azure, Cortana, Bing, or Edge. But when they arrive, they could give Microsoft a much stronger foothold in China than either Google or Amazon.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.