McKinsey Hits Pause on China GenAI Projects as US Regulatory Heat Intensifies

US-China tech tensions claim another casualty—consulting giant McKinsey freezes generative AI initiatives in the Middle Kingdom. Here's why it matters.

The Great AI Retreat

When even the 'smart money' consultants get spooked by geopolitical crossfire, you know the stakes are high. McKinsey's China AI freeze follows months of escalating US export controls on advanced chips and algorithms.

Consultants vs. Regulators

This isn't about ethics—it's about exposure. With US lawmakers scrutinizing every byte of tech transfer to China, McKinsey's move reeks of self-preservation. Because nothing terrifies management consultants more than becoming the case study.

The Bottom Line

Another win for bureaucracy over innovation—just what the global economy needs. Meanwhile, China's homegrown AI players are probably popping champagne. Nothing like watching Western firms retreat while your state-backed champions advance.

TLDRs;

• McKinsey halts generative AI projects in China amid rising geopolitical and regulatory pressure from the US.
• The move limits AI work to legacy systems but affects engagements with multinational clients.
• McKinsey repositions its China strategy, focusing on private sector firms amid tightening oversight.
• The decision coincides with growing US-China tech tensions and McKinsey’s broader AI transformation.

McKinsey & Company has reportedly ordered its mainland China operations to cease work involving generative artificial intelligence (genAI), according to insiders familiar with the matter.

The decision, driven by increased U.S. government scrutiny of American firms working in sensitive tech sectors in China, marks a major pivot for the global consulting giant.

The restriction applies to projects for multinational clients based in China as well, significantly narrowing the scope of McKinsey’s AI engagement in the region. However, the firm’s local offices are still permitted to work on projects involving older, more established AI technologies.

This MOVE underscores how geopolitical tensions between Washington and Beijing are increasingly reshaping the operations of major Western firms in China, particularly those operating in emerging technologies like AI and quantum computing.

Internal AI Still in Use

Despite these new limitations, McKinsey continues to use AI internally. The firm’s proprietary genAI platform, Lilli, introduced in 2023, is still widely adopted across its global teams. The tool automates tasks such as creating presentations and writing proposals, integrating internal knowledge and adhering to McKinsey’s desired tone of communication.

According to McKinsey’s global tech and AI lead, Kate Smaje, over 75% of staff use Lilli monthly. It represents the firm’s commitment to digital transformation, even as external projects face political headwinds.

Still, client-facing work involving third-party tools like OpenAI’s ChatGPT remains restricted, especially where data security and cross-border compliance issues may arise.

US-China Tech Tensions Shape Corporate Strategy

The decision to halt genAI initiatives in China lands amid increasing concerns in Washington about how U.S. technologies are used abroad. In recent months, U.S. lawmakers have intensified their focus on the role American companies may play in advancing China’s tech capabilities. McKinsey itself was previously scrutinized for failing to disclose the extent of its work with Chinese government-linked entities.

At the same time, Beijing has imposed exit bans on certain U.S. citizens and tightened its own surveillance of foreign business activity. McKinsey, which employs over 1,000 staff across six cities in China, is now treading carefully to avoid becoming collateral in the growing tech cold war.

Shifting to  Non-GenAI Services

As part of its adjusted China strategy, McKinsey is doubling down on serving private sector firms and multinational corporations  but without genAI. A spokesperson noted the firm is “enhancing client service policies” to better align with current legal and ethical standards.

Meanwhile, the broader consulting industry is grappling with structural changes brought on by AI. Tools like Lilli and competitors like BCG’s Deckster and Bain’s Sage are automating Core junior-level tasks. This trend is disrupting the traditional consulting pyramid model and triggering layoffs,  McKinsey’s headcount has already dropped from 45,000 to 40,000 globally.