Another important factor for Microsoft to consider keeping research and production in China is a recent government decision to support local integrated circuit providers, Fok said. Integrated circuit making is a critical upstream industry for smartphones.

China shipped 220 million mobile phones in the first half of this year, with overseas brands taking around one-third of the market share, according to data from the China Academy of Telecommunication Research and Beijing company Analysys International.

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Samsung Electronics Co and Apple Inc are the major foreign-brand smartphone vendors in the country while Micosoft's Nokia only accounts for around 3 percent of the market.

Nicole Peng, research director of Canalys China in Shanghai said the operation workforce of Nokia in China is already very lean after job cuts in 2012. The exact number of jobs lost is unknown because the company does not break down the figure by region.

"The decision to axe Nokia X and Android-based phone teams would have significant impact over Microsoft's device strategy in China," Peng said.

Smartphones powered by Windows operating systems are not popular in China. More than 90 percent of the devices sold in the nation are installed with Android or iOS operating systems, according to the China Academy of Telecommunication Research.

Analysts agreed employees in Microsoft China's cloud service and Xbox gaming console are most likely to survive the layoff while staff members in traditional businesses could be cut.

"I think the Finland operation will take the hardest hit globally and the Chinese teams in charge of feature phone and Android phone projects are mostly likely to be cut," said Peng.