US-China tensions have teetered on the brink of boiling point since the start of the Trump administration in 2016. But this year the battle has turned its ugly head towards the technology sector. Over the summer, President Trump said that US companies had 45 days to stop dealing with Tencent and TikTok-owner ByteDance – a starting pistol that spurred a bidding race for the social-media app, with the likes of Microsoft (US:MSFT), Walmart (US:WMT) and Oracle (US:ORCL) in the running.
Meanwhile, Secretary of State Mike Pompeo proposed the extension of the “Clean Network” initiative, encouraging “freedom-loving countries” to address the national security risks presented by Chinese technology. And that is not to mention the proposal, also from Mr Pompeo’s department, that Chinese companies listed in the US should comply with American accounting standards or risk being kicked off exchanges.
Such bold behaviour seems precarious – especially given how interwoven the global technology industry is. But according to William de Gale, portfolio manager of the Bluebox Global Technology Fund, the US still has a massive advantage over China. There are no non-western alternatives to certain elements of the tech supply chain – albeit Mr de Gale does caution that this might not be the case in 15 years' time.
That American edge is not news to China. The state has been pumping huge resources into its technology supply industry, not least in the shape of a Rmb 204bn (£23.5bn) 'China Integrated Circuit Industry Investment Fund' – otherwise known as the 'big fund'. Beijing continues to push growth in its native chip industries, even announcing a 10-year income tax exemption for some chipmakers. Zhao Haijun – the chief executive of state champion Semiconductor Manufacturing International Co (HK:981), or ‘SMIC’ – said in an August earnings call that the company was trying to procure chip-making tools and materials from within its home state.
America Inc has not been complacent – even dragging UK business into its enormous semiconductor industry, as exemplified by Nvidia (US:NVDA) unveiling plans to buy Cambridge-based Arm in September. But China too has crept into the UK chip ecosystem – with Imagination Technologies, which delisted in 2017, fighting off an attempted board coup by an investment firm controlled by the Chinese state. Indeed, Sky News reported that a former executive of Imagination had said in a letter that he would “not be part of a company that is effectively controlled by the Chinese government”.
Tariffs, board coups, money poured into competing technologies: a cold war is on, and it is bound to impact the sector that is driving much of the bull rally across global markets. A report by Deutsche Bank found that a tech cold war’s demand disruption and supply chain upheaval could delineate the world into rivalling tech standards – and cost the sector more than $3.5 trillion (£2.7 trillion) over the next five years alone.
Why is this happening?
There has always been a hum of anti-China sentiment in Trumpian politics. During the President’s first election campaign back in 2016, he told a rally in Indiana that US-China trade was the “greatest theft in the history of the world”. But Trump has not just been all talk: the initial 5G Clean Path initiative targeted Chinese telecommunications companies, leading the US crusade against Huawei, and eventually led to a number of other western countries following suit, including the UK.
Trump’s tune has not evolved much in the past four years, and it is unlikely to be a coincidence that the President is ramping up anti-China messaging in the lead-up to the election in November. But, as much as it may pain some to admit, he has a point on the security front. The presence of Chinese technology in western democracies does pose legitimate risks.
“Facebook or Google are going to use your data to make money. That is something that the public have either knowingly or unknowingly accepted,” says Dr Alexi Drew, research associate at the Centre for Science and Security Studies at King’s College London. “The difference with the Chinese market is that data is not simply going to be used to sell you things...but it will also be used to craft tailored disinformation campaigns, kompromat, to further enhance internal and external Chinese censorship on digital platforms.”
How will it affect listed companies?
The US has made it clear that it does not trust Chinese technology, which could dampen their prospects for international expansion as American allies huddle around companies that the President deems safe. Meanwhile, in the States, the Nasdaq is unfazed by the tensions that are snowballing towards the technology sector – advancing 75 per cent since its nadir during the March sell-off. But American tech companies should be more alarmed at the prospect of a decoupling. They depend on China for their manufacturing, often for a big chunk of sales, as well as growth narratives to spin to investors.
Take Apple (US:AAPL), which relies on Chinese workers for the manufacture of its iPhones – indeed, the coronavirus outbreak in China earlier in the year, and the subsequent disruption that rippled through its supply chain, forced the company to issue a revenue warning in February. It also depends on Chinese consumers for around 16 per cent of its sales, according to estimates provided by FactSet. Meanwhile, chip companies such as Nvidia, Qualcomm (US:QCOM), Intel (US:INTC), which literally power American technology, all depend on China for at least a fifth of their top line.
What if there is a decoupling?
It is hard to carve out any clear-cut stances in Trumpian foreign policy – but it is evident that the incumbent President is not afraid to lash out at the world’s second-largest superpower. A Biden administration would probably not take a radically different stance. “The decision by the United States to regard China as a rival that needs to be contained...that mindset would be shared,” says Professor Rana Mitter, director of the University of Oxford China Centre. “But they will address it in a variety of different ways: including a much stronger push to bring in allies than the Trump administration.”
The US and Chinese media internet companies are not rivals – indeed, they are likely to be insulated from a wider decoupling within their parallel bubbles. It is the tech supply chain that is most vulnerable – but China has been preparing for changes for some time, with its colossal fund, as well as supercharging its research capacity: the number of science and engineering papers has grown by almost fivefold since 2003, making the state the world’s biggest contributor of scientific articles.
Still, that doesn't mean China is ready for a decoupling: SMIC's 40 nano-meter (nm) chips are still several generations behind the much smaller rival products – Taiwan Semiconductor Manufacturing Co (TW:2330) has already started to mass produce 5-nm technology. For now, America retains the upper hand, and investors are undoubtedly safer putting their money into the more transparent American system. But it seems fair to say that China’s advantage has always been the long game, free from the constraints of four-year election cycles.
Investors with a strong stomach might consider holding the 'BAT' stocks, although their share prices can be sensitive to geopolitical developments. That is not to mention the risk of shadowy accounts. But the businesses have an undisputed lead in a huge market, and prices are often well behind the sky-high valuations of American tech.