In this white paper, we first analyze the two main decoupling forces splintering the global technology sectors: COVID-19’s economic impact and deteriorating US-China relations. Secondly, we categorize which sectors are de-coupling – or diverging – and which ones aren’t, with a case study on 5G – arguably the most significant yet geopolitically sensitive technology development in Asia-Pacific over the next year. We conclude by providing our outlook - assessing the longer-term implications of these pressure points on the Asia-Pacific region.
The economic lockdowns and subsequent recession resulting from COVID-19’s spread around the world are bringing geopolitical tensions to the fore, with fraying relations between the US and China among the most consequential.
Amid deteriorating US-China relations, policymakers are ramping up pressure to splinter the global tech sector. On the one side, Beijing recently unveiled a US$1.4 trillion1 plan to reduce its dependence on foreign technology while on the other side, Washington has imposed new sanctions on Chinese tech firms to restrict Chinese access to US technology. These decoupling measures are forcing companies, supply chains and even whole economies to rethink their dependencies on foreign hardware, software and technology research.
In China, this new geopolitical landscape creates uncertainty for Mainland tech companies looking to expand their business globally but also accelerates the trend for these companies to become self-reliant over time. Offering a counterweight, Chinese policymakers have earmarked an ambitious 5G nationwide rollout and digital infrastructure investment plan this year2.
Technology companies that conduct business in both countries will continue to experience an uncertain cross—border operating environment as the geopolitical tit-for-tat continues until at least the November US presidential election, with potential consequences reverberating throughout the region’s heavily technology export-oriented economies. The 5G capex spend and product upcycle is estimated to be worth around USD $900bn3 to the region’s economy.
Technology decoupling: COVID-19 leads to shifts in global supply chain
The pandemic has brought the global supply chain’s reliance on Chinese manufacturing to the surface. Amid the lockdowns, factories are forced to shut down and consumer demand has withered. Companies around the world are re-evaluating their production lines and supply chains in China. In a recent survey compiled by the American Chamber of Commerce in Shanghai (AmCham) and PwC China4, MNCs with manufacturing operations in China are looking to diversify their production base towards at least one other country – a move generally known as “China Plus One”. Governments from around the world are introducing policy to further this supply chain diversification trend. For example, the Japanese government has a new policy to encourage Japanese firms to diversify their production bases in China – already they are paying 87 Japanese companies5 to shift their production onshore or to other Southeast Asia countries.
The US government has warned that US-headquartered MNCs may be forced to shift their production elsewhere6, with the State Department “turbo-charging” the initiative to reduce the reliance of the US’ supply chain on China7.
Technology decoupling: geopolitical tensions
In 2007, global trade and investment reached a peak with foreign direct investment (FDI) at more than US$3.1 trillion8 worldwide. Although by the end of 2018, global FDI had fallen by 57%, this decline in global FDI flows has not been evenly distributed. Data shows that while China’s FDI to the US has fallen by more than 88% since 2016, US outbound investment to China has been relatively steady throughout the years, including up to the first few months of 20209. The big drop in China’s recent FDI to the US is the result of the escalating trade tensions over the past couple of years, with the US Congress enacting more onerous reviews via the Committee on Foreign Investment in the US (CFIUS) of Chinese investments into US companies10.
Furthermore, the White House has started to implement a new act, the Foreign Investment Risk Review Modernization Act11, which makes it much more difficult for Chinese telecommunication companies to purchase US technology parts and for Chinese social media and messaging companies to operate unencumbered in the US. The potential ban of Chinese social media apps in US is one of the emerging risks that Chinese tech companies face in doing business in the US. As each country erects trade and investment barriers, it’s likely to see a continued decline in technology-related FDI between the two countries.
The outlook for cross-border investments between the US and China is grim – as acrimonious trade tensions have boiled into an all-out geopolitical tussle, compounded with a global pandemic. These factors will likely diminish US-China technology investment flows in the near-term as companies look to conserve cash to stay afloat during this period of economic uncertainty and governments around the world focus their policies on protecting their domestic economies.