Pain Ahead for Chinese Tech Companies

The growing trade conflict being driven by the US may yet snare more Chinese companies. The US government is investigating any and all means to protect US interests. The US Treasury Department is drawing up plans to prevent companies with more than 25% Chinese ownership from buying US companies that make products and technologies considered to be industrially significant. Comments from officials suggest that the ownership threshold may be altered before the laws come into force.

Perhaps in response, China seems to be softening its rhetoric around its Made In China 2025 initiative that aims to have China catch-up with and even surpass other nations in key technology areas such as robotics, clean vehicles, advanced materials and artificial intelligence. This initiative is a core strategy for China as it aims to become a global superpower over the next 30 years. So while China is referring less and less to the Made In China 2025 initiative in print, it is likely still driving the initiative as hard as ever.

This push has the US administration scared and it is working to limit the potential for competition from China. The Wall Street Journal reported that the U.S. Commerce Department and National Security Council were proposing “enhanced” export controls to prevent key technologies being shipped to China. While ZTE fell foul of the US administration due to its incomplete compliance with previous penalties, the new proposals could see similar export restrictions widely applied. While this is an extreme interpretation of what is currently only at the discussion stage, it will concern not only Chinese tech companies, but also US companies that rely on Chinese companies for significant chunks of their revenue.

We expect China to strike an emollient tone, but to redouble efforts to build home-grown technologies that can back fill any potential gaps that occur should the US impose wider and more restrictive trade practices. All companies in the tech sector should monitor developments closely; this situation is likely to evolve rapidly and have potentially high-risk outcomes. But it can also create significant opportunities for those that are prepared to move fast.