US tech faces big risks from Trump’s China trade war

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The blueprint for corporate America’s global influence in many industries has been straightforward: build scale in the the world’s biggest domestic market, then ride a favourable geopolitical tide to go global.

The country’s tech companies have benefited from this playbook as much as any. But they now face a discomforting realisation: China is well on the way to beating the US at its own game.

This week’s news that Google is trying to get back into China with a censored search service is a stark demonstration of how much is at stake. When it quit the country in 2010 rather than continue to censor its own results, it was buoyed by more than its own self-righteousness: there was a general belief in Silicon Valley that China’s political restrictions would thaw as its economy developed, and that the US brand of internet capitalism would inevitably take hold.

Eight years on, the global spread of liberal democracy does not feel so inevitable and China’s internet market has gone from being a small backwater to the world’s biggest, at least in terms of user numbers. Google’s attempted return to the country with Project Dragonfly, first revealed by The Intercept, shows how profoundly the calculation has changed.

Can today’s US tech companies hope to maintain their position globally in the long term without a strong position in China? And if not, how does the souring political climate between the two countries affect their attempts to put down deeper local roots — not the easiest of tasks at the best of times?

The extent of the unease was evident from Apple chief executive Tim Cook’s ruminations about the US-China trade relationship this week.

Sales in China have become a key swing factor in Apple results. After 18 months of year-on-year declines, growth has rebounded to double-digits in the past four quarters and the country now accounts for 18 per cent of its revenues.

Mr Cook surveyed the current tariff landscape before concluding that there was an “inescapable mutuality” between the two countries that makes it inevitable they will come to an accommodation on trade.

It sounded like wishful thinking, at least in the current political climate. Products covered by the next swath of US duties on Chinese imports do not include iPhones or Macs — but the financial penalties do hit the company’s smart watches and speakers, and threats of escalation have already raised the prospect of all Chinese imports being affected.

Mr Cook’s discomfort also reflects possible Chinese retaliation that will limit Apple’s recent rebound in the country. It already faces growing competition there, particularly as with the resurgence of Huawei and Xiaomi.

Huawei took over from Apple this week as the world’s second-biggest smartphone producer, while South Korea’s Samsung retained the top spot. This was partly a result of timing — this is usually Apple’s weakest quarter of the year, as it prepares for the next iPhone cycle. It also resulted from Huawei taking sales from smaller companies, often in lower-priced parts of the handset market, rather than from Apple. iPhones actually increased their market share slightly from a year before.

But that does not change the fact that Chinese competition is becoming stronger — and not just in smartphones. The threat is strongest in the next big tech markets, where China’s companies start from an equal position, and where they benefit from a strongly favourable domestic industrial policy.

Electric cars are a case in point. As Elon Musk pointed out this week, China is already “by far the largest EV market in the world”. It accounted for 17 per cent of Tesla’s sales last year. But a 40 per cent tariff on car imports from the US — imposed recently in retaliation over the duties imposed by Washington — led Mr Musk to say that Tesla may start diverting shipments to other markets to maintain its growth targets.

Tesla can ill-afford to lose sales in China just at the moment it needs to put down roots. The electric carmakers that win the race for market share in China are likely to generate scale economies that will help them win in other international markets.

Tesla has at least taken an important step this year towards establishing a global production platform, with an agreement to build a wholly owned battery and vehicle assembly plant in Shanghai. But there is still a long way to go before it has all the permits it needs, or can raise the $2bn from local banks that Mr Musk says he needs to fund the project.

The White House’s assault on China’s trade practices — begun, ostensibly, with the aim of helping the US tech industry — shows no sign of letting up. For the companies that are meant to benefit, the risks are rising — and an eventual pay-off is hard to see.

richard.waters@ft.com

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