Caixin
Sep 30, 2019 07:36 PM
OPINION

Opinion: Silicon Valley’s Take on China-U.S. ‘Decoupling’

Photo: VCG
Photo: VCG

If China and the U.S. were a couple, months of spats, tariffs, market entry bans and fruitless mediations have aroused increasing worries about decoupling and a divergent world.

In Silicon Valley, where I am based, this ominous feeling started to pick up as the technology sector has unfortunately become the center of a perfect storm.

When the Trump administration started the ban on sales of U.S.-made parts to China’s second-largest telecom-equipment maker ZTE Corp. nearly a year and half ago, it came as a shock and wake-up call for many policymakers and industry players in the Chinese tech and science space, who expressed strong concerns about China’s heavy dependence on the U.S. in the tech sector, such as in microchips.

At that point, many still held the optimistic view that it was merely an isolated case — that China-U.S. ties were too intertwined and co-dependent to decouple. But the sentiment has subtly turned south after U.S. continued to ban Chinese companies from accessing its market and technology. The most high profile move was the blacklisting of Huawei Technologies Co. Ltd., a pioneer in the field of 5G, by putting the Chinese telecom giant on its “Entity List.”

The case has inevitably disrupted Huawei’s supply chain and global business, but it also hurt the U.S, causing possibly billions of dollars in lost sales for U.S. companies, many of which are based in Silicon Valley. China also retaliated by coming up with its own “unreliable entities list,” saying foreign companies that have withdrawn from China will not be allowed back.

That’s when I notice the worrying talks over decoupling picking up in the valley. Adding to the jitters are a series of more aggressive moves by Washington, such as barring federal agencies from buying Chinese-made drones, citing security risks; and forcing the gay dating app Grindr to clear its Chinese investment on worries that the Chinese government might get hold of the app’s data on 27 million (or maybe more) users, and could use sensitive information, such as private messages, selfies and even HIV status, to blackmail users with security clearances.

It almost feels like the couple is on the brink of an ugly divorce as paranoia gets the better of them, and they are doing things just to hurt the other party regardless of the result, while also hurting themselves.

“It’s simply a lose-lose situation for all involved,” Steve Westly, managing partner of The Westly Group, said on the sideline of the Silicon Valley Innovation and Entrepreneurship Forum, in reference to the U.S.-China trade war. Westly is focused on investing in sustainable energy and had served on the board of Tesla Inc.

Decoupling, really?

Many active cross-border players in the tech and investment space, who used to shrug off the question of decoupling, now find themselves looking at it with a cautious light.

“It might mean there will be two internets; two sets of technologies and standards and possibly two ideologies governing the technology,” Rocky Lee, international partner at King & Wood Mallesons, one of the most active cross-border legal advisors for venture capital and private equity firms, told me.

Lee, who has worked on some of the largest tech deals in China, expected a possible change in the landscape in the world’s tech sector. “I see China actively investing in what are traditionally U.S. dominated tech sectors and perhaps this is out of necessity because U.S. companies are no longer able to sell to China,” he said, adding that China might make its own advanced semiconductors, and the world might one day have two types of 5G infrastructure and two 5G standards, one built by China and the other by western telecom companies.

“The world could be divided, and the change might be permanent,” Lee told me.

His view is shared by several prominent venture investors with Chinese backgrounds in Silicon Valley, but the key lies in the timing.

“Given the current geopolitical situation between China-U.S., it is inevitable that two technological systems will be created. However, it will take long time to be there, it may take 10 to 20 years,” said Raymond Yang, co-founder and managing partner of WestSummit Capital, who is one of the most active venture capitalists in the China-U.S. tech space. His portfolios include gaming platform Twitch Interactive Inc., which was bought by Amazon Inc.; chipmaker Movidius Ltd., which was acquired by Intel Corp.; and Chinese podcast platform Himalaya.

The reality is that U.S. manufacturing in low-wage, low-skill industries, such as shoes, toys and apparel are already moving their factories out of China to Southeast Asia or South Asia, as wages in China have gone up about eight times over the past 15 years. In this regard, the decoupling has already begun.

But in the tech sectors, especially in electronics and smart manufacturing, China’s supply chain advantages are hard to replace. It will take years to find a replacement with millions of skilled workers, extensive networks of factories that supply essential components with organized assembly lines, efficient highways and ports and other forms of transportation that can move goods from the factory to the world.

The decoupling in these sectors, if it really happens, will be a painful for both sides. That’s why many business leaders and tech players have begun to prepare themselves for the worst, while voicing their concerns.

Worst versus best scenarios

In the worst scenario for China, it could be decoupled entirely from not only the U.S., but the rest of the world, as the major countries join Team USA.

But the possibility that this will happen is low for many reasons. First, China’s supply chain advantages and huge market opportunities are hard to replace worldwide; moreover, Washington’s aggressive policies guided by the “America First” principle are not exactly conducive for “winning friends.”

At the same time, Beijing is reaching a consensus to accelerate the opening up of its markets to the rest of the world in order to offset the negative impact of the trade war, according to the sources I’ve spoken to. China’s Belt and Road Initiative is also gaining traction worldwide despite some concerns about geopolitical risks in some regions.

The likely scenario if the two countries really do decouple might be China continuing to do business with other countries in Europe, Asia and other regions.

The best-case scenario, for both sides, and probably the world, is reconciliation, as China and U.S. have a lot more in common and at stake than the hawks in Washington might think.

Just as historian Odd Arne Westad of Yale pointed out in Foreign Affairs magazine, it is not purely a zero-sum game for China and U.S., as Chinese society has a lot more in common with American society than Soviet society ever did, and the Chinese have the same hopes and aspirations as Americans.

“You can’t apply the U.S.-Soviet cold-war mindset to U.S.-China relations, because it is a completely different game and different times now,” said a political analyst who requested anonymity due to the sensitivity of the issue.

The analyst explained that the U.S. and the Soviet Union had almost no interdependency, especially in the economic sphere, while the U.S. and China are exactly the opposite. “Unlike the Soviet Union that failed, China has constantly reformed itself with its peaceful development, and it has proven successful over the decades,” he told me.

Opportunities amid crisis

As the divergence between the U.S. and China widens, opportunities emerge from crisis.

As big companies from both China and the U.S. face greater fallout, there might be a silver lining for startups and venture capital firms, according to Yang, the venture capitalist, who is known for his contrarian views on investing.

“In fact large companies are more vulnerable in this geopolitical conflict as we have seen today for both sides. This impact would not affect startups and VCs in the short term. Instead it will benefit many startups in China since the geopolitical situation provides more opportunities (that) otherwise wouldn’t be available to them, which would (have gone) to large foreign companies,” Yang told to me.

“Once the second system becomes mature or commercialized, the startups can jump on the wagon,” he added.

There might be hidden opportunities, but do prepare for the chaos as the emerging two global tech systems are also expected to create confusion for startups looking to do business in both the U.S. and China, especially in the mobile internet space, as they might have to pick sides.

“There is anxiety for Chinese Americans looking to build a Silicon Valley-style startup — Do they focus only on the U.S. and skip China; or go directly to China and skip the U.S.? It’s a dilemma,” Lee observed, adding that China has been proactively more open to business from the U.S. and the rest of the world since the trade war began.

“China has accelerated its opening-up, particularly in the banking and finance sector. I see slower GDP growth; however, very sustainable long term growth for China,” he said.

Vivi Lin is founder of media company VMG, former TV journalist at Reuters and host of “Vivi in the Valley.”

Contact editor Wu Gang (gangwu@caixin.com)

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