Intensification of U.S.-China Technology Sector Hard Decoupling under Geopolitical Pressure

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The hard decoupling of the U.S. and China in the technology sector is likely to accelerate as multinational companies are generally reassessing the Chinese market under geopolitical pressure and the impact of the COVID-19 pandemic.

Texas Instruments has cut its MCU (microcontroller) team in China and moved its entire MCU production line to India, according to multiple media reports on May 7. Data shows that the number of R&D personnel and business personnel of Texas Instruments in Shanghai is about 600 people. In response to this, Texas Instruments said on May 8 that it did not lay off any employees in China, as the country remains the most important market in the world, and that it will continue to invest in the Chinese market to fulfill its commitments.

Some Chinese media and industry insiders said that the outside world is too exaggerated about Texas Instruments cutting its MCU R&D team in China. They pointed out that Texas Instruments’ MCU does not have much influence on the market, and there is also no shortage of MCU chip technicians in the country. Some analysis suggested that Texas Instruments’ business in China has been in a declining stage since 2018. In addition, the lockdown due to the COVID-19 pandemic in Shanghai has lasted for several months and exerts a great impact on the business of Texas Instruments. Therefore, the company decided to lay off its team in China.

Researchers at ANBOUND believe that Texas Instruments’ response was official diplomatic rhetoric and that the trend of foreign companies cutting their Chinese R&D teams needs to be seen in a broader context. From the development of U.S. technology companies in China in recent years, it can be observed that several companies have started to withdraw or scale down their R&D teams in China.

In January 2022, U.S. semiconductor giant Micron laid off its DRAM R&D team in Shanghai and offered some of its core technicians the opportunity to move to the U.S. In early 2021, IBM closed its China Research Institute. IBM China Research Institute is one of IBM’s 12 research institutes worldwide and the first IBM research institute in a developing country. IBM established a research institute in Beijing in 1995 and a branch in Shanghai in 2008, which at one point had 200 employees.

According to the Science and Technology of China magazine, there were more than 1,700 foreign-funded R&D centers/research institutes in 2017, but a large number of foreign-funded R&D centers have been closed since 2017, such as IBM, Oracle, General Electric, Pfizer, AstraZeneca and so on. Although many foreign-funded research institutes have not closed down, they are actually scaling down their R&D operations in China in various ways. As a matter of fact, the Chinese government always encourages and welcomes foreign investment to set up R&D centers in China and has introduced various preferential policies to support them. However, in this context, foreign investment is still reducing the scale of R&D centers in China in recent years, and the reasons are thought-provoking.

As foreign multinationals close or scale back their R&D operations in China, there are various analyses in the industry. First, the confrontation between China and the U.S. has intensified. As the U.S. and western countries have tightened restrictions on high-tech business in China, multinational companies have had to scale back their research facilities in the country. Second, China’s intellectual property protection still has a larger room for improvement. Many parent companies and home countries of foreign-funded research institutes are highly sensitive to intellectual property protection and believe that China has not met the requirements for the time being. Third, China’s overall scientific and technological R&D is at a relatively lower level, and the R&D tasks undertaken by foreign-funded research institutes in China are basically expendable at any time. Fourth, the trend of increasing the import of substitution technology in China has increased foreign investors’ concerns about investing in R&D in China.

Researchers at ANBOUND believe that all these factors play a role, but one change that has become apparent in recent years is that geopolitical factors are becoming a key factor influencing multinational companies’ R&D and even investment layout in China. In fact, geopolitics has become the dominant factor in global politics and the economy. The shrinking of foreign investment in R&D in China is but just one aspect of this trend, and it will become more and more obvious in the future.

In recent years, since the U.S. adjusted its strategy toward China at the end of 2017, the U.S. and western countries have constantly adjusted their cooperation strategies toward China. The United States, in particular, has constantly pushed for decoupling from China in various fields, including trade and economics, science and technology, finance, and education. While it is not easy to fully decouple the economic and trade ties forged over decades of globalization, the U.S. continues to do so based on geopolitical considerations. The hard-line policy toward China adopted by the Trump administration has been inherited by the Biden administration. As analyzed by ANBOUND in our previous research works, since the U.S. has identified China as its biggest long-term strategic competitor, the U.S.-China relationship will be in a kind of strategic coopetition of “containment and counter-containment” for a long time to come. It is important to understand that “containment” was the core of the U.S. strategy toward the Soviet Union during the Cold War, which determines the future U.S.-China relations would be competitive, rather than cooperative.

The new geopolitical turmoil in the form of Russia-Ukraine war has brought new variables. Geopolitical “antagonism” towards China in the U.S. and across the Western world will intensify because of China’s special relationship with Russia and its attitude towards the war in Ukraine. Multinational companies will carefully assess the future prospects of Sino-U.S. and Sino-European relations in the geopolitical context. In the era of globalization, China has two major attractions for multinational companies, i.e. low manufacturing costs and a promising consumer market. Now, China no longer has the advantage of low manufacturing costs. Although the scale of the Chinese market is constantly expanding, under the influence of geopolitical factors, multinational companies have to reassess the geopolitical risks they have to face to develop their business in China. The technology industry will be the first sector to bear the brunt of the risk in this shift.

It is worth noting that the rise of other Asian countries has also given more options to multinational giants, such as Qualcomm, which has decided to set up an Asian R&D center in Vietnam and transfer some research tasks from its China research center to the Southeast Asian country. Other multinationals are shifting their R&D centers to human resource-intensive India, further reducing the scale of their R&D in China.

In addition, since the beginning of this year, China has been affected by the novel coronavirus outbreaks. Strict prevention and control measures are imposed in parts of the country, especially in Shanghai, which has been under lockdown for several months, resulting in the suspension of many production and business activities. The disruption of China’s industrial activities and social operations at such a high intensity in a non-war state has had a considerable impact on some multinational companies, which has further prompted them to consider adjusting their investment and R&D layout in China.

Final analysis conclusion:

Under the influence of geopolitical factors, the impact of the COVID-19 pandemic, and various other factors, multinational companies are reassessing the potential risks in the Chinese market. The hard decoupling of the U.S. and China in the technology sector could happen much faster than what was imagined previously.

Writer by He Jun
Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy.

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