China’s Tech Giants Face ‘New Business Realities’ Across The World

Chinese technology giants have seen their businesses thrive during the coronavirus pandemic in areas from health care to cloud computing. Chinese industry is at somewhat of a crossroads, facing an uncertain global economic and geopolitical environment. The tough political environment between China and the U.S. could accelerate so-called “tech decoupling.”

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GUANGZHOU, China — China’s technology giants — like their U.S. counterparts — have seen business thrive during the coronavirus pandemic. But the tech industry is at a crossroads, facing an uncertain economic and geopolitical environment.

China’s gradual though uneven economic recovery, Beijing’s focus on domestic consumption, and the digital trends that have been accelerated by Covid-19 are all set to benefit the technology sector. But risks remain.

“On the user behavior side (in China), the pandemic gave an impetus to the penetration of several major digitization businesses, helping some of them grow significantly to reach the necessary scale and achieve economic efficiency in a short time,” Charlie Chai, analyst at 86 Research, told CNBC.

“On the other hand, a countervailing force is a cut in investment on the business side, as major industry leaders including BAT (Baidu, Alibaba, Tencent) prioritize margins amid a potentially turbulent economic and geopolitical environment.”

Just as in China, technology firms in the United States have seen benefits from the pandemic as people have been forced to stay at home. Services such as Zoom have boomed, while consumers have turned to Amazon for shopping and Netflix for entertainment.

Investors around the globe wonder what’s next. The themes of globalization, digitization, economic outlook and the coronavirus will take center stage at CNBC’s East Tech West event, in the Nansha district of Guangzhou, China.

Pandemic and digitization
China, where the coronavirus first emerged, shut down more than half the country in early February in order to stem the outbreak. That led to a 6.8% decline in growth in the first quarter. As the spread of the disease stalled in March, businesses began to reopen, and the official gross domestic product grew 3.2% in the second quarter.

Locked down at home, people began to rely more on digital services ranging from e-commerce to video games. That trend has staying power.

“Because of the virus, China is more hungry for technology than ever before,” Abishur Prakash, a geopolitical specialist at the Center for Innovating the Future (CIF), a Toronto-based consulting firm, told CNBC by email. “From health care to transportation to finance, projects are underway that will rewire China — and put technology at the heart of everything.”

That has helped China’s big technology mainstays. Alibaba’s shares are up 30% this year and its revenue grew 34% year on year in the June quarter.

“We were well-positioned to capture growth from the ongoing digital transformation, which has been accelerated by the pandemic, in both consumption and enterprise operations,” Daniel Zhang, chairman and CEO of Alibaba, said in a statement at the time of the second-quarter results in August.

Tencent blew past second-quarter analyst estimates and posted strong results, thanks to gaming.

Companies attempting to digitize and bringing more of their businesses to the cloud are now “moving back to full speed” after taking a hit during the pandemic, Chai said. Meanwhile, remote work and collaboration tools are seeing “explosive growth” in China, as they have in the United States and Europe. The analyst cited Alibaba’s DingTalk platform and the enterprise version of Tencent’s WeChat messaging service as two beneficiaries.

Tech and health care
There are just fewer than 200 vaccine candidates in development globally, with 40 of those in the clinical evaluation phase, according to data from the World Health Organization. Much hope is pinned on vaccines to end the pandemic, though experts have warned that may not be how it plays out.

China’s technology companies see opportunities in health care. During the pandemic they moved into services ranging from consultations with doctors online to algorithms they claim can assist vaccine development.

The increased focus on health care during the height of the pandemic in China has continued beyond the disease’s worst phase there.

Internet search giant Baidu is in discussions with investors to raise up to $2 billion over three years for a new biotech company, a person close to the matter told CNBC earlier this month. And JD Health International, an online healthcare business owned by e-commerce company JD.com, has filed for a Hong Kong initial public offering, the Wall Street Journal reported on Monday.

The tech ‘decoupling’
Recent trends have brought the very idea of globalization under scrutiny. U.S. President Donald Trump has been pushing “deglobalization,” while economists have pointed out that the coronavirus pandemic also threatens globalization.

Meanwhile, the trade war between the U.S. and China rages on — with technology firms caught in the middle. The U.S. has placed sanctions on Huawei, restricting its access to American technology and also cutting it off from important semiconductor supplies. Washington has also reportedly put sanctions on SMIC, China’s biggest chipmaker, which threatens to hit at the heart of China’s plans to boost its domestic semiconductor industry.

Meanwhile, TikTok, which is owned by Beijing-based ByteDance, has been called a national security threat by the U.S. which has accused it of collecting American user data and sending it to China. TikTok has repeatedly denied those claims.

TikTok is now part of a deal that was forced by the Trump administration. The deal will see a U.S.-based TikTok Global established, with Oracle and Walmart owning 20%. ByteDance will own the other 80%, the company says. Oracle contested that saying ByteDance would have no ownership of the new company. Those talks are still ongoing.

Those moves have often been pointed to as evidence of a so-called tech “decoupling” — the concept of Chinese technology and American technology separating into two distinct ecosystems that operate distinct from one another.

The idea emerges at a time when Chinese technology companies are trying to push into international markets. But that is proving tough.

“What Covid has done is that it has accelerated everything — especially in geopolitics of technology. The tech decoupling, which may have taken place slowly over the next decade, is now well underway,” Prakash said.

People in face masks watch the flag-raising ceremony at Tiananmen Square to mark the 71st Anniversary of the Founding of the People’s Republic of China on October 1, 2020 in Beijing.

People in face masks watch the flag-raising ceremony at Tiananmen Square to mark the 71st Anniversary of the
For their own part, American technology firms have been in the crosshairs of politicians and regulators from the United States and Europe, and some are banned in China.

There is growing concern among U.S. lawmakers that technology firms are growing too powerful. In July, the CEOs of Amazon, Apple, Facebook and Google parent Alphabet testified remotely before the House Judiciary subcommittee on antitrust.

So what does all that mean for technology giants —in both the East and the West? It’s creating “new business realities,” according to Prakash.

In China, it could define the kinds of products they sell. For example, if Huawei can’t get access to chips it needs, can it continue making next-generation smartphones? Access to talent could also take a hit, Prakash said. And the possibility that Chinese technology firms can operate globally like their Western competitors is “fast becoming impossible,” he added.

“They are being forced to play by a different set of rules, which include being forced to sell or be banned,” Prakash said. “All of this means that as Chinese tech firms navigate geopolitics of technology, they will be pioneering a new way to operate. And, this may become the new business blueprint for firms across the world.”

– CNBC

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