Does Donald’s rift with China signal a tech boom?

Geopolitics and technology don’t seem terribly related. Except during Sputnik moments. When foreign tech embarrasses a country’s government, things get going mighty fast all of a sudden.

My colleague Boaz Shoshan wrote about just that in the latest edition of The Fleet Street Letter Monthly Alert – out last Monday.

Today, I wanted to explore the effect on tech stocks as China becomes the world’s pariah.

Until now, the Chinese economic model has been tolerated. The world allowed the country to rob them of manufacturing and the intellectual property developed elsewhere.

You’ve probably heard a lot about China’s intellectual property theft. But here’s another example which I experienced first-hand.

When I visited foreign businesses operating in China as part of a university tour in 2010, they all complained of the same thing. They’d employ Chinese people, develop their talent, and then watch them leave for inferior pay at Chinese companies…

One Aussie steel worker claimed the reason why is simple. In China, your family controls your income. So earning more doesn’t really get you all that much. But prestige is everything. Job titles and who you work for are crucial for your standing in society. And foreign companies make you look like a sell-out.

Anyway, the world tolerated all this under the presumption that China would become like us. Or like Japan, which is completely different to the West, but competes on a more even playing field. We hoped China would develop, catch up and then integrate. Eventually, we’d be on equal terms with mutual prosperity as the key ambition.

That didn’t go so well as China has much larger ambitions. And its methods aren’t exactly easy to stomach.

Right now, the worm is turning on China. Human rights, commercial practices and geopolitical goals are simply too much at odds with the West to be ignored. Covid-19 is just a spark in this process.

But how does this connect to tech stocks? Well, if China becomes an economic pariah, that changes the world’s economic model dramatically. And tech stocks will be affected more than most.

China’s manufacturing capacity has made consumption items, especially tech related ones, much cheaper for us to buy.

Companies like Apple and Tesla benefit from China’s role in the world economy. What would their booms have looked like without Chinese manufacturing, rare earths and more?

But China doesn’t just take foreign tech and expertise. It also sells the corresponding consumer goods back to us in the form of manufactured goods. Just look at who is rolling out 5G around the world.

If the world turns anti-China, the whole flow of trade could change too. If consumer tech isn’t produced in China over security or intellectual property concerns, that changes the equation for investments and what you and I buy.

Japan has established a fund to help companies move out of China. Here in the UK, the China Research Group is echoing the European Research Group. Even Australia is kicking up a fuss. And the EU almost published a critical report on China too.

Suddenly, the economic benefits of our relationship with the Middle Kingdom do not outweigh other considerations.

If tech companies leave China and return more of their operations home, this could reinforce the value of intellectual property. But it could also raise manufacturing costs and undermine a key market to sell in.

We’re talking a mixed picture for tech firms. But, as far as I can tell, the smaller innovation-based firms should do well as their innovation is more secure. Larger firms like Apple will lose out because of the turmoil and manufacturing costs.

Companies that currently compete with China in areas like 5G infrastructure would benefit from the controversy too – Ericsson and Nokia for example.

If all that seems vague, just consider this from the Independent yesterday: “White House could pull US military and intelligence operations out of UK as part of Huawei review, reports say. Spy planes, intelligence officials, military barracks and other US assets being assessed.” That would be a serious hit to many communities in the UK who benefit enormously from US military presence. I went to school in one such area. A US marine drill sergeant taught me to play basketball…

The US Congress already passed a bill calling for sanctions on China over its abuses in Xinjiang. Such sanctions could cause serious commercial problems for a lot of companies reliant on China. Anyone who worried about Brexit should be in a panic about this. Not that they are…

5G is of course the poster example here. But the space race is another one. China is launching a competitor to the US’s GPS, which we all rely on these days. But that’s spurring China-proof infrastructure and attempts to ensure China isn’t involved in the production process at all. Co-operation is dying and competition is back, along national lines.

My question for you today is whether you expect all this to show up in investment trends. Would you like to see an “Onshoring Portfolio” or a “Not made in China” filter for stocks? Would you sell out of companies identified as China reliant and buy ones that benefit from a rift with China?

Let me know at nickolai@southbankresearch.com.

Nick Hubble
Editor, Southbank Investment Research

Category: Technology

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