New Cold War speeds up Asia's supply chain break up

James Kynge

Hi everyone - James here in Hong Kong. More than the pandemic, this decade could come to be defined by the new cold war between the US and China. The world of tech - and particularly supply chains - is being recast before our eyes. Our Big Story this week highlights three articles that delve deeply into the trends and implications of the changes under way.

As the US-China rivalry intensifies, other countries are getting squeezed. Check out Spotlight for an indication of how one of Japan's most outspoken self-made billionaires is feeling. Elsewhere, there are appeals for US and European unity in the face of Chinese competition (Mercedes' top 10) and an analysis on how Samsung is making significant inroads in 5G (top 10). Smart data heralds something that #techAsia has long awaited...the Europeans are turning up to south-east Asia's tech party. Welcome!

The Big Story

A new cold war between the US and China is accelerating the break-up of the world's tech supply chain, according to in-depth analyses from the Financial Times here and Nikkei Asia here.

In one expression of the rising pressures, US officials have told a big electronics supplier in Taiwan to cut its ties to China, sources said. Similarly, US officials have met with several top Taiwanese chipmakers in what appeared to be an effort to draw those companies over to Washington's side in the US-China rivalry.

Key implications: The fallout from this trend is on a grand scale and could last for many years. Consumer electronics makers are rethinking their China exposure, with Taiwanese companies such as Casetek, Wistron and Merry selling important assets to Chinese competitors.

"These companies are all suppliers of Apple, and Apple is now separating its supply chain for China and non-China," said CY Huang, a Taiwanese investment banker.

US companies are also cooling their China ambitions. A US business survey last month found only 28 per cent of respondents plan to increase their investment in China, down from 48 per cent in 2019 and 60 per cent in the two preceding years.

Upshot: The idea of unpicking the sophisticated tech supply chain that has grown up in China over the last two decades would have been unthinkable just two years ago. But pressure from the Trump administration has made this a reality, with companies from Apple to Google decamping from China to Vietnam, India, Thailand and Malaysia in the last 36 months.

A new system of regional - rather than global - supply chains now appears likely. Check out this feature on the US-China rivalry over tech standards.

Mercedes' top 10

A round-up of the week's top stories from Asia tech reporter Mercedes Ruehl

Scoop: a former Chinese government official was in charge of deciding what content should be allowed on TikTok, the Chinese short-video app.
Japan's Sony and memory chipmaker Kioxia, facing an earnings hit, have joined South Korea's Samsung and SK Hynix to seek US approval to bypass a Huawei ban.
Google had a spat with start-ups and developers in India over its PlayStore and the US tech group blinked first.
South Korean conglomerate Samsung's coal industry ties are drawing the ire of investors and environmentalists.

Copyright: Getty Images
Could Pakistan be the next country to ban TikTok?
Speaking of Huawei, a timely US visit may have prompted Greece to give the Chinese group the cold shoulder.
Meanwhile, this call to arms for the US, Europe and the UK to unite to keep Chinese technology in the rear-view mirror was popular with FT readers.
Is Tesla eyeing Indonesia? A Reuters report says the country, a big nickel producer, has had early discussions with the US electric carmaker.
Samsung is making significant inroads into the global market for 5G telecoms equipment.
Is saving the planet from catastrophic climate change the most spectacular tech investment opportunity of our lifetimes?

When sages speak

Techno-nationalism is on the rise. Such behaviour, which links technological innovation to the security and prosperity of a nation, is set to profoundly reshape the rules and international institutions that govern global trade, says Alex Capri in this piece for the Hinrich Foundation.
Asia House has a useful webinar on emerging tech and business trends in China following Covid-19. It looks at how the pandemic has changed how critical technology is being applied.
The GGV Capital podcast looks at ed-tech, for which 2020 has been a defining year. With 85 per cent of countries ordering schools to be closed, some 1.5bn students have at some point been reliant on ed-tech. No wonder funding has flooded in.

Best of comment

When China allowed Elon Musk to set up the Tesla Gigafactory in Shanghai in 2018, it was as if a big catfish had just been dropped into a placid pond,writes James. But the introduction of the industry's apex predator into China's home market was a calculated move by Beijing.

It would force its domestic companies to get stronger in order to compete and, in Beijing's eyes, Tesla would become the "Apple of the automotive industry".

Apple's engagement with China, where it makes many of its smartphones, has expanded the Chinese supply chain because of the imperative for Apple to source key components locally. It has also created spillover effects in which technologies originally intended for Apple phones have been adapted by suppliers and used by domestic competitors.

One of the reasons why Chinese smartphone manufacturers such as Huawei, Xiaomi, Oppo, Vivo and others have risen so quickly over the past decade is because Apple has continually seeded its Chinese supply chain of about 380 companies with the latest intellectual property. The emergence of Luxshare-ICT, a Chinese Apple supplier, as a formidable competitor to Taiwanese contract manufacturing giant Foxconn provides an example of the power of this influence.

It is the hope of such a spillover effect that endears Tesla to Chinese officials. They realise that whatever short-term pain is suffered by competitors such as Nio, WM Motor, Li Auto, Xpeng Motors, BYD and others, it is outweighed by the longer-term advantages that flow from the deepening of the Chinese electric vehicle supply chain.

Spotlight

Shigenobu Nagamori, one of Japan's most outspoken chief executives, had some forthright suggestions in this interview about what Tokyo's position should be at a time of US-China rivalry.

The 76-year-old self-made billionaire said that his company, Nidec - an electric motor manufacturer - has continued to build up its presence in China despite the trade war between Washington and Beijing.

He says that the government of Yoshihide Suga, Japan's new prime minister, should deal with both the US and China. "No matter what the country or region, the right posture is to show you want to contribute to the other side," he said. "The Suga government should do just that."

"While I am sure there are national security issues to keep in mind, Japan is an island country lacking natural resources. Unless the world buys our technology, there's no way forward for Japan," Mr Nagamori added.

Art of the deal

Dufry, a leading operator of airport duty-free shops, may be battling a slump in air travel but that has not stopped interest from Chinese technology group Alibaba. The ecommerce company has agreed to take a stake of up to 10 per cent in the Swiss firm. Alibaba is also taking a 51 per cent interest in a joint venture to be formed in China with its new partner.
Alert readers know Reliance Jio regularly features in this section. This week the Indian group gets its mention for raising Rs248.9bn (3.4bn USD) in just one week from prominent global investors including GIC, TPG, Silver Lake and KKR.
Interesting move by Brazilian ride-hailing service 99, controlled by China's Didi Chuxing, to allow WhatsApp users to summon cars on its platform. The partnership is the first of its kind anywhere for Didi and could give it a leg up over Uber in the large emerging market.
That wasn't it for the Swiss. Japanese electronics business NEC said it would purchase Swiss banking software developer Avaloq Group for SFr2.05bn (2.2bn USD).
Singapore's GIC, an investor in Ant Group, is seeking to put more than 1bn USD into the Chinese financial technology company's IPO.
Danish fund manager Copenhagen Infrastructure Partners says it expects to invest up to one-third of its 5.5bn Euro fund in Asia, with 10 per cent of it directed at Taiwan for renewable energy products.

Smart data

Private equity and venture capital investors with known fund investments in Asean-based fund managers

When it comes to investing where the bulk of humanity is - also known as Asia - European players have been more gun-shy than their US peers. This is especially the case for south-east Asia and its 655m people. But there are emerging signs of a sea change, according to several recently launched funds with European limited partners.

That includes Panta Capital, a private equity firm that aims to link European money with Indonesia. Founder Daniel Tjoa says south-east Asia is not promoted in Europe and many don't have connections to invest in the region.

Elsewhere, Jungle Ventures, a Singapore-based venture capital firm, said its latest 240m USD south-east Asian fund had a number of European investors coming on board as limited partners. "In 2015 and 2016, Jungle raised less than 2 per cent [of] capital from Europe, whereas I think [with funds raised in 2019 the figure] was closer to 35 per cent," said Amit Anand, Jungle managing partner.

#techAsia is edited by James Kynge, Mercedes Ruehl and Kenji Kawase.