Technology Report
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Executive Summary
This article is part of Bain's 2022 Technology Report. In the past 12 months, the geopolitical detangling of China and the United States that began several years ago rapidly accelerated. As the world moves away from unconstrained globalization centered on growth and efficiency and toward a fractured system of competing technological standards, higher costs, and increased constraints, technology companies and their leaders must thread a narrow passage. Pull out too soon from lower-cost manufacturing arrangements and a company ends up functioning at a cost disadvantage relative to competitors. Fail to invest enough in the future, and it risks finding itself with an insufficiently robust supply chain when the next unexpected emergency arises. Geopolitical concerns are already fueling supply chain diversification and other realignments (see Figure 1). As the Chinese Internet moves further away from the global web and toward its local version, Internet platforms including Airbnb, LinkedIn, and Yahoo have left the market due to censorship or operational difficulties. And recent data indicates that early start-up investment is significantly slowing in China. As investments are made and factories built in new places, a more permanent decoupling becomes more likely.
Figure 1
Covid-19 has been a powerful accelerant. Half of the CIOs and CTOs surveyed by Bain in June said that China’s zero-Covid policy has affected their business, and at least a dozen major US technology companies have blamed the lockdown of Shanghai for missing quarterly revenue and earnings estimates. The virus has contributed to a talent decoupling as well, reducing the exchange of ideas and innovation as the number of foreigners in China fell by half over the past two years, according to data from the China Demographic and Economic Census, and the share of nonimmigrant visas issued by the US to Chinese citizens dropped from 16% in 2018 to 4% in 2021 (see Figure 2). Student exchange is off sharply too.
Figure 2
The Ukraine crisis accentuated companies’ need to make geopolitical moves quickly, and their willingness to prioritize geopolitics over economics in certain instances. By early June, at least 133 technology companies had withdrawn from or suspended operations in Russia. Though Russia is a smaller market and easier for many to exit than China, the degree of response remains remarkable. The ramifications of the US-China decoupling are radiating around the world. ChinaChina has committed $1.4 trillion over five years to build strategic technologies and digital infrastructure domestically, including 5G, smart cities, and Internet of Things applications for manufacturing. In a retreat to something closer to the model multinationals used when they first sought access to China, some companies are closing research and development (R&D) labs and other operations there, and setting up partnerships to sell and distribute products developed and made outside of the country. Companies that retain extensive local operations must comply with regulations that can be quite expensive. Greater China is the largest global market for electric vehicles in terms of both exports and sales, and Tesla’s revenue in China grew more than 120% to $6.7 billion in 2020 after its Shanghai Gigafactory opened. China now accounts for more than 20% of the company’s total revenue. But in a sign of the limits for multinationals, Tesla vehicles have been banned in recent months from districts and certain city streets during political events, apparently due to concern about the data gathered by their cameras and sensors, even though all data is stored inside the country. The United StatesThe US continues to restrict trade with China and heighten its regulatory oversight of Chinese companies operating in the US. In June, a law blocking most imports from China’s Xinjiang region, home to many Uyghur, went into effect, threatening to further interrupt shipments of polysilicon, a material essential to making solar energy panels, and raise compliance costs. This could add to inflation and, over time, accelerate a shift of some supply chains out of China. The CHIPS for America Act, which establishes investments and incentives to support US semiconductor manufacturing, independent R&D, and the supply chain, was signed into law by President Joe Biden in August. China’s Semiconductor Manufacturing International Corp. is on the US Commerce Department’s entity list limiting the company’s access to key US technologies. There have been a few glimmers that the US and China could work together. In May, Shanghai’s Semcorp Advanced Materials Group announced it will establish a manufacturing facility in Sidney, Ohio, to make separator film, a key component in electric vehicle batteries. And in August, the two governments reportedly reached an accommodation that would allow US officials to inspect audits of Chinese companies listed on US stock exchanges. The deal could avoid the delisting of more than 200 companies valued at roughly $1 trillion. Europe emergesIntense scrutiny and regulation of data sharing and privacy has Europe emerging as a regulatory leader. Rising tensions with China are fueling a desire for tech independence, including domestic chip production. In response to Chinese sanctions on European human rights advocates, the European Parliament passed a resolution on May 20, 2021, to freeze ratification of the EU–China Comprehensive Agreement on Investment. Ten months later, Intel announced its initial investment in the EU. Asia beyond ChinaThis region has become something of a buffer zone, attracting businesses leaving or seeking alternatives to China, as well as those seeking to generally broaden their geographic footprint, especially in semiconductors. In addition to domestic and European investments, US semiconductor giant GlobalFoundries is spending more than $4 billion to expand its Singapore wafer plant and capacity. Industry leader Taiwan Semiconductor Manufacturing Co. is boosting to $8.6 billion its investment in a new plant in Kumamoto, Japan. Rohm Semiconductor, a Japanese semiconductor and electronic components designer and manufacturer, has opened a new center in India to tap local engineering talent, technology, and partners, and the South Korean government plans to invest $451 billion in its own chipmakers. What should companies do now?Untangling these markets is complex, and even with this year’s acceleration, will take time. Companies must consider what investments they need to balance potential short-term shocks, like the war in Ukraine, with building a long-term, geopolitically resilient business mix. The difficulty of cross-border M&A means companies have to think through smaller acquisitions and new approaches to growth. Planning the talent pipeline for each market, navigating increasing cross-border regulation, and investing in supply chain diversity and resilience are complicated and expensive. All this must happen while managing rising inflation, supply chain shortages, and general market turbulence. Pacing the rate of decoupling to reflect what customers and competitors are doing will help companies avoid disadvantaging themselves by prematurely cutting off access to markets or lower-cost production. Value EvolutionCompetitive BattlegroundsOperational AdvantageRead our 2022 Technology Report |