Silicon Valley may bear brunt of China's retaliation

Apple is heavily invested in China, which is both a major manufacturer of the iPhone and a major market for it.
Apple is heavily invested in China, which is both a major manufacturer of the iPhone and a major market for it.PHOTO: AFP

SAN FRANCISCO • When Silicon Valley looks west to China, it sees many things. More than a billion hungry consumers. A cheap source of labour. A competitor, partner, supplier and security risk.

Now add this: A foe bent on retaliation.

The Chinese government on Friday said it was putting together an "unreliable entities list", in a counterattack against the US for denying important technology to Chinese companies. No companies were named or details given, but tech firms seemed all but assured of being a prime target.

As the economic ties between the two countries fray at warp speed, the much-anticipated tech cold war is escalating.

Some Silicon Valley companies are more vulnerable than others. Because Facebook and Google are blocked by the Chinese government, social media and search might be kept out of the conflict.

But Apple is heavily invested in China, which is both a major manufacturer of the iPhone and a major market for it. Tesla is building a plant in Shanghai that will produce 250,000 cars a year. Venture capitalists have also poured in funding.

Microsoft's research lab in Beijing is its largest outside the US, while many of the products in the Amazon mall are made in the country. Amazon also just opened an AI lab in China.

 
 
 
 

The consequences of the deteriorating relationship are already playing out with smaller tech companies.

Two weeks ago, the Trump administration put Huawei, the giant Chinese maker of telecommunications gear, on an "entity list" that would force it to get permission to buy technology from US companies. Huawei relies on American-made parts for everything, from its smartphones to its networking equipment.

Although it received a 90-day waiver to allow time for negotiations, many companies based in the US have already severed ties with the company.

China's importance to American chip-makers is magnified by the fact that many chips are sent to the country to be assembled to make gadgets for customers elsewhere, such as the iPhones that Taiwan-based Foxconn makes for Apple in China. Roughly 60 per cent of semiconductors sold are connected to the Chinese-based supply chain, consulting firm KPMG said.

Chip-makers hope the latest barbs between China and the US are aimed mainly at gaining leverage in talks, not permanent changes in how the countries will have to do business.

China is a big and fast-growing consumer of computer chips. Customers in the country accounted for about 34 per cent of global sales last year, which totalled US$468.8 billion (S$644.3 billion), according to the Semiconductor Industry Association.

Its president John Neuffer said "each volley in the US-China trade dispute causes semiconductor companies to wince and financial markets to wobble, while pushing us farther from a deal that would benefit both economies".

A version of this article appeared in the print edition of The Sunday Times on June 02, 2019, with the headline 'Silicon Valley may bear brunt of China's retaliation'. Print Edition | Subscribe