• Rising conflict between China and America
  • A New Tech Axis — and how to profit

An obscure inter-departmental committee in Washington, which operates above the law, is doing its part to ‘contain’ China.

CFIUS <the Treasury Committee for Investment in the US> is authorised to review, investigate and block any transaction or investment that could result in a threat to US security or strategic infrastructure.

That’s a pretty big brief, and it turns out that no CFIUS decision can be over-ruled by a US court.

Chinese companies such as Huawei and ZTE are already being ‘contained’ by CFIUS, and recently Chinese moves to acquire memory chip maker Micron, data storage leader Western Digital and broad range semiconductor company Fairchild have been seen off even before getting to the stage of a CFIUS investigation: simply that they were ‘covered’ by the terms of the CFIUS remit.

No wonder: spearheading these bids were Tsinghua Unigroup and Hua Capital, both wards of the Chinese State.

The macro context for this building conflict between the US and China is as follows:

<> The US has not had to face a peer power since 1945 and is not about to aid the arrival of another one.

<> China feels caught by an orchestrated US campaign to contain it via the dollar and dollar driven institutions such as the IMF and the World Bank, the US Navy, most notably by its super-carriers in the S.China Sea and along its maritime supply lines and trade routes, and via close allies such as Japan. S.Korea and Vietnam.

<> Meanwhile, China presents a piebald picture in science and technology. It reverse engineered the trillion dollar (yet to fly) next generation F35 jet fighter with its J31, seems to have established a lead in quantum communications, sports the world’s fastest supercomputer, the Tiahne-2 and has the world’s leading genomics operation at Shenzhen BGI.

<> And yet, as China drives to build up its ‘new economy’ sector — advanced consumer electronics, EVs and renewables energy storage — it is still very largely dependent on foreign suppliers of semiconductors, silicon foundries, batteries and robots to make it happen, and this doesn’t jive with a leadership that under the ‘Made in China 2025’ project is aggressively driving for China to develop its own world-class key component and robotics industries.

And so, China is having to rely on US, Korean, European and Japanese suppliers. It has embarked on a $150 billion campaign to boost its flagging indigenous semiconductor resource by acquiring foreign semiconductor companies — hence the passes at Micron, Western Digital and Fairchild — and also imposing ever fiercer terms on US and other companies seeking access to the Chinese market. It’s a danse macabre.

<> The US is understandably concerned about the use of some of its key technologies not only to help create a strong challenger in global markets but also in the development of weapons, cyber and otherwise, while both sides, not just the PLA, indulge in cyber warfare.

<> When Xi Jinping visited the US last September he went straight to Seattle, rather than to the White House, to meet leading US tech companies for whom China is the key and fastest growing market. The US administration was visibly upset by this as it was working on the likes of Intel and IBM to tone down their cooperation with China on tech transfers and access.

Three Ways to Profit

As Stalin liked to say: ‘in politics, naivety is the only sin.’ In key areas of global tech and M&A, power politics is reducing the writ of market economics and price discovery.

My base case is that China will increasingly look to Europe and Israel to gain access to key enabling technologies. The US is to all intents and purposes now blocked off, and neither the Japanese nor the S.Koreans will sell their key companies to Chinese interests for political reasons, although like their US counterparts, they will step up their operations in China as they play to the music in the dance macabre.

For investors, there are three takeaways…

1. China will look to Germany. It is no surprise that China’s Midea has made a $5 billion bid for Germany’s Kuka — one of the world’s top four robotics companies. It is meeting resistance at local and EU levels, but has to be seen in the context of a close relationship between Germany and China within Germany’s Industrie 4.0 program and Kuka’s now long established role as the leading robot supplier to China. It is by no means impossible that Chinese interests will make a pass at Germany’s world-class semiconductor company Infineon. Chinese interests have long been welcome in the Mittelstand.

2. Israel is buzzing with high-tech start-ups in cyber security, batteries and sensors and advanced vision systems <eg, Mobileye>. Chinese conglomerate HNA Group is actively looking for Israeli tech companies to invest in or acquire. Fosun, Alibaba and Baidu have made such investments. It is part and parcel of a growing partnership between China and Israel under which in return for Israeli tech smarts, China mass produces Israeli products for global markets.

3. China will play a minimal role in the US-controlled semiconductor industry and will look to invest $150 billion to boost its own resources. In its near desperate bid to acquire control of a world-class chip making foundry we will not be surprised if China bids for Abu-Dhabi controlled, Singapore based Global Foundries.

It’s a fair assumption that the ever ingenious and determined Chinese, with huge amounts of money at their disposal, will find ways round CFIUS and the US problem, and it’s a story we’ll be following.

We’ll be reporting on China’s brand of innovation and the extent to which the stultifying effects of the ‘cultural revolution’ have now washed out and a new entrepreneurial culture has taken its place — watch out world.

Feel free to contact me here if want to discuss in general terms how this might affect your portfolio.