The past year has been marked by mounting geopolitical tensions. From hostilities in the Middle East, to the ongoing war in Ukraine, plus the continued friction between the United States ('US') and China, the global world order is reshaping and bringing significant disruption. This has implications for businesses trying to trade and manage supply chains – and particularly for the technology sector.
Technology is increasingly a pawn in tensions across the globe, as governments recognise the strategic advantage it confers. While other military conflicts may bring disruption, it is the stand-off between the world’s superpowers, China and the US, that has had the greatest impact on the technology sector today.
US trade and investment flows to China have declined sharply as the US government has grown increasingly nervous about Chinese influence in its strategic industries. In November, a meeting between Presidents Biden and Xi suggested some thawing of relations, but there are still key areas of contention between the two countries: Xi pressed Biden to lift export controls and support stronger trade links, while Biden sought to curb the import of fentanyl ingredients. There are also key flashpoints, such as Taiwan.
Inevitably, these tensions put up barriers to trade, force technology companies to make adjustments to their supply chains, but also to spend more time navigating and monitoring risks. Countries across the world are taking sides, based on their economic and strategic interests. Nevertheless, it also represents an opportunity for many technology companies, with global governments keen to build domestic strength in areas such as semiconductors and artificial intelligence ('AI'), while protecting themselves from cybersecurity threats.
After years in which technology was exchanged freely between China and the US, the US is increasingly determined that China should no longer be allowed unfettered access to its intellectual property. The past two years have seen a series of protectionist measures put in place to limit China’s access. For example, the US has imposed export controls on the high-performance Graphics Processing Unit ('GPU') chips required to develop cutting-edge AI systems. Nvidia has responded by launching a slower version of its gaming chip in the Chinese market. China has responded with export restrictions on gallium and germanium which are used to produce chips, solar panels and fiber optics.
This protectionism increasingly forces other countries to pick a side. Germany’s high-tech manufacturing economy has seen plenty of investment from China, including involvement in industrial giants, such as Daimler. This has raised concerns for the German government, which has called for an EU-wide review body. France has also restricted investments. ASML, the Netherlands-based creator of high tech chip-making equipment has halted exports to China. This is thought to be in response to a request from the US government. However, more fragile EU economies worry that cutting China out of the supply chain could hurt their growth.
For companies, this may restrict access to China’s vast market, but many recognise that maintaining friendly relationships with Washington is more important.
Geopolitical tensions and the legacy of the pandemic have prompted companies to create greater certainty in their supply chains. Many technology companies found themselves exposed as lockdowns disrupted supply of crucial elements and have sought to diversify manufacturing or shift it away from politically sensitive countries such as China.
This is easier said than done. Apple, for example, has significant production in China. Its key manufacturer Foxconn has around 200,000 workers on its iPhone City campus in central China. It is difficult to find alternative suppliers that can match this level of skilled labour and scale in the short-term. Nevertheless, Apple’s dependence on China is reducing. The group has made its iPhone 15 in India and says it wants to make one in four iPhones there within the next two to three years. The USA has signed a series of investment agreements with Vietnam on AI and semiconductor investment.
There is already a clear shift to manufacturing in markets such as Vietnam, Thailand, Mexico or Malaysia, alongside a drive to bring production closer to home. This process is likely to continue over the next decade and will create new opportunities. This has implications for the technology companies themselves. They will have to shift the focus of their investment, manage risks, and look more closely at the areas of demand. This may see their cost base change.
AI is a clear geopolitical battleground. Its potential impact on economic growth, and its military applications make AI dominance a crucial factor in geopolitical tensions. White House National Security Advisor Jake Sullivan said in a recent speech: "Preserving our edge in science and technology is not a 'domestic issue' or 'national security' issue. It's both.”
Nevertheless, it is clear that both sides already see the military potential for AI. Goldman Sachs says: “The intelligence community and US Department of Defense are leveraging advancements in this field for real-time surveillance and threat detection, and AI stands to play a central role as increasingly autonomous systems transform defense technology.”
A focus on AI has implications across the supply chain. Semiconductors enable AI, and AI progress is impossible without the sophisticated analysis of data. Countries across the world are seeking to build up their domestic resilience in key areas. In the US, this has been seen through the Chips and Science Act. The EU passed its own Chips Act in 2023, which also seeks to drive investment into semiconductors.
China has ‘Made in China 2025’, a state-led industrial policy that looks to make China dominant in global high tech manufacturing. The programme brings together state subsidies, strategically-important companies and intellectual property to build domestic expertise in key areas, including electric cars, next-generation information technology and telecommunications, plus advanced robotics and AI.
China is looking to achieve 70% self-sufficiency in high-tech industries by 2025. It has some way to go – it accounts for around 60% of global demand for semiconductors, but only produces 13%. However, it can point to considerable success in electric cars. BYD has already overtaken Tesla in electric car sales.
Inevitably, a lot of modern warfare is conducted online. State-sponsored cyber criminals are proving increasingly disruptive, particularly as countries digitise their critical national infrastructure. The war in Ukraine has seen a stream of cyber-attacks, which have disrupted public services. Russian hacking groups claimed responsibility for an attack on the European Parliament website, while the Pentagon has also come under attack and a Chinese espionage attack infiltrated the US government.
S&P Global adds: “The digitization of critical national infrastructure means that many essential services, including power grids, water supply networks and transportation systems, are increasingly vulnerable to cyberattacks. A successful cyberattack on any of these systems can have severe consequences, including loss of life and economic damage…Government networks, private sector networks and infrastructure are all susceptible to hacking and espionage.”
This creates ongoing demand for cybersecurity solutions. McKinsey estimates that the damage from cyberattacks will be to about $10.5 trillion annually by 2025 – a 300% increase from 2015 levels. It believes that the addressable opportunity may be worth between $1.5 and $2 trillion in the longer-term. Growth is also likely to be supported by rising regulation, with national governments increasingly levying fines for companies that fail to protect their customers.
While geopolitical shifts introduce volatility and uncertainty, they also open up new avenues for technology companies. They may force companies to look at their revenue lines, their supply chains and outsourcing partners. However, it also creates greater government focus on AI and cybersecurity, which should be supportive for companies with the right solutions.
