SINGAPORE/HONG KONG -- The leaders of America's most powerful tech companies have been parading through Beijing since early spring, following the end of COVID-19 controls and the gradual reopening of China. Even chilly U.S.-China tensions have not stood in the way of a resumption of pre-pandemic business dialogue.
In June, Bill Gates, the co-founder of U.S. tech giant Microsoft, was received in Beijing by Chinese President Xi Jinping -- an almost unheard-of protocol exception for a business leader. "You are the first American friend I've met with so far this year," China's president told the American billionaire, flashing a rare smile.
At the end of May, Elon Musk, co-founder of electric vehicle front-runner Tesla, also visited China. The celebrity entrepreneur met with Chinese government officials in Beijing and then toured Tesla's Shanghai factory. In April, Intel CEO Pat Gelsinger also visited Beijing and met Chinese officials.
And in March, Tim Cook, CEO of Apple, and Cristiano Amon, CEO of Qualcomm, attended the China Development Forum held in Beijing, sponsored by the Chinese government, along with executives from other global companies. "Apple and China ... grew together and so this has been a symbiotic kind of relationship," Cook said on his first trip to China since the pandemic began.
U.S.-China relations were briefly plunged into crisis by the shooting down of a Chinese spy balloon in February, but even this could not cool the good vibes of the U.S. tech sector. In June, following Gates' visit, U.S. Secretary of State Antony Blinken arrived in Beijing for talks aimed at thawing relations, followed by U.S. Treasury Secretary Janet Yellen in July.
The U.S. tech leaders' attention to China demonstrates the country's critical importance to some of America's -- indeed the world's -- biggest companies. "The big question facing the C-suite is how do they fit into the new Chinese economy, where geopolitics is front and center," said Abishur Prakash, CEO of The Geopolitical Business, a Toronto-based advisory company.
"They know the direction things are moving in: The Chinese market is increasingly becoming less and less accessible," and "this is why executives are going to China to meet with government officials -- to gauge how the operating environment will change," he said.
While the U.S. tightens sanctions aimed at blocking China from accessing U.S. technology, the biggest American tech companies still heavily rely on China's tech imports and the Chinese market. In fact, despite five years of "decoupling," this reliance has barely changed, and in some cases grown, making the companies vulnerable to politics.
China entanglement
In 2018, Washington began the move to decouple from China under then-U.S. President Donald Trump, imposing restrictions on exports and investments aimed at limiting China's access to advanced U.S. technology.
Washington particularly wanted to prevent the outflow of technologies that can be diverted to military use and to reduce the excessive dependence on supply chains located in China.
But five years on, an analysis of financial data by Nikkei Asia shows U.S. technology companies still depend crucially on China for a large portion of their sales: The analysis, using data from the QUICK-FactSet database, found that 17 of the top 100 global companies in sales in China in the most recent fiscal year were U.S. tech-related companies.
Meanwhile, dependence on China, as measured by the portion of yearly sales, increased or remained almost unchanged since 2018 for many top tech brands, such as Apple and Tesla. Even companies in the semiconductor sector, which has been specifically targeted by the U.S. government and recently by China as well, have seen little change in the portion of their revenue generated in China.
Many international companies do not disclose their China revenue. QUICK-FactSet estimates it from annual reports and other filings and then uses an "estimation algorithm based on gross domestic product weighting and accounting logic." The Nikkei analysis used company filings where possible.
It is difficult to say whether China depends on U.S. technology more than U.S. technology companies rely on the Chinese market and supply chain. But whatever the case, the dependency of each side on the other has not shrunk except in a few cases. In some, dependency has increased since 2018.
An "indispensable" market
Apple, the world's most valuable company by market capitalization at $3 trillion, was the global company earning the most sales in China in 2022, close to $70 billion, according to QUICK-FactSet. Qualcomm, a major U.S. chip company, depends on China for more than 60% of its sales. Tesla relies on China for over 20% of its sales.
Eight of the companies most dependent on China for sales were in the semiconductor sector -- the area where the conflict between the U.S. and China has been most severe. In October, for example, Washington banned U.S. companies from supplying some categories of semiconductors, chipmaking equipment and updates for past sales to Chinese chip companies. It also prohibited American citizens from working with Chinese semiconductor companies.
Notwithstanding the ramp-up in political pressure, for Qualcomm, Lam Research and four other U.S. companies in the semiconductor industry, China was the largest source of revenue last year, surpassing the major markets of Europe, the United States and Japan, according to QUICK-FactSet data. One reason is that China is a hub for electronics manufacturing, and much technology exported to China is ultimately re-exported as finished goods. The high numbers thus do not reflect China's domestic demand. Many companies stressed in their annual reports that revenues by geographic location, such as China, were based on shipment and billing information rather than end-user customers.
"U.S. tech companies' high exposure to China is just a statement of China's share of global GDP and China's share of the global population," said David Wong, head of APAC Technology Research, Nomura. "And until fairly recently, there was no particular reason to think that there was particularly high risk in developing the Chinese market."
Overall bilateral trade between the U.S. and China -- the world's two largest economies -- reached a record $690 billion last year, with U.S. exports to China increasing by 28% between 2018 and 2022. U.S. imports from China in 2022 totaled $536.3 billion.
"China has grown to be an indispensable part of the global economy," said Fu Fangjian, an associate professor of finance at Lee Kong Chian School of Business, Singapore Management University. He added that China is now also "a single market not much less than the domestic U.S. market for these high-tech companies. While the U.S. government tried to block Chinese access to high technology, the high-tech firms [in the U.S.] can't live without the Chinese market."
Some experts warn that high dependency on China for revenue could prove to be a source of vulnerability for U.S. tech companies.
"The biggest risk" for these U.S. tech companies "is outright bans and losing the ability to sell or manufacture in China," Prakash of The Geopolitical Business advisory said.
Hard to quit
This dependence on China has changed little despite the decoupling. According to a company filing, the amount of its total sales that Apple generated in greater China, which includes mainland China, Hong Kong and Taiwan, decreased only 0.74 of a percentage point, to 18.8% in the most recent fiscal year, compared to the fiscal year ending September 2018.
Greater China remains Apple's second-largest source of revenue, following the company's home market. Apple's greater China revenue jumped 43% to $74.2 billion in fiscal 2022 from $51.9 billion in fiscal 2018, after revenue decreased in fiscal 2019 and fiscal 2020 due to China's economic slowdown.
Apple has been focusing on developing the Chinese market since around 2014. At the company's earnings call in October 2015, the year when net sales from greater China surpassed those from Europe, Cook said he was "very bullish" on the Chinese market and the company would be investing in China "for the decades ahead," sharing his view "that China will be Apple's top market in the world."
As for Tesla, its sales in China have leaped in large part due to China's rapid adoption of electric vehicle technology. In 2022 it earned 22% of its total sales in China, up from 8% in 2018.
Qualcomm, which is highly dependent on China, in the year through last September made 63.6% of its sales in mainland China and Hong Kong. The ratio was 67% in fiscal 2018, according to company filings.
The technology industry today is fighting through weakening economic conditions and softening market demand. Under these circumstances, the U.S. tech sector could be vulnerable to further U.S. restrictions.
For Apple, which sells smartphones and personal computers; Tesla, which sells EVs; and chipmakers that supply semiconductors to electronic equipment factories in China, the outcome of the U.S.-China confrontation and the risk of further escalation hold enormous implications.
"When we think of the risk of escalation, we have to ask from who," Wong said. "There is a higher chance of the U.S. government saying Qualcomm chips can't go into China smartphones, as opposed to saying iPhones can't go in, so Apple can't make money in China."
From China's perspective, U.S. tech companies' "risk is higher at the smartphone level or EV level," where they compete with Chinese companies, while "Chinese companies would actually want the components" from the U.S., Wong said.
"But the risk of the U.S. expanding export restrictions is probably higher than China imposing import restrictions," he added.
China has followed U.S. restrictions with apparent tit-for-tat escalations of its own. In May, Chinese authorities announced that U.S. chipmaker Micron Technology had failed a security review, with operators of key infrastructure barred from buying from the company.
"The impact" of the decision by the Chinese authority "remains uncertain and fluid," said Sanjay Mehrotra, the chief executive officer of the U.S. memory chip giant, during the quarterly earnings conference call in late June.
Several Micron customers "have been contacted by certain critical information infrastructure operators or representatives of the government in China concerning the future use of Micron products," he said.
"We currently estimate that approximately half of that China-headquartered customer revenue, which equates to a low double-digit percentage of Micron's worldwide revenue, is at risk of being impacted," the chief executive said. "This significant headwind is impacting our outlook and slowing our recovery."
De-risking attempts
To mitigate geopolitical risks, some companies in the U.S. tech industry have begun to reorganize their operations in China in an effort to contain any potential damage from sanctions.
In late May, Hewlett Packard Enterprise, announced a plan to sell shares in Chinese tech company H3C, which it jointly holds with China's Unisplendour, for $3.5 billion.
H3C sells HPE hardware in China. HPE has been gradually reducing its stake in H3C but plans to sell its remaining 49% stake in the next transaction.
"This is the best outcome for customers, employees, and shareholders because, obviously, doing business in China is becoming more and more complicated these days," HPE chief executive Antonio Neri said in an interview with Nikkei.
HPE "will basically only have in China a very small direct presence that will support our multinational customers in China" and "will continue to resell our HPE offerings through the H3C entity, but we will not own any of the stakes" after the transaction, which is awaiting regulatory approval, Neri said.
Regarding the spinoff decision, the chief executive said, "geopolitical [situations] played a role because it's unknown what is going to happen in three to five years, and what the value of those stakes may be."
"It's clear that the trend of de-globalization and decoupling is here to stay unless something dramatic happens from a geopolitical perspective. At least in the short term, I don't see that changing."
In early June, leading U.S. venture capital firm Sequoia Capital announced it had decided to separate its China division.
"To deliver on our mission, we have decided to fully embrace our local-first approach," Sequoia said in a joint statement from the three heads of its U.S. and Europe, China, India and Southeast Asia businesses. The three funds will be split up and independently operated by March 2024.
Known as an early investor in companies that went on to be tech giants -- Apple, Cisco, Oracle, Nvidia, and Google -- Sequoia was also successful in its early entry into the Chinese market in 2005. Portfolio companies have included Alibaba Group Holding, TikTok parent ByteDance and e-commerce giant JD.com.
"It has become increasingly complex to run a decentralized global investment business," the VC company said.
In May, LinkedIn, a social media platform owned by Microsoft focusing on business networking, announced it would shut down its jobs apps in China and cut more than 700 positions. LinkedIn cited "shifts in customer behavior and slower revenue growth" as reasons behind the decision.
Amazon.com in July will close its official app store in China, the company said, while Airbnb shut down its China operation last year.
It is, however, difficult for other tech companies, especially those that rely heavily on China for sales, to follow HPE and other corporations down a path of drastic structural changes in China. Meanwhile, the environment surrounding these companies is becoming increasingly severe.
After the U.S. last October announced it would be tightening regulations on the export of cutting-edge semiconductor technology, Applied Materials, a major semiconductor manufacturing equipment company, predicted the move could cut its sales by up to $2.5 billion for the fiscal year through this coming October. The amount is equal to 10% of the company's sales for the fiscal year through last October.
According to Applied Materials' results for the quarter that ended April 30, sales to China plummeted to $1.4 billion, down 34% from a year earlier. China's share of the company's total sales, meanwhile, decreased significantly, to 21% from 34% for the year-before quarter.
Another U.S.-based chip equipment company, Lam Research, expects annual sales in 2023 to fall by $2 billion-$2.5 billion due to U.S. restrictions.
Lam Research's China revenue was down 34% to $839 million year-on-year for the quarter that ended March 26. The sharp decline in China business "was largely attributed to the U.S. government sales restrictions for certain Chinese domestic customers," said Douglas Bettinger, the company's chief financial officer.
Until recently, the direct victims of the U.S.-China tech rivalry have been mostly on the Chinese side, such as Huawei Technologies and ZTE, two telecom equipment makers. The U.S. sanctions struck the Chinese tech giants, restricting them from accessing critical American technologies, significantly impacting their smartphone businesses. The U.S. and some other Western nations have also moved to ban the use of Huawei and ZTE 5G equipment in their communications infrastructure.
No end in sight
However, as the China-U.S. confrontation prolongs itself and worsens, restrictions from both Beijing and Washington are beginning to harm a key American industry.
American management teams rarely comment on the risks of their dependence on China except for companies such as Micron and Lam Research, where such risks directly impact earnings.
But the fine print in companies' annual reports sets out risks many tech executives rarely touch upon publicly.
Qualcomm said in its annual report that "a significant portion of our business is concentrated in China, and the risks of such concentration are exacerbated by U.S./China trade and national security tensions."
Apple noted that "tensions between the U.S. and China have led to a series of tariffs being imposed by the U.S. on imports from China's mainland, as well as other business restrictions. Tariffs increase the cost of the company's products and the components and raw materials that go into making them. These increased costs can adversely impact the gross margin that the company earns on its products."
Akira Minamikawa, senior consulting director at U.K.-based research company Omdia, says that "manufacturing bases for electronic devices such as smartphones and personal computers are highly concentrated in China, and therefore, the dependence of the U.S. semiconductor industry on China remains high." But, he added, "the U.S. tech industry's dependence on China will decline gradually."
"One of the reasons is the geopolitical risk of producing in China, but another reason is that the cost competitiveness of China itself is waning," Minamikawa said, estimating that "about one-third" of the electronics manufacturing in China will go abroad.
Apple and other tech giants like Google are looking to move parts of their supply chains away from China and into other Asian countries. Apple has said India will be a "major focus" for the company, which is hoping to tap the country both as an alternative production base to China and a source of growth.
These refocusing efforts will mean "U.S. tech companies should become less dependent on China," Minamikawa said, but "this will take about four to five years."
Tangled in the tension between the U.S. and China, Cook has carefully avoided direct comment on geopolitical issues.
Meanwhile, Charlie Munger, vice chairman of Berkshire Hathaway, a major Apple shareholder, spoke candidly at his company's shareholders meeting.
The investor blamed both the U.S. and China, saying economic tensions have been "wrongly created on both sides. I think we are equally guilty of being stupid."
Using Apple as an example, he stressed that U.S. engagement with China has produced results that have been "good for Apple and good for China." He added, "Anything that increases tension is stupid, stupid, stupid."
IBM CEO Arvind Krishna told Nikkei at the World Economic Forum in Davos earlier this year that he is a "firm believer" that the "world is better served by nations having lots of trade, and by building to participate in a much larger global economy than by any kind of falling prey to geopolitics."
"IBM has been invested in China for almost 30 years. And our hope is that we will remain invested for the next 30 years," the executive said.
Similarly, Satya Nadella, CEO of Microsoft, told Nikkei last year that he hopes "the largest powers in the world will always find some common ground to work together on issues that the world needs us to work [on] together, while not sacrificing what's in their national interest."
"As a business, we just want some certainty about policies," Nadella said.
However, analysts do not see the U.S.-China technology confrontation ending anytime soon. Minamikawa predicts that the U.S. will only quit once China's technological competitiveness decreases. "Just like the trade war with Japan, it won't stop unless the U.S. sees a clear victory," he said.
"There's no easy answer for companies dealing with the U.S.-China rivalry," Prakash of The Geopolitical Business advisory said. "These firms are used to accessing the whole world with no limits. The C-suite has to accept that a new status quo is forming."
Additional reporting by Yifan Yu.