Business World

Thursday 20 June 2019

US-China trade tensions hit tech firm funding supply chain

Sanctions: Firms in both countries have been hit by the trade spat as US President Donald Trump ramps up pressure on China with tariffs. Photo: Reuters
Sanctions: Firms in both countries have been hit by the trade spat as US President Donald Trump ramps up pressure on China with tariffs. Photo: Reuters

Gina Chon

The manufacturing supply chain isn’t the only one upended by trade tensions between the US and China. American venture capitalists pumped a record $19bn (€16.8bn) into Chinese startups in 2018 while funds from China  injected $3.6bn into US startups, also a record. But tougher foreign-investment rules and rising nationalism are set to change the game for capital movement.

The relationship between the world’s two biggest economies is at a low. Donald Trump’s trade war and crackdown on Huawei has sparked retaliatory levies from Beijing and calls for boycotts against Apple and other US products. Last week, state media reported that China’s Commerce Ministry will draft a list of foreign companies it views as “unreliable”.

Please log in or register with Independent.ie for free access to this article.

Log In

However, investors in both countries have so far kept their wallets open for startups. American backing of doubled in 2018 from the previous year, with VCs participating in fundraising rounds for at least one-third of startups through December last year. The push put US venture funding in China above direct investment for the first time.

Financial technology and business services were popular outlets. General Atlantic was among the funds that participated in a $14bn fundraising round in 2018 for Ant Financial, which was effectively blocked earlier the same year from acquiring money-transfer outfit MoneyGram by the Committee on Foreign Investment in the United States (CFIUS) on national-security grounds.

On the other side, Chinese funds poured 50pc more money into US startups last year than in 2017. The investment came as acquisitions of American firms by PRC entities plunged by more than 80pc. Healthcare and biotechnology were the most popular sectors in terms of the number of deals.

Tougher foreign-investment rules are set to curb even these fundraising ties. CFIUS since last autumn has the power to review the acquisition by foreign buyers of minority stakes in American companies, including where there is access to nonpublic, technical information, a board seat, or involvement in substantive decision-making. The expanded mandate focuses on emerging technology such as AI.

Semiconductors, biotech and financial services are vulnerable sectors. China wants to build its own chip sector, partly to decrease its reliance on American products, and US startups in the field have benefited. In 2018, there were nine Chinese venture-capital investments into American chip companies totalling $219m, making up 14pc of the total number of deals that year and nearly 25pc of total investment value, according to PitchBook.

It’s true that Silicon Valley is awash in capital, but Chinese money has been critical in certain niches. For example, the semiconductor area has not been popular with domestic venture capitalists, who have favoured consumer internet or software-as-a-service companies. A chip company founder who has received Chinese backing told Breakingviews he is worried about not drawing enough interest in his next fundraising effort later this year.

CFIUS is also becoming more aggressive when it comes to deals that have already closed.

The Chinese owner of Grindr has been looking for a buyer for the dating app after CFIUS raised concerns over national security, particularly around the potential for Kompromat. Beijing Kunlun bought a majority stake in Grindr in 2016.

The US Treasury-led committee also forced Shenzhen-based iCarbonX to sell its majority stake in PatientsLikeMe. The service helps patients find others who are suffering from similar health issues. Companies that hold potentially sensitive data have become an increasing concern.

Other deals could soon find themselves in the crosshairs.

Last year, China Life Healthcare Fund led a $46m investment in XtalPi, which combines quantum physics, AI and cloud computing for drug research.

The rules are murkier for US investment in Chinese startups, but similar risks exist. There is a growing sense that American money is less welcome in the country’s tech sector. It could affect even funds with a long history in China, like GGV Capital.

Chinese firms and investors in them also have to watch for pressure from American politicians. DJI, the world’s largest consumer-drone maker, has backing from US venture capitalists Sequoia and Accel Partners from 2014 and 2015, among others. Information passed through the company’s devices are stored in DJI’s cloud, which could present real or perceived national-security concerns when it involves video of sensitive places or installations, for example.

Senator Chris Van Hollen told Breakingviews in a statement that Chinese access to US data, including through drones, threatens American privacy and national security and urged the Trump administration to take action.

Such tensions could mean less competition for Chinese venture capitalists in their home market. A local startup investor told Breakingviews he was already seeing prices drop by up to 40pc for private China-based tech companies because of trade tensions and wariness on the part of overseas funds.

It’s an example of how the changing US-China dynamics are creating new winners and losers – among both investors and companies in need of cash.

Reuters

Also in Business