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Ongoing political tensions between the US and China are negatively impacting bilateral investment and tech investment in particular, according to a new report. Between 2016-2020, overall Foreign Direct Investment (FDI) between the two countries fell 75% from $62 bn to $16 bn, Bain and Co.’s latest annual technology report found. The tech sector investment fell more sharply by 96% over the same period.
Anne Hoecker, partner with Bain & Co., told Nikkei Asia that Chinese companies have shifted their attention toward Europe and Africa in recent years, with investments from China to the US falling more steeply.
As per Bain’s analyst who specialises in semiconductor and overall electronics supply, businesses out of the two nations are reevaluating their global strategies and growing momentum towards decoupling. Hoecker, who led the research, said investments are continuing to get more local amid the intensified shortage faced by the global chip industry and supply chain disruptions exposed by the Covid-19 pandemic-led travel restrictions. According to Hoecker, the chip shortage is likely to last through 2022.
Due to an uncertain business environment in the US, Chinese overall direct investment to the US fell to a mere $7.2 bn in 2020 from $48.5 bn in 2016, data from US-China Investment Hub showed.
The localization trend was also clear in the US, with US investment in China registering a 35% drop to $8.69 bn from $14 bn in 2016 over the same period. The drop in overseas investment was most pronounced in fields related to sectors like technology, real estate and healthcare.
This is in contrast to the situation a few years ago when business leaders were finding better access for increasing service levels and reducing costs by moving supply chains to China. But even after the recent dip, China still remains one of the largest recipients of US overseas investment flows of capital.
Steps towards decoupling?
Despite the talks, tensions between the US and China continue to escalate with little sign of improvement with trade and technological competition remaining two key points of contention.
Washington’s crackdown has resulted in 168 Chinese companies being blacklisted between 2018 and April 2021, most of them from the tech sector, according to a Nikkei Asia research.
The supply chain disruptions brought by Covid-19 and the unprecedented semiconductor shortage accelerated the trend for several major economies to invest more than ever in their own technology and supply chain independence, Bain’s report suggested.
At the same time, the Chinese government continues to push efforts towards building a homegrown technology sector, in order to decrease the country’s reliance on external suppliers, as well as a comprehensive nationwide semiconductor value chain.
Bain’s Hoecker added that while both the economies and their technology ecosystems are headed towards decoupling, it will be a very long process and it is unlikely that supply chains will be fully separated.
