The COVID-19 coronavirus outbreak is causing tech firms in the UK to reconsider their strategies in China and Asia at large.
Due to virus lockdown measures, some companies have been forced to suspend their operations or even suddenly pivot to creating new products on a short-term basis. Others, however, are seeing more business than ever as consumers stuck at home flock to their products.
Regardless of the short-term fortunes of these companies, they all face an uncertain global economic outlook as a result of COVID-19. The virus will not only be a drag on global growth but may also impact the policy directions of both the UK and Chinese governments going forward.
In light of the disruption caused by COVID-19, this article explores the issues facing the UK-China tech relationship going forward.
The Chinese government has drawn widespread praise over the way in which it contained the COVID-19 outbreak after bungling its initial response. Chinese authorities took forceful actions to contain the virus’ spread, including a strict quarantine in Wuhan and most of the rest of Hubei province – the epicenter of the outbreak – social distancing measures throughout the rest of the country, widespread testing, and the use of hotels to separate people at risk of carrying the virus, among other measures.
China also drew attention for its use of technology in combating the virus. For example, the Chinese government developed a mobile app used to determine users’ health status and monitor their movements.
Despite the use of high-tech solutions, offline measures were likely the most impactful in containing the virus. This included, for example, the mobilization of neighborhood communities to enforce compliance with isolation and conduct mass testing, allowing authorities to trace the virus’ spread.
UK authorities can draw from China’s successes to manage the COVID-19 outbreak locally. This includes strict enforcement of social distancing, testing as much as possible, and bearing the short-term economic pain of shutting down parts of the economy in exchange for a faster recovery. UK authorities would also do well in experimenting with innovative high-tech solutions to the virus, though this should be a complementary tool to assist on-the-ground measures.
Notably, the governance style in China is significantly different than in the UK, meaning not all strategies will be suitable in the UK context.
Global supply chains were already in a difficult state before the COVID-19 outbreak, namely due to prolonged US-China trade tensions and the UK’s exit from the European Union. The already precarious state of global supply chains were then thrown in disarray with the initial outbreak and subsequent shutdown in China, and later worldwide.
The initial shutdown in China led many tech companies scrambling to find suppliers abroad to compensate for production that was suddenly frozen. Google and Apple, for example, were among leading companies that accelerated efforts to relocate parts of their production from China to Southeast Asia.
COVID-19, however, is impacting tech firms unevenly. Some businesses, such as those supplying technology used for autos and aircraft, face steep declines in demand. Others, like producers of entertainment products, such as video game systems, are actually seeing increases in demand.
Moreover, the nature of a firm’s business is a significant factor in determining the level of disruption caused by COVID-19. Those involved in the production of hardware may be significantly curtailed by the virus, while businesses focused on web-based apps and software-as-a-service are having to confront a sudden and overwhelming demand due to remote working arrangements.
Going forward, the COVID-19 outbreak will likely encourage more businesses to diversify their production through the use of “China plus one” strategies. COVID-19, along with the US-China trade war, highlighted the dependence many firms have on China for their production. Moreover, the geopolitical conflicts that may emerge in connection with the international spread of COVID-19 could add risks to the UK’s relationship with China, either directly or as a result of tensions with the US.
Combined with the rising costs of doing business in China and slower growth, many businesses are shifting parts of their production to low-cost destinations like Vietnam, Indonesia, and India. That is not to say that investors will completely move production out of China. With its massive domestic market and increasingly highly educated workforce, China will likely attract more investment for higher value-added research and development and production. China is also at the forefront of new technology innovation (such as in 5G, artificial intelligence, and the internet-of-things), and UK companies will not want to miss out on new business opportunities and the chance to learn from China’s unicorn hyperlocal start-ups.
Once COVID-19 is under tighter control, there are signs that the UK may reassess its relationship with Chinese investments into high-tech industries.
The UK intelligence community has reportedly raised concerns over Chinese investments in sectors like digital communications and artificial intelligence, and accordingly has called on the government to reassess its current policies on foreign investments from China.
Despite these issues, the British security community did not challenge the UK’s decision to allow Huawei to invest – albeit with limits – in its 5G infrastructure.
Additionally, as a result of lockdown measures, video conferencing platforms like Zoom have exploded in popularity, raising concerns about their security and data protection practices. UK intelligence agencies, for example, warned politicians and government officials against using Zoom out of fear that calls and data could be surveilled and collected by China-based entities.
As lockdown measures continue and video conferencing becomes increasingly normalized in day-to-day life, security and data collection concerns may become more widespread. This could result not only on restrictions on Chinese-owned companies in the UK, but also on the security and data use behavior of global companies with operations in China.
The various concerns of the intelligence community raise the possibility of restrictions on Chinese investment into the UK after COVID-19 is under control. Further, these concerns could also lead to restrictions on access to academic research from Chinese researchers. Such actions could result in a decrease in Chinese students and researchers looking to attend UK universities, as well as complications with partner institutions in China.
The global economy is facing a crisis of proportions not seen since the 2008 financial crash – and this one is potentially much worse. The IMF recently predicted that the global economy could shrink by three percent in 2020 due to loss of production from COVID-19. That being said, the IMF expects the global economy to rebound in 2021, with a projected – but highly uncertain – 5.8 percent growth rate.
China’s economy was hit hard by its lockdown measures at the start of the year but has since largely reopened its economy after getting the virus spread largely under control. Due to the lockdown measures, China’s economy shrank by 6.8 percent in the January to March period compared to the year before.
However, although China’s economy is now mostly open for business, it suffers from soft domestic and global demand. As a result, a poll of economists project that China’s economy will grow by just 1.3 percent in the second quarter of the year, though there is a high level of variance in projections due to the unpredictable nature of COVID-19-related impact. According to the same poll, economists project China’s economy to grow by just 1.8 percent for the whole year.
Similarly, the UK now faces severe economic hardship. The Office for Budget Responsibility says that the UK’s economy could shrink by 35 percent over the spring and for the year, GDP could contract by 13 percent. Further, the UK faces expected unemployment of between two and six million people, depending on the length of the outbreak.
Ultimately, the scale of economic hardship and the speed of recovery will depend on the ability to contain COVID-19 – not just locally in China and the UK but worldwide. Containment in the UK, for example, would allow the country to gradually reopen most of its economy, but the global economic outlook would still be poor if major countries like the US continue to struggle with the virus.
The UK-China tech relationship faces a period of uncertainty. Not only is the global economic outlook negative, but it is also highly uncertain.
Further, the UK appears to be planning on reassessing some of its technology investment policies with regards China. Such a reassessment may not materialize for some time, however, as politicians prioritize containment of the coronavirus and immediate economic recovery. This may cause some investment strategies to be caught in limbo as investors await greater clarity on policies going forward.
On a broader scale, however, COVID-19 appears to be accelerating pre-existing trends in global tech supply chains. Facing heightened risks in China, UK tech firms with production in China may look to shift low-value production to India or Southeast Asia while simultaneously expanding high-value investments in China.
The virtual “UK- China Tech Forum” session organized by techUK and China Britain Business Council was held on May 5, 2020. Maria Kotova, Head of UK & Ireland Desk, Dezan Shira & Associates participated as one of the speakers at the webinar. Readers may click here to access a recording of the session.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
We also maintain offices assisting foreign investors in Vietnam, Indonesia, Singapore, The Philippines, Malaysia, and Thailand in addition to our practices in India and Russia and our trade research facilities along the Belt & Road Initiative.
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