What is the effect of Tech decoupling

Phillipe E. Snel

Since 2004, Philippe is permanently established in Shanghai and has assisted numerous foreign investors to establish, develop and operate their businesses in China. Philippe mainly advises in the fields of corporate law, compliance and technology transfer.

In recent years, the US has expressed its desire to at least attempt to rid its telecommunication networks of Chinese-made software and components as part of their so called ‘Clean Network Program’. Examples include the Trump Administration blacklisting one of China’s major semiconductor companies, restrictions on Huawei in the 5G rollout, and actions launched against Tiktok and WeChat.

On the other side of this, China is also showing a preference for protectionism by pushing to more self-reliance, especially in areas of primary concern such as semiconductors, under the ‘China Manufacturing 2025 program’.

The China-US rivalry in technology, even in the face of political, trade and financial moves towards decoupling, is set to cause the biggest upset, according to a report from the European Chamber of Commerce in China, in partnership with MERCIS (Decoupling: Severed Ties and Patchwork Globalization) released on Thursday January 14, 2021.

Critical inputs
Due to the China-US rivalry in technology, targeted restrictions on the sale and export of critical inputs—such as semiconductors, related manufacturing equipment, software or even rare earths—have become a more pressing concern for companies.

Many companies, especially in the technology and manufacturing sectors, depend heavily on a steady supply of critical inputs, often a business with only a few suppliers. Even small disruptions in their supply chain can disrupt entire industries.

What can companies do?
Decoupling is already making it harder for many companies and the situation could be set to worsen. While the US is being stripped of China-sourced inputs and China is choosing for self-reliance, European companies are stuck in the middle.

Due to decoupling, companies may be forced to choose for a ‘dual system’ by entirely separating their operations in China. For digital systems in China, this would mean either building an entire digital operation for the Chinese market, or partnering with or outsourcing to Chinese providers.

Or, they could choose for a more “flexible architecture” which means that everything that can be supplied in either market is developed and built for both markets, with other parts being built and developed separately.

With all this in mind, companies need to evaluate the short- and long-term effects of decoupling on their businesses by analyzing the current and future level of exposure to potential bottlenecks, like the complete loss of critical software or loss of access to critical inputs like semiconductors. Not only within their own company but also with suppliers and customers up-and downstream.

Furthermore, it will become more and more important for companies to invest in due diligence and compliance. For help with such things, please do not hesitate to contact us if you have any related questions. Our team of experienced lawyers is here to help.