US-China Trade War put Europe in a Sweet Spot

China tech money headed to Europe as US tensions remain high in first quarter

Chinese technology companies are increasingly turning their eyes to Europe for investment and deals as US regulators are seen as a “major hurdle” to technology-driven transactions, according to a new report from GP Bullhound, a technology advisory and investment firm.

The report found outbound deal volumes by Chinese technology investors into Europe increased 25 per cent in the first quarter when compared with the fourth quarter, according to the firm’s Asian Insights Q1 2019 report.

Deal flow into the United States from China dropped 13 per cent in the first quarter and fell 53 per cent in the Asia-Pacific region in that period.

“In light of the ongoing trade negotiations and tightened US regulatory scrutiny, European targets continue to enjoy popularity,” said Elsa Hu, an executive director at GP Bullhound in Hong Kong.

Despite increased scrutiny of foreign technology investment in the US, most Chinese outbound technology investment still went to North America in the first three months of 2019, according to the report.

In the first quarter, there were 24 outbound deals in North America, 18 transactions in Asia-Pacific and 15 in Europe, according to GP Bullhound.

Technology giants Tencent Holdings and Alibaba Group Holding were the most active Chinese technology investors in the first quarter, the report found. Alibaba is the parent company of the South China Morning Post.

Among the European deals by Chinese technology firms, the largest was the US$641 million acquisition of UK payments company WorldFirst by Ant Financial Services, an Alibaba affiliate. The transaction, announced in February, came just over a year after Ant called off its US$1.2 billion deal for MoneyGram when CFIUS indicated it would not approve the acquisition.

The European Union implemented a new framework this month to screen foreign direct investment into the 28-nation bloc, as concerns have increased in recent years about such investment, particularly by Chinese firms.

But, that additional scrutiny has not deterred Asian technology investors in Europe, Hu said.

“People seem to think that Europe, at least in the near term, can be a very good alternative if they cannot get into the US,” Hu added.

CONTEXT: US-CHINA TRADE WAR

Washington has taken bold moves in the trade war, trying to force Beijing to end practices that the Trump administration sees as unfairly promoting China’s homegrown businesses and stifling foreign competition.

• American companies seem to disagree with this strategy, claiming that lack of access to one of the world’s biggest markets is hurting profits.
• US chipmakers reportedly lobbied hard for the US government to end a ban on trading with Huawei.
• The end of multilateralism seems clear, at least for trade. However, one should also bear in mind that the world is no longer flat. Beyond trade, the US is also building up barriers to flows of investment, knowledge and talents. For example, the US has ratcheted up its efforts to vet China’s investments, especially those into US high-technology companies. The most obvious instrument has been the Committee on Foreign Investment in the United States, a large part of whose actions have targeted China and especially the manufacturing and industrial sectors. In addition to investment, the US could restrict the flow of talent and knowledge via tightening student/working visa issuance to Chinese citizens.

What’s in it for Europe?

The European Union is set to be the biggest winner of the trade war that has raged between the United States and China since last year, according to a new study by the United Nations Conference on Trade and Development.

The United Nations organisation estimated that European companies are likely to capture about US$70 billion in trade – about US$50 billion in Chinese exports and US$20 billion in US exports – that have traditionally passed between the world’s two largest economies.

Countries that are likely to benefit the most from trade tensions are those which are more competitive and have the economic capacity to replace US and Chinese firms, the United Nations Conference on Trade and Development (UNCTAD) said.

“Our analysis shows that while bilateral tariffs are not very effective in protecting domestic firms, they are very valid instruments to limit trade from the targeted country,” said Pamela Coke-Hamilton, the heads of UNCTAD’s international trade division.

“The effect of US-China tariffs would be mainly distortionary. US-China bilateral trade will decline and replaced by trade originating in other countries.”

As the US raises the stakes at the negotiation table, it is hard to imagine how China can accommodate the demands from the US. It seems that China does not have many effective ways to retaliate without hurting its long-term development. The best strategy it can take is to continue to open itself to the rest of the world. Because the EU is the largest economy outside the US, we should expect China to be much more willing to collaborate with Europe in the future and accept some of the EU’s longstanding requests on China to move further in their economic cooperation, namely better market access and reciprocity.

Within this context, the impact of what we considered to be a paradigm shift in terms of US-China economic relations could potentially benefit the European Union, which heavily depends on a number of general and sectoral factors. For the general consideration, the key is the response of the EU Commission (i.e., whether it will align with the US to protect its market from Chinese exports, or will maintain neutral policies). In the latter case, Europe could substitute the US and China in each other’s markets to some extent. At a more granular level, the situation is clearly very different across sectors.

At the first glance, the US and EU’s exports to China are very similar. China’s top five imports from the US are chemicals, transport equipment, motor vehicles and medical instruments. China’s top five imports from Europe are motor vehicles, machinery and equipment, chemicals, medical instruments and transport equipment. If the EU does not take sides and the US does not hit the EU directly, European industries’ potential market is quite relevant for motor vehicles and aircraft sectors—and more to come from the list of tariffs on the $200 billion worth of products.

If we assume that the EU could take up all the market shares of the US and China in the counterparties’ market, potential gains for European exporters are huge. Based on the lists released by both parties in April, we find that European auto manufacturers have the most to gain in both the US and China markets. Chemical products and machinery are the sectors that could potentially benefit from the tariff measures by the US. As for the gains in China’s market, European aircraft manufacturers are more likely to realise the gains as they do not face major competition from the other countries. Although China removed aircraft from the list of products subject to tariffs released in July, European aircraft manufacturers are better positioned to enjoy the benefits if China decides to escalate.

For the US tariffs on an additional $200 billion worth of Chinese imports released on July 10, European manufacturers of consumer goods are expected to grasp the opportunity and expand their market share in the US market. Noticeably, European exporters have the capacity to expand their market share as they already take up great shares in the global market for many products. The EU now supplies more than 40% of global imports for furniture, metal, plastic and paper products.

RECENT CASE:

Trade war helping Germany-based SAP pull ahead of US rivals

SAP, one of the world’s largest enterprise software companies, could outperform its US rivals during the trade war because it is free to trade with China, the company’s CEO Bill McDermott said in an interview at a TechCrunch event on September 6.

The trade war has created a binary hurdle for American rivals including Microsoft and Cisco: not only has the US banned trade with Chinese businesses, China’s state-owned firms will not let them bid on their procurement tenders.

“The fact that Germany has excellent relations at the public and the private-sector level in China, it’s no question it’s a help to us.” —Bill McDermott, SAP CEO

Why it’s important

The Trump administration is betting on a strategy of non-cooperation to stifle China’s competitive tech companies on the global stage. McDermott’s comments indicate that the trade war is helping it gain an edge over US rivals simply because it has unfettered access to the Chinese market.