This article will explore how large hi tech firms around the world are being impacted by China. These firms include Apple (OTC:APPL), Microsoft (NASDAQ:MSFT), Samsung (OTC:SSNLF), Qualcomm (NASDAQ:QCOM), IBM (NYSE:IBM), Cisco (NASDAQ:CSCO), HPE (NYSE:HPE) and Intel (NASDAQ:INTC).
As stated by Chinese President Xi Jinping:
China's 13th five-year plan cannot be realized without substantial cooperation from the world. We will continue to deepen reform in various areas, stick to a peaceful development road and an open strategy, and let the world benefit. The country's annual growth rate should be no less than 6.5 percent in the next five years to realize the goal of doubling GDP and per capita income by 2020 on the basis of 2010.
The party's decision-making Central Committee met from October 26 to 29 to approve a draft of the national economic and social development programme from 2016 to 2020. It will then be put to the National People's Congress for its rubber stamp in March before each region and industry comes up with its own programme that dovetails with the overall direction.
According to Cary Huang of the South China Morning Post the plan aims to help China "make the leap from low-cost, export-led manufacturing to domestic consumption and services" and it aims to "make SOEs (State Operated Enterprises) more efficient and more complementary rather than competitive with private enterprise." Lastly Cary says, "China will continue to open up its economy to attract foreign investment and encourage Chinese firms to make overseas investment."
I note that the statements quoted above are all from either government officials or the press that is allowed to keep operating in China. If you really want to learn more about Chinese policies you can check out the Archives of the Chinese Government. This database includes archives and publications of the Chinese central government, its ministries and subsidiaries, and regional authorities.
Some some recent actions by the Chinese government.
- Lifted the limit of one child per family.
- Alibaba is now truly international . . . they even funded the latest Mission Impossible film.
What the policies say is not necessarily what they mean. Often what is not said provides a clearer view of reality.
It is pretty common knowledge that to get any type of a Chinese approval or to open a foreign owned facility in China, the Chinese government expects things in return. The things that they expect vary. Chinese approval of a merger may require bringing newer technology to China and teaching Chinese workers how to make new technology products. Chinese purchase of new technology may require that the products be made in China and that Chinese workers are taught how to make and manage production of the product. China may require that new foreign technology be combined with Chinese products with the final package being a Chinese product. There are many variations, but China always expects something. If China does not get what they want, then a foreign company doing business in China can expect Chinese investigations into various business practices.
China's Impact on the World Economy
China impacts the world economy in many ways. I will focus on two that widely affect hi tech companies: GDP growth and technology policies.
GDP growth impacts are pretty straightforward. If the CHinese growth rate slows then due to its shear size, total sales on a worldwide basis drop from what was expected. For example in China, fewer iPhones are purchased, fewer PC are bought, fewer server systems are installed. This reduction in purchases impacts the bottom line profits of many hi-tech businesses operating in the world theater. Often not meeting sales expectations due to China impacts translates to a more dramatic impact on profits because large R&D expenses are planned to be amortized over a larger base of sales. If those sales don't materialize then the large R&D expenses are amortized over a smaller base and profits decline more dramatically.
This China growth impact was heard recently when Apple and Intel announced with their earnings that the slower economic growth in China would adversely affect 2016 sales.
Technology policy impacts are not as direct and can vary depending on how a company approaches its investments in China and on how China perceives the company. If China perceives that a foreign company is making too much money selling products in China or licensing technology to Chinese firms, then that company can expect investigations into their business practices and slow response to approval requests. Of course none of this can be directly proven but the coincidental nature cannot be ignored.
Some Examples of Good Business Practices in China
Now lets get into some specifics . . . Universities appear to be a way to work around the policy that says SOEs are not supposed to compete with private enterprise. Is a university considered a SOE?
Tsinghua University (a Chinese government agency) is the sole investor in Tsinghua Holdings who in turn owns most of Tsinghua Unigroup. Intel owns 20% of Tsinghua Unigroup. Tsinghua Unigroup in 2014 purchased Spreadtrum and another Chinese chip design firm and in 2015 made a $23b bid to buy Micron.
At then end of 2015 Intel announced that it would be investing billions to improve an Intel Fab in China to produce 3D NAND and eventually 3D XPoint.
Recently Tsinghua University and Intel agreed to work together to make server packages for China. In the deal Intel will provide the Xeon processor and the university would provide the RCP (Reconfigurable Computing Processor . . . sounds kind of like an FPGA) and combine the two products into a module that would be sold in China by the University with University developed software.
Is the a connection between the Intel investments in China, the RCP and Chinese timely approval of the Intel purchase of Altera at the end of 2015?
Note that President Xi Jinping graduated from Tsinghua University in 1979 with a degree in chemical engineering.
This is an example of China cooperating with the world, attracting foreign investment, encouraging Chinese firms make foreign investments, being more efficient and complimenting private enterprise . . . all consistent with China's policies. It sounds to me like it still involves a lot of government control even though it accomplishes all of the stated objectives.
If this was done in the USA, it would be like MIT and Harvard Law School jointly buying Mediatek, Qualcomm and Micron to further Obama's economic and technology goals (Obama graduated from Harvard).
A Few Possible Consequences
Chinese perceptions regarding Apple profiting on iPhone sales in China will likely result in less favorable response to Apple requests, more investigations into Apple business practices and support of alternative products with Chinese names on the products like Xiaomi, Meizu and Huawei. Then there are the iPhone knockoffs that look just like an iPhone down to the Apple logo and made in China. Apple will either need to make changes regarding how it operates in China or risk loosing a large chunk of business.
Qualcomm is a good example of pressure by the Chinese government:
Now that the country has the world's most Internet users and its largest smartphone market, multinationals are bumping into a regulatory ceiling.The starkest sign of that came on Monday, when the American chip maker Qualcomm said it would pay $975 million for violating China's anti-monopoly law. As part of the deal, Qualcomm will also offer its licenses for third- and fourth-generation communications systems for high-speed wireless data to smartphones, at a sharp discount to what it charges companies elsewhere.
For foreign companies in China, which have faced heightened scrutiny for corruption, monopolistic practices and tax evasion, it is a sign of the times.
Dozens of American, European and Japanese multinationals in the last year have faced a rash of investigations and raids by the Chinese authorities.
All hi-tech multinational firms will have a negative impact in 2016 from the slower Chinese growth and as victims of economic nationalism. Business practices that confirm to Chinese government policies, such as those practiced by Intel, can help to reduce this negative impact on sales in China and overall profits.
Disclosure: I am/we are long INTC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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