5/10/22: Are Chinese Tech Companies Worried About Secondary Sanctions from the Ukrainian Conflict?
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Insider Digest 5/10/22: Are Chinese Tech Companies Worried About Secondary Sanctions from the Ukraine Conflict?
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I’d just like to remind you that entertainment livestreaming has long been a thorn in Beijing’s eyes, not just for minors, but please differentiate it from livestreaming ecommerce, which the government is very much pro, as it helps the real economy, even though it will definitely seek to reduce fraud and tax evasion, etc.
Insiders are wary of believing Chinese sources on this topic anymore …
5/10/22 Are Chinese Tech Companies Worried About Secondary Sanctions from Ukraine Conflict?
Since I did all the research already for an event last week with USFCA’s CSBI (China Business Studies Initiative) I thought I’d share with you here some of my findings. Nothing super illuminating sorry, and generally an overall sense that the Chinese tech names you are likely investing in are none too worried about the prospect of secondary sanctions.
Firstly, most global companies are taking a wait and see approach. Yale’s School of Management just came out with a list of 1,212 companies and mapped what they are doing in response to the sanctions against Russia. The results are as follows:
A: Clean Break - Surgical Removal, Resection: 320 Companies or 26%. Companies totally halting Russian engagements or completely exiting Russia.
B: Keeping Options Open for Return: 413 Companies or 34%. Companies temporarily curtailing most or nearly all operations while keeping return options open.
C: Reducing Current Operations: 126 Companies or 10%. Companies that are scaling back some significant business operations but continuing some others.
D: Holding Off New Investments/Development: 143 Companies or 12%. Companies postponing future planned investment/ development/ marketing while continuing substantive business.
F: Defying Demands for Exit or Reduction of Activities: 210 Companies or 17%. Companies that are just continuing business-as-usual in Russia.
To no one’s surprise, of the 43 Chinese companies that they are tracking, all but 3 fall into what they graded as the “F” category. The other 3? D. No one has drastically reduced operations in Russia. In fact, the only one who did, Didi, immediately reversed their position the same week. My understanding is that the Russian business wind-down was long in the making and purely for financial reasons, but since the announcement came after the conflict and could easily be mistaken as siding with “the West,” it was politically expedient and therefore had to be quickly jettisoned. Didi’s Russian business probably remains just as unattractive as before, if not more, but at least they are not making an “ideological error.”
Of the 3 “D”s who are holding off new development, one is Binance, the global cryptocurrency exchange that I don’t think should be considered Chinese, since they’ve shuttered their mainland business; Huawei, who’s furloughed some local staff for a month, and UnionPay, who’ve suspended issuing bank cards to Russian banks. The remainder of the Chinese businesses — all “F”s by Yale’s grading system — are largely state-owned enterprises or a few private companies in the energy, industrial or logistics sectors. Almost all are said to be conducting “business as usual,” and a few “declined to comment.”
Back to tech though, this is what it looks like when we break things down:
Internet companies - Most of them have close to no Russian presence, and so are generally unworried about secondary sanctions, a fact I’ve confirmed with a few executives. How can you sanction me when I don’t operate there (directly)?
Alibaba is perhaps the only one with a “significant” presence, as it claims to operate the most-visited e-commerce site in Russia, with 35mm MAU in 2021 and about 10% market share. However, this business is classified as an investment. If we really want to get into details, AliExpress China continues to ship products to Russian shoppers, but is that enough to tip over the sanction jar? Alibaba clearly hopes not, as this business is a minuscule amount (<1%, probably) of its total revenues. It also seems easy enough to fix (route through AliExpress Russia?) if push comes to shove. JD.com
As the other Chinese internet company everyone cares about, Tencent does not have a direct presence there, but does have an investment via VK (formerly Mail.ru). (Oddly enough, Tencent bought VK bonds earmarked for growing AliExpress Russia back in 2020.) I don’t really see how it gets in too much trouble here. As for its better known US investment Epic and subsidiary Riot Games, both have stopped commerce / payment methods for Russians in their games, so very limited drama can be made out of that IMO.
Finally, the two other large and as-of-yet private Chinese internet companies that do business in Russia — TikTok and Shein — the former has cut off new content originating in Russia as of March, and the latter has not done anything, although apparently the conflict derailed its IPO. (I’m under the impression it’s much more than just volatile capital markets that led to the IPO to be paused, but the volatility is a convenient scapegoat!) TikTok will have to tread very careful going forward, but it seems to have a more than capable government relations team at the moment. Shein’s strategy has been much more erratic, but I imagine Alibaba would have to be in the line of fire first before Shein, which is still below most people’s radars.
Smartphone makers - This group has actually benefitted from the conflict, because as soon as Apple and Samsung suspended operations in Russia, sales of Chinese-branded smartphones doubled (in the period from 2/18 to 3/13/2022). However, that’s because they’re coming from a very small base. Apple and Samsung were 30% and 15% market share in Russia before the conflict, but realme was just at 5.7%, Honor 2.5%, ZTE 1.2% and OPPO & Vivo at 0.4% and 0.3% respectively. Doubling or even tripling on this basis sounds impressive but really isn’t.
It was just reported over the weekend that Lenovo and Xiaomi are reportedly curtailing their operations in Russia due to pressures from suppliers, so maybe there will be some concessions here, but again, not a major contributor to revenue.
Previously sanctioned entities - and here we’re really just talking about Huawei and SMIC. Huawei, as noted above, is treading carefully. SMIC, on the other hand, has remained mum about the whole affair and continues to keep on doing whatever it’s doing, which it claims of course doesn’t violate any rules, and the US is ... threatening to sanction it anyway? Hard to see exactly what’s going on, especially with sales to Russia comprising also a similarly small portion of revenue, same as most of the other companies discussed. It may be that SMIC figures that it will always be first in line for more sanctions anyway and so is just keeping its head down?
Frankly, I think the semiconductor companies don’t need to have any Russian business ties to get sanctioned. Reports are surfacing again that the US is contemplating sanctioning other Chinese semiconductor companies besides SMIC, and that the export bans will be geographic in nature, meaning that even US-owned and built factories in China will be subject to export bans. It’s certainly not surprising to me that it’s being considered ... we’ll see if the business community can manage to block it.
As if to drive the above point home about the unpredictability of sanctions from the US side even without anything to do with Russia whatsoever, may I point you to the current rumor that Hikvision, one of China’s leading providers of surveillance cameras, may be placed on the Treasury Department’s SDN (Specially Designated Nationals) list, for its involvement in Uyghur surveillance and internment. Such an action would “vault it past Huawei to become the most-sanctioned Chinese tech company,” and “grievously (perhaps fatally) wound the company.” Most experts seem to have come out publicly and warned against such an action, calling it a “dangerous escalation,” but how effective is that really? We’ll see.
Finally, I wanted to add a brief note about how the “Chinese public” is reacting to the war. There has no doubt been a notable softening in the tone of state media regarding the conflict, from one that was quite pro-Russia (while being formally neutral, of course) to one that is much more explicitly neutral, with increasing coverage from the point of view of the devastation suffered by Ukraine. Nonetheless, I should emphasize that the official stance is still loathe to condemn Russia. The most pro-Ukrainian articles so far are an interview of the Foreign Minister and a translation of a foreign article on Zelensky, which required the use of the word invasion, in quotes. This made such an uproar that it seems to have since been removed from the official Xinhua website (though reposts are not 404’ed) and either way, the word was changed to a milder term (”conflict,” I believe) even before the removal. Whether that was just something that slipped through the cracks or something that actually betrays a true shift in China’s stance is hard to say. It doesn’t really matter for our purposes, anyway, because the tech “cold war” with China seems independent of Russia-Ukraine, don’t you agree?
But here is a graph that shows some factors influencing Chinese public opinion that you might find interesting anyway. Between 3/28 and 4/5/2022, the Carter Center China Focus conducted a survey of almost 5,000 Chinese individuals on their opinion regarding Russia’s invasion of Ukraine. It found that 75% of respondents agree that supporting Russia is in China’s national interest, and 60% support China mediating an end to the conflict. No surprise that more consumption of national level state media and social media correlated with higher support for Russia, but you might be surprised to hear that so did higher education, although to a far less degree than the other two. Even within state media though, only national level state media was positively correlated, and local state media as well as commercial media had no effect. Age, gender and income level didn’t either. Not what I would’ve guessed, but those are the results. I guess if you’re only reading or talking to a certain group of people in China about Ukraine, then be aware of their potential bias ...
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