US Tech Startups Quiver in Fear of the China Trade War

Julija A. Image
ByJulija A.
June 10,2019

According to the 2019 Startup Outlook Report, 50% of US startups are concerned that trade policy between the US and China will hurt their businesses. What’s more, 33% are somewhat worried, while 17% are very concerned.

This rising anxiety is due to China’s ‘Made in China 2025’ plan, a strategic project issued by the Chinese Premier Li Keqiang and his cabinet in May 2015. In short, China is working towards producing the highest value products and services and becoming a high-tech manufacturing superpower. The industries in for a makeover include information technology, AI, IoT, robotics, and others.

How will China achieve this goal? Firstly, China’s domestic content of core materials will increase to 40% by 2020 and 70% by 2025. They also plan on investing in quality-driven product innovation as opposed to production. Secondly, China is investing heavily in Russian and European US competitors.

‘Made in China 2025’ Plan For Tech World Domination

China has more Unicorn companies than the US, in spite of the US being the primary source of venture capital, according to a Churnbase study. In 2014, 150 scientists and scholars drew up the 2525 plan, under the supervision of the Ministry of Industry and Information Technology.

Miao Wei, China’s industry and information technology minister, stated for the South China Morning Post that it would take at least 30 years for China to become a manufacturing superpower. Still, the desire to keep up with the US and eventually surpass their tech monopoly is part of President Xi Jinping’s “Chinese dream” and a matter of national pride.

The Threat of Cyber Attacks and the Theft of Intellectual Property

US startups and powerful corporations alike are raising eyebrows at China’s ambition, focusing particularly on the threat of cyber warfare and the theft of intellectual property. In 2015, presidents Obama and Xi Jinping reached an agreement that they would end mutual industrial espionage. According to a 2016 report by FireEye, China honored this agreement, with the number of Chinese cyber attacks on the US falling by 83%.

In 2018, president Trump cut the deal off. According to an NSA spokesperson, digital attacks against the United States’ financial, transportation, energy, and healthcare sectors have been on the rise after a brief ceasefire. Right now, According to a Time magazine article, 70% of America’s corporate intellectual property theft is believed to originate from China.

China Investing in US Competitors

Small businesses survival rate, currently at 30% past the 10-year milestone, might drop because of this economic shift, with competition rising overseas.

After Huawei, the world’s largest manufacturer of telecommunications equipment, was blacklisted by US companies, tensions rose significantly. The US stated that they would refuse to supply Huawei with goods and services, threatening to choke off China’s access to key technologies.

Soon after, Beijing announced it would release a similar list of “unreliable” foreign entities, and even stop supplying the US with rare earths and other resources. China also resorted to investing a bucketload of capital into US competitors from Russia and Europe.

In the most recent case, Chinese fintech startup Pingpong announced they would invest over  €100 million ($113 million) in Luxembourg startups in the coming years. The immense funding will drive collaboration between Luxembourg and Pingpong on various fronts, such as Chinese exports to the EU, Pingpong’s local payments, and online banking projects.

Also, China’s Alibaba and Russia’s RDIF sovereign wealth fund plan on investing $100 million in a shared, Russian venture. The plan is for Megafon, the Russian mobile phone operator to sell a9.97% stake in internet group Mail.ru to Alibaba. Megafon will also get 24.3% in the JV, with Mail.ru will adding its Pandao e-commerce business to the JV and $182 million in cash.

The Consequences for US Tech Startups

An innovation-powered US economy is aware of the Chinese threat. According to a 2018 Global Startup Ecosystem Report, advanced manufacturing and robotics are the most lucrative tech subcategory at a growth rate of 189.4%. With the US attempting to stay at the forefront of global technology, the threat of data breaches and intellectual property theft could be truly damaging to startups and technology leaders. The cyber attack deal has long been abandoned, and we are yet to see a Huawei sales ban backlash. The consequences of potential Chinese rise to tech power is unlikely to affect US startups at the current time. Still, the more successful startups striving for unicorn-status are already falling behind and facing an uncertain future in several decades’ time.

About the author

Julia A. is a writer at SmallBizGenius.net. With experience in both finance and marketing industries, she enjoys staying up to date with the current economic affairs and writing opinion pieces on the state of small businesses in America. As an avid reader, she spends most of her time poring over history books, fantasy novels, and old classics. Tech, finance, and marketing are her passions, and she’s a frequent contributor at various small business blogs.

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