US president Joe Biden issued an executive order on August 9 imposing tighter restrictions on certain technology investments in “countries of concern.” It cites military applications of these technologies by hostile states that raise US national security concerns. The EO leaves “countries of concern” vaguely defined, but the target is China, including its special administrative regions of Hong Kong and Macao. It leaves open the option to modify this list of countries as the administration desires.
Although the EO similarly leaves the list of relevant technologies open for future modification, it highlights three technologies as initial focus points:
- Semiconductors and microelectronics. China is already constrained in its ability to innovate in advanced semiconductors. Prior US actions put limits on China’s ability to import US processors from AMD, Intel, and others. A 2022 ban on chip-making equipment further crippled China’s ambitions, since it can no longer acquire the equipment needed to make the most advanced chips. This EO does not expand restrictions in any specific way, as it is vague about the category. We expect continued trade in less advanced semiconductors like sensors and microcontrollers — many of which are manufactured in China. The ambiguity of “advanced semiconductors” could threaten the supply of these more mature (and cheap) chips if the US administration chooses to expand its definition.
- Quantum information technologies. Quantum computing and related quantum-based technologies like quantum encryption remain in the infantile stages of development, but quantum holds incredible promise. Research and product development are a focus of intense investment by governments, venture capitalists, and private equity companies. No country can yet legitimately claim to lead in quantum development, but the US government doesn’t want it to be China.
- Artificial intelligence capabilities. No topic is now drawing more attention than AI — and especially generative AI. What constitutes “AI” is unclear, as rampant AI-washing is clouding what could be covered by this EO. The Biden Administration leaves this definition open to interpretation, and it will need to clarify what specifically falls under this EO’s definition of AI. One clear impact already causing waves in the industry is a restriction on export of NVIDIA GPUs to China because of their popularity to accelerate AI applications.
The Executive Order Further Escalates The US-China Trade War
The intent of this presidential action is to impede the development of technologies the US government identifies as strategic to national security and international economic competitiveness. It is the latest in a string of actions to prevent other countries — most notably China — from surpassing the US in technology leadership. Your political position may be favorable or critical of these actions, but that doesn’t matter. What does matter is this EO is now in place, and you need to understand what it means to you, to the tech industry, and to your business.
Western Tech Firms Have Relatively Little Exposure
The impact of this EO on Western enterprises should be limited. The US and Chinese governments have been exchanging punitive sanctions on each other since the Trump administration. This trade war already caused firms in the US and other Western countries to throttle back investment in China — and vice versa. As a result, Western enterprises now purchase less technology from Chinese companies like Alibaba, Huawei, and Tencent.
Lenovo has less exposure than these other Chinese tech companies. While its main headquarters is in China, it has a large R&D presence and secondary HQ in the US and established business operations in many Western economies. Recall that it acquired much of its enterprise technology from IBM — PCs in 2005 and servers in 2014. Still, as a Chinese tech giant, Lenovo could be considered an impacted entity within the EO.
Most US tech companies have either curtailed or discontinued relevant operations in China. IBM has the most exposure among major US tech firms with multiple Chinese subsidiaries pursuing AI and quantum development. HPE had exposure with its stake in H3C, but it agreed to sell that stake earlier this year.
Follow The Money
The main parties impacted by this EO are obviously Chinese tech companies and Western institutional investors like venture capitalists, private equity firms, and fund managers. Their financial interests in China will be heavily scrutinized with threats of severe penalties for any violations. Most will opt to avoid the complexity and steer their money to Western tech development. This redirection of money will add to the already heavy pressure on Chinese entities.
Enterprise Tech Leaders Should Not Lose Sleep Over This Executive Order
Do not expect immediate changes to technology supply. An EO like this takes months or even up to a year to set up the bureaucracy needed to monitor and enforce the EO mandates. Also, while this escalation in tech trade tensions complicates tech supply chains, globalization is far from dead. The US and China need each other and plenty of other countries to ensure a resilient, smooth global ecosystem.
Engage your technology suppliers in a serious discussion about their tech supply chains and how this EO impacts them — and consequently, you. Most enhanced their supply resiliency since the lessons of COVID came swift and harsh. Good companies adapted. If your tech supplier is Chinese, you likely already have valid concerns that just got magnified a bit more.