US-China: Gone and maybe not coming back

As the trade war between China and the US continues to escalate, tech M&A between these two countries is suffering some pretty serious collateral damage from the battle. That makes sense since cross-border acquisitions are a form of trade, just as any other exchange of goods or services between two countries. But right now, relations between the two largest economies on the planet are making it pretty much impossible for them to get any tech deals done. What’s more, those deals may not even return when the current political hostilities have ended.

This year, which has already seen the two sides impose billions of dollars’ worth of tariffs on each other’s exports, is currently on pace for the fewest deals and lowest spending by Chinese companies on US-based tech businesses since China began shopping here in earnest a half-decade ago. According to 451 Research’s M&A KnowledgeBase, acquirers based in China have picked up only two US tech companies worth $137m so far in 2018. That puts this year on pace for just one-third the number of tech acquisitions announced by Chinese buyers in any of the previous four years.

While never a huge acquirer, China had emerged as a fledgling buyer of US technology vendors in recent years. For instance, Beijing-based IT giant Lenovo picked up significant hardware businesses cast off from IBM and Motorola Mobility in 2014, while more-recent activity saw China-based investment groups take out Lexmark and Ingram Micro, both in 2016. However, that mini-boom in M&A got snuffed almost overnight when China imposed severe restrictions on its currency in late 2016. That had the immediate effect of cutting Chinese spending on US tech providers by an incredible 95%, from a record $11bn in 2016 to just $500m in 2017.

Undeniably, the decline in 2017 was due to a change in internal Chinese policies. However, the further decline so far this year is more attributable to the ever-accelerating deterioration in US-Chinese relations. That’s likely to have implications for tech M&A between the two countries that last much longer than the current trade spat. Even assuming the two countries can resolve their trade difference (a large assumption given the tit-for-tat tariffs and a just-filed WTO complaint), China is unlikely to return to shopping for tech in the US, at least not like it did in the peak years.

Having seen how acquisitions in the US can potentially be ‘politicized’ and shot down, China is likely to focus its expansion in the technology industry via internal, rather than external, resources – building, rather than buying. It’s worth remembering that the country’s blueprint for upgrading its overall economy – and its technology industry, specifically – is called ‘Made in China 2025.’