The US-China tech rift’s surprising beneficiary: Southeast Asia

Tensions between global superpowers ratcheted up a notch this August after US President Joe Biden signed an executive order prohibiting certain US tech investments in China on the grounds of national security. Yet the order, which also requires investors to provide government notification in some cases, was a move that many saw coming.

“Major players knew and expected that the US government would increasingly restrict US capital from being involved – whether as equity or debt – in the China tech sector, so the ban was not a complete surprise,” Simon Wong, a partner at law firm Withersworldwide, tells Tech in Asia.

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The latest executive order singles out three sensitive technologies that can accelerate the development of another country’s advanced military capabilities: semiconductors and microelectronics, quantum information technologies, and AI.

In these sectors, “it is likely that their equivalent in Southeast Asia will be the biggest beneficiaries,” says Wong, who is part of the corporate investment management practice at Withersworldwide.

However, this is based on the assumption that the region has enough alternatives. In the field of AI, for instance, ASEAN countries lag behind the US and China in terms of adoption by two to three years, according to a 2020 study by consultancy firm AT Kearney and Singapore’s EDBI.

The study also found that between 2015 and 2019, AI investments in ASEAN accounted for just US$2 per capita compared to US$155 in the US and US$21 in China.

As global firms navigate an increasingly complex tangle of rules and penalties imposed on those doing business with China, Southeast Asia is emerging as an alternative destination for investors looking to circumvent and hedge against these restrictions or to avoid them altogether.

Southeast Asian players in these industries appear to be largely unscathed by the impending ban – at least for now.

“Unless they are subsidiaries of Chinese firms, investment flows to firms in these sectors in Southeast Asia should not be affected,” notes Martin Chorzempa, senior fellow at the Peterson Institute for International Economics (PIIE), a US-based nonpartisan think tank.

Winners and losers

In reality, the extent of economic benefit for each Asian country is uneven. It could vary depending on the strength of the country’s ties with the US, openness to multinational firms, and relative labor costs.

As investments to China get redirected to other capital markets, Vietnam and Indonesia could emerge as “tech epicenters,” Wong says. At the same time, he notes that Singapore could also stand to gain from its strengths as a corporate and legal hub.

In Asia, India and Vietnam have been among the winners of the growing trade spat that has led firms like Apple to reconfigure its global supply chain. Manufacturing locations in both countries have increased: India currently has 14 factories, up from zero in 2012, while Vietnam now has 4x more facilities.

Because the rules apply only to future investments and are not retroactive, multinational companies seeking to set up new subsidiaries or joint ventures in China will be among those most directly affected.

Reprieve for limited partners

Impact on fund flows

Up in the air