By AARON PRESSMAN and CLAY CHANDLER
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Rising tensions between the United States and China was one of the biggest stories of 2018. That rift promises to dominate global headlines again in 2019. Apple CEO Tim Cook cited it this week as one of the reason’s for Apple’s problems.
Herewith, eight predictions for relations between the world’s two largest economies in the coming year:
Trump and Xi will agree on a trade deal that forestalls further tariffs—but the accord will neither eliminate China’s trade surplus with the U.S. nor put an end to the trade war. The two sides are actively engaged in negotiating terms of a settlement. A final deal may well include substantial concessions from Beijing. Even so, the trade math hasn’t changed. There’s virtually no way China can buy enough American soybeans, jets, or natural gas to achieve Trump’s goal of reducing the Chinese surplus to zero. And it remains unlikely Beijing will commit to specific verifiable targets for measuring China’s performance in protecting U.S. intellectual property rights.
Xi will stage a tactical retreat from his Made in China 2025 industrial policy—but hold fast to his oft-stated goal of reducing China’s dependence Western technology. Xi dispelled any doubt of that in two recent speeches, one commemorating the 40th anniversary of Deng Xiaoping’s economic reforms and another outlining his economic priorities for the new year. Both stressed “self-reliance.”
Xi will reject calls for a more market-oriented approach to economic development and instead double down on support for state-owned enterprises and public investment projects. (See speeches noted in 2.)
China’s leaders will tighten their grip on China’s technology sector, obliging public and private tech firms to prioritize governance and regulatory compliance over growth and innovation. Beijing recently ended a months-long clampdown on new online games. But China’s old policy of benign neglect for disruptive technologies is over. In recent months, the state has expanded censorship of the Internet, imposed new restrictions on tech companies’ involvement in financial services, stepped up oversight of ride-hailing giant Didi Chuxing, and demanded more patriotic content from Beijing Bytedance’s Toutiao news aggregator. The Chinese scientist who boasted late last year of making genetically edited babies has been detained.
Cross-border investment between the U.S. and China won’t return to past highs, thanks in no small part to the new Foreign Investment Risk Review Modernization Act approved by Congress last August.
The inevitable consequence of items 1-5 above: China’s economy will continue to slow, its debt to GDP ratio will grow and its domestic stock markets will languish. Martin Wolf, in a recent column, makes the case that China, like 1980s Japan, could fall victim to “ultra-high investment and rapid debt accumulation.”
Huawei Technology will have to fish or cut bait on a strategy for gaining entry to the U.S. market. In a rare meeting with global press last month, Ken Hu, one of Huawei’s four deputy co-chairmen, challenged officials from the U.S. and its allies to document claims that the world’s biggest telecommunications manufacturer poses a cyber-security threat. But those perceptions are unlikely to change—and Huawei unlikely to participate in 5G rollouts in some of the world’s most important markets—unless the company’s leaders do something more than just fulminate about how unfairly they’re being treated.
Despite the above, Chinese tech companies will continue to innovate, and many will do so in ways that encroach on global competitors in markets outside China. (See this excellent piece by The Information’s Shai Oster on how Bytedance will start competing with Facebook for ad dollars in India and Southeast Asia.) Regardless of continued tumult in U.S.-China relations or or the travails of China’s macro-economy, American tech companies ignore Chinese competitors at their peril.
Contagion. After disclosing its own China problem, Apple saw its stock price drop 10% on Thursday. Wall Street analysts, who had largely missed the problem in advance, had a lot to say afterwards. New Street Research analyst Pierre Ferragu, the one person who slapped a “sell” rating on Apple shares months ago, raised his rating to “neutral,” however. The Apple drop hit other tech stocks, too, as Microsoft shares fell 4%, while Facebook, Google, and Amazon each lost 3%.
I Am Legend. The life sciences unit of Alphabet, Verily, raised $1 billion in private capital from investors led by Silver Lake. Silver Lake managing partner Egon Durban and Alphabet CFO Ruth Porat are joining Verily’s board. In other VC news, location-based game developer Niantic raised$190 million, according to a securities filing. Maker of the hit game Pokemon Go, Niantic is working on Harry Potter: Wizards Unite as its next big release.
Carriers. A lawsuit by the Los Angeles city attorney claims that the Weather Channel’s app, owned by a unit of IBM, secretly tracks and sells user location data for purposes like targeted marketing and hedge fund analysis. “If the price of getting the weather forecast is the sacrifice of your most personal info about where you spend your time, you need to be clearly told in advance,” City Attorney Mike Feuer says. In other metro legal matters, a judge blocked New York City’s home sharing tracking law from going into effect while a lawsuit by Airbnb and others challenging the constitutionality of the rules moves forward.
The Andromeda Strain. A group of hackers published personal information about hundreds of German politicians including Chancellor Angela Merkel on Twitter. The now-suspended Twitter account leaked email addresses, credit card details, messaging chats, photos, and other data.
Viral. In a study published in the journal Science this week, researchers at the University of Illinois performed a hack of their own, reworking a protein molecule in tobacco plants to improve photosynthesis and make the plants grow quicker and 40% larger. Next up for the scientists, funded in part by the Bill and Melinda Gates Foundation, will be trying the technique on food staples like soybean and tomato plants.
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FOOD FOR THOUGHT
The dream of creating major media brands entirely online took a hit last year, with layoffs and closings roiling many Internet news sites. Derek Thompson at The Atlantic has a detailed rundown of the major trends impacting the media business last year and into the future. For one, new technology won’t be a savior:
As advertising has migrated to digital platforms, the news media have converted to hero worship. The iPad was going to save media. Then it was venture capital. Then it was the mystical promise of “Hulu for news.” Then it was Facebook’s video platform. No, podcasts!
Each savior has proved fleeting or fictitious. The iPad is great for many purposes, none of which is the resuscitation of mid–20th century business models. Venture capitalists blithely expected media companies to produce tech-company returns, and many pulled back when they learned what any journalist could have told them: News isn’t a profit gusher. Companies such as Mic that went all in on Facebook turned themselves into glorified subletters—and they ended up on the street when the social network changed its priorities.
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