Illustration: Sarah Grillo/Axios
As Google, Facebook, Apple, Amazon and Microsoft all report their first set of pandemic-era earnings this week, the industry will get a clearer fix on just how much pain the falling-out between the U.S. and China will inflict.
The big picture: For decades, tech's leaders have bet big on China as a manufacturing hub, supply chain provider and, increasingly, a lucrative market — but trade frictions, national-security tensions and now coronavirus blame games are imperiling that partnership.
Context: China has become a flashpoint in the coronavirus crisis, thanks to questions about Beijing's forthrightness and revved-up criticism of China on the presidential campaign trail.
- Americans' views of China have turned sharply unfavorable in recent weeks, according to recent polling.
- Beijing has also used the pandemic to take shots at the U.S.
What's happening: In their earnings reports this week, the tech giants will have to tell the public how the crisis and disrupted supply chains earlier this year have already affected their businesses. They'll also get pressed by analysts to talk about just how big a threat they face from rising enmity between the U.S. and China.
Why it matters: If the "great decoupling" that was already underway pre-virus gets accelerated by the crisis, tech is bound to get caught in the middle.
Manufacturing: Apple and many other electronics companies make most of their devices in China.
- Changing that could be costly, complicated, and tough to scale.
- Such a transition could prove a competitive boon for multinational companies, such as South Korea's Samsung, that have already moved their supply chains out of China in recent years.
- Some part makers that work with U.S. tech giants, such as iPhone manufacturer Foxconn, have also been exploring expansions in countries like India and Vietnam in recent years.
Commercial exports: The U.S. remains the global powerhouse in semiconductors, home to giants including Intel and Qualcomm.
- Losing China as a market would hobble these companies' businesses and could push China to further ramp up its own nascent chip industry.
- Chipmakers already warned that they'd suffer from the Trump administration's actions against Huawei last year and were instrumental in getting carveouts that let some of them continue doing business with the Chinese telecom giant.
Exploring Chinese consumer markets: China has been a key growth region for some U.S. companies, like Apple.
- But many others, including Facebook, Google, and Amazon, have been largely cut out of the market — or have chosen to not accept the government's rules there.
- Yet most U.S. firms still dream of access to China's massive middle class market, and a definitive cut-off would put a big cap on their global growth prospects.
Political favor: If the war of words between China and the U.S. keeps escalating, tech firms may find that their commercial relationships with China or Chinese companies makes them targets.
- Google got a taste of that last year, as President Trump flirted with investigating the company after billionaire tech investor Peter Thiel accused it of treason for exploring work in China and thereby, he argued, aiding the Chinese military.
Yes, but: The rift with China remains more a matter of bluster than hard measures, and decoupling is still mostly a possible outcome, not a reality.
- Trump's tariffs on many Chinese-made goods haven't succeeded in moving companies to shift supply chains elsewhere.
- Trump himself frequently touts his friendly relationship with President Xi Jinping and has flip-flopped on moves against Chinese firms, as when he reversed a ban on Chinese phone maker ZTE.
- If Trump loses in November, a Biden administration might push China for more virus transparency but have little stomach for its predecessor's trade war.
"The basic question for the U.S. in dealing with the China relationship is whether the American state can govern," said Matt Stoller, a China critic and research director at the American Economic Liberties Project. "That's really the only question, because right now Wall Street and multinationals don't want that break with China."
What's next: The willingness of a Trump or Biden administration to take strong action on decoupling may ultimately rest on how long the coronavirus crisis lasts, said Derek Scissors, Asia economist at the American Enterprise Institute.
- Public sentiment in the U.S. will likely continue to darken on China and favor "less contact" and "less dependence" on the country if the U.S. still faces localized virus outbreaks in 2021, he said.
- "We're in a political period, obviously, where it's a strategy for everyone to say, 'I'm the toughest on China,'" Scissors said. "The real test is next year."