Something really big is happening in Washington with respect to China, and it is going to change everything for investors.
According to a new report Friday, the Biden Administration is preparing a series of executive orders that will dramatically curtail investment in China, what technology can be sold there, and the proliferation of Tik Tok.
This is bad news for Qualcomm (QCOM), and good news for Snap Inc. (SNAP).
Semafor reported on last week that President Biden will set the wheels in motion to ban direct investment by American firms in Chinese technology companies. The president also wants to limit what kinds of technology can be sold in China. While the initial focus will be high-end semiconductors, the guidelines may extend to artificial intelligence, quantum computing, electric vehicles and rare earth metals.
The motivation is clear: Mute Chinese neocolonialism. China is rising as a superpower. Under the leadership of President Xi, the Chinese Communist Party set ambitious goals toward expanding its influence across the globe. Advanced technology is a good place to start, especially in the developing world.
The Belt and Road Initiative, introduced in 2013, is a Chinese global infrastructure development strategy for roads, rail systems and sea routes. The BRI seeks to help countries in Asia, Europe, Africa, the Middle East and Americas exchange capital, talent and technology. The catch is the infrastructure must come from Chinese firms.
Leaders in the U.S. State Department believe that infrastructure will become a tool of the Chinese government to further its political agenda.
Semafor notes that officials in the Biden Administration were particularly alarmed to learn that Sequoia Capital, a major Silicon Valley venture capital firm, is raising $8 billion to make new investments in Chinese technology firms.
The yet to be announced executive orders will make it tougher to invest in China, limit what technology can be sold to Chinese firms, and squash the rising influence of Chinese-owned companies like Tik Tok.
This will have wide-ranging implications for several American companies. During the past week Nvidia (NVDA) revealed in a Securities and Exchange filing that the U.S. government asked the company to stop selling certain technologies to China. And Bloomberg reported last week that Berkshire Hathaway (BRK), the company run by Warren Buffet has begun liquidating its investment in BYD, a major Chinese battery and EV manufacturer.
The pain could be more severe for Qualcomm (QCOM). The San Diego, Calif.-based company designs cutting-edge semiconductors used in smartphones, internet of things devices, and communication gear used in next-generation EVs. More importantly, the company derives 67.4% of its $33.5 billion annual sales hail from China.
Snap. Inc. is on the other side of the ledger. The Santa Monica, Calif.-based company operates a social media platform that is popular with teens and 20-somethings. Snap isn’t active in China. Unfortunately, a prominent Chinese-owned firm is active in Snap’s market. TikTok is a social media phenomenon, and it is gobbling-up market share from Snap.
The Chinese social media company has been the most downloaded smartphone app globally for the past two years. Given its Chinese roots official data is sparse, yet industry insiders believe Tik Tok has sales in the $4.6 billion range.
The Biden Administration is more concerned about what the firm is doing with all of the data it is collecting on an estimated 155 million American members. That information could be used to sway public opinion through disinformation campaigns.
Nine sitting U.S. senators sent a letter in June to Treasury Secretary Janet Yellen to address that concern. And a second letter was sent in July to Lina Khan, Chairwoman of the Federal Trade Commission to investigate data security at Bytedance, the Chinese parent company of Tik Tok.
Snap would be the direct, and immediate beneficiary of any potential Tik Tok regulation. Snap shares are down 77% year-to-date.
The bottom line is some direct action on China and tech is imminent, and it will have a dramatic impact on the near-term performance of specific firms. The time for investors to prepare is now.
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