The deteriorating relationship between the U.S. and China is forcing global companies trying to do business in the world’s two largest economies to start coming up with game plans for navigating the frostiness. Venture-capital firm
Sequoia
Capital’s decision on Tuesday to split out its China businesses offers a glimpse of the path others may take.
Sequoia, known for early stakes in
Apple
(ticker: AAPL) and
Airbnb
(ABNB) as well as the Chinese food-deliver company
Meituan
(3690. HongKong) and TikTok owner ByteDance, told investors it would split into three independent firms. One, to be focused on China, will now be named HongShan. Another, focused on India and Southeast Asia, will be called Peak XV Partners, while the third will focus on the U.S. and Europe as part of Sequoia Capital.
The firm, according to The Wall Street Journal, had independent national security experts look closely at the investments by its Chinese business in areas like quantum computing and artificial intelligence. Those are businesses that policy makers in both the U.S. and China are looking at more carefully for potential restrictions as they view their relationship increasingly through a national security lens.
The move comes as investors have also been reassessing their stakes in China in light of the changing relationship. Money managers now allocating less to China than the country’s weighting in the benchmark MSCI Emerging Markets index have cited concerns about China’s longer-term economic outlook, as well as geopolitics.
Sequoia’s move is “another manifestation of de-risking. Global fund managers are attempting to purge their portfolios of China risk,” said Stephen Roach, former chairman of Morgan Stanley Asia, who recently wrote Accidental Conflict: America, China, and the Clash of False Narratives. “Segmenting from China-centric supply chain linkages is much tougher.”
Global companies are also seeking to diversify their supply chains, rethinking new investments in China, and looking carefully at their stakes in areas that could get caught in a crossfire between the two countries, such as in advanced technologies like semiconductors.
Mohamed El-Erian, chief economic advisor at
Allianz,
the German financial-services giant, and chair of Gramercy Funds Management, recently told Barron’s that
Yum! Brands
‘ (YUM) 2016 spinoff of its Chinese operations could offer a path for other multinationals to create a way to reap dividends but allow operations on the ground to be fully Chinese.
Could Sequoia’s move offer another template? It depends. Sequoia’s approach may work for certain kinds of partnership-based organizations where economies of scale and cross-national collaboration matter less, such as venture capital and law firms, says Scott Kennedy, senior advisor and trustee chair for Chinese Business and Economics at the Center for Strategic & International Studies.
However, Kennedy says, it isn’t a blueprint for most multinationals, which depend on global planning and execution for their success.
The parade of U.S. executives that have headed to China in recent weeks, making their first visits since the Covid-19 pandemic, have reinforced the idea that multinationals are finding ways to navigate the situation rather than pulling up stakes. While
JPMorgan Chase
CEO Jamie Dimon described the China situation as “far more complex” than in the past, he was the latest to say he doesn’t see a decoupling, but rather an effort to reduce risks.
U.S. officials trying to create a floor for the relationship have also emphasized that they are looking to minimize risk, rather than pushing for a conflict with, or a break from, the world’s second-largest economy.
The question for investors is what that de-risking looks like, and what steps people in venture capital, private equity, and corporate treasury offices take to achieve it.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
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