This article is part of Bain's 2021 Technology Report.
Several major countries are investing more than ever in technology and supply chain independence. And yet the global technology industry will continue to be codependent for the foreseeable future, as many barriers to self-reliance will take years to break down. These two opposing dynamics have forced technology executives into a high-wire balancing act: How can they step toward the decoupled era while simultaneously keeping the other foot stable in today’s codependent reality? And how long will they be required to maintain this balancing act?
Decoupling will define the future
The US and China pushed the world in this direction, and the decoupling of their economies and technology ecosystems has been gaining momentum for several years. Consider this: Technology-related foreign direct investment between the two countries dropped by 96% from 2016 to 2020 (see Figure 1).
Foreign direct investment between the US and China has declined significantly, especially in technology
Now, the US and China are upping their bids for technology and supply chain independence with massive domestic investments. In June, the US Senate approved the $250 billion US Innovation and Competition Act, which would provide $52 billion for domestic semiconductor research and manufacturing, a 30% funding boost for the National Science Foundation, and $29 billion to fund a new applied sciences directorate. Meanwhile, China’s annual spending on R&D climbed to more than $350 billion in 2020, and the country is spending $1.4 trillion over the next few years in infrastructure technologies such as artificial intelligence (AI), semiconductors, and 5G networks. The two nations’ recent moves signal that decoupling will be a defining feature of the technology landscape for years to come, even with one of its most prominent contributors—former US President Donald Trump—no longer in office.
Although the US and China put the world on the decoupling path, other leading countries and regions aren’t trying to reverse course; they’re embracing it. South Korea announced a $450 billion investment in May to establish itself as the world's largest chip-manufacturing base by 2030. The European Union in March pledged a $150 billion investment in “digital sovereignty,” with the goal of doubling its share of global semiconductor production to 20% by 2030.
The unprecedented scale and pace of investments in decoupling around the world has technology companies scrambling to update their short- and long-term strategies. But although decoupling appears all but inevitable, multiple chokepoints assure the global technology industry will remain codependent—for now.
Despite significant investments, mainland China has been unable to ramp up domestic semiconductor manufacturing because it lacks key process technology and critical equipment.
Over the past year, as tightening US export controls highlighted these vulnerabilities, China showed signs of shifting to a more friendly approach to multinational corporations. That has led to a surprising development: Many multinational technology companies have found doing business in China is arguably getting easier, at least for the time being. Additionally, China is trying to alleviate chokepoints from multiple angles, from investing in open-source, homegrown alternatives across the technology stack (e.g., RISC-V chip design architecture), to setting a national agenda for next-generation AI standards.
On the other hand, the US relies mostly on Asia for access to leading-edge semiconductor foundries, original equipment and design manufacturers, and component makers. Recent supply chain disruptions, such as the global chip shortage, have only exacerbated these challenges and compounded the desire for self-reliance.
While China’s hard-tech chokepoint could require decades to overcome, the US’s semiconductor capacity chokepoint could be alleviated in the next decade. But it would take significant investments to construct factories and develop talent. Investments announced by leading chip makers and the US government could help address the problem.
As both the US and China try to secure their domestic technology bases and supply chains, several key uncertainties are clouding the picture for technology executives.
US. America is trying to urge a coalition to present a united front against China. If successful, this could make it easier to limit or block the sale of critical technologies to China.
Europe. Its willingness to join such a coalition isn’t yet clear. Will it use its scale to attempt self-reliance, join a US-led alliance against China, or get picked apart by the US and China?
Taiwan. The future direction of Taiwan and its relationship with mainland China has entered the spotlight for technology companies around the world. Can Taiwan walk the tightrope to remain the top global supplier of semiconductors?
China. Technology executives are closely watching China’s next steps toward supply chain security. Its effectiveness could hinge on whether its next-generation technology standards and open-source technologies gain traction in the rest of the world.
Worldwide. An important unanswered question surrounding countries’ growing domestic technology investments is the level of subsidies for companies headquartered in other countries, particularly those from nations that may be less strategically aligned with the subsidizing country.
How to adapt
The ongoing uncertainty makes it challenging for tech companies to adjust their strategy and feel confident in their choices. Here are several no-regrets moves that executives can make to adapt to the changing environment.
Play the long game. Recognizing that decoupling will take years to play out, technology executives are starting to run scenario-planning exercises projecting the next decade or more. They’re preparing for a range of outcomes, hedging their downside risk and exploiting potential upside.
Strengthen government relations. As governments pour vast sums of money into their technology ecosystems, doing business as an international technology company requires an effective public partnership strategy and strong government affairs and global trade teams. Tech executives will find themselves spending more time in Washington, DC; Beijing; and capitals around the world.
Make difficult market choices. Technology executives recognize they need to constantly evolve their thinking on which markets to invest in, given the fragile state of geopolitical and technology ecosystem relationships. Two years ago, many US tech executives were looking at bold moves to maintain access to the Chinese market. Now, the situation on the ground appears to be changing. Ultimately, the answer boils down to where the company can differentiate itself and make itself indispensable for as long as possible.
Support operational linchpins. Technology executives are quickly evolving their long-term supply chain strategy. The key is to evaluate risks to the linchpins across their supply chain and make investments to diversify and get ahead of potential bottlenecks and disruptions.
Plan for talent shortages. These will become more frequent as competing nations try to replicate capabilities and ramp up domestic technology sectors. Companies will need to build new muscles. An important one is the ability to hire from other countries within a network of allied nations. For example, US companies are shifting talent hubs from China to more neutral countries. Companies such as Taiwan Semiconductor Manufacturing Co. are also investing in training programs at their headquarters for new hires based at overseas facilities.
The bottom line is that flourishing in this policy-led era of the technology industry will require executives to be comfortable with constant adaptation. The nimblest ones will step confidently onto stable ground in the decoupled future.