Welcome everyone to another edition of my China Tech Law Newsletter. A short post this time with just some quick observations. Recently I’ve been talking to a lot of friends in the US about the potential Tik Tok ban. Does it impact sentiment for trade and investment between the US and China?
For sure we are seeing and have seen a huge slowdown in cross-border acquisitions (M&A, asset acquisitions, exclusive licensing deals, etc) for hard tech. This has been going on since the revamp of CFIUS and introduction of strengthened US export control rules, well before the Tik Tok case came along.
But for software, especially enterprise SaaS, we continue to see companies coming to China. Not to sound like too much of a ra-ra cheerleader, but the pipeline is really as strong as ever and a bright spot in cross-border investment. These are often ERP or LMS providers which are being pulled in by their multinational clients.
Some companies continue to use various ways to host their enterprise software solution outside of China and accelerate it through the “Great Firewall” through various methods. But it often can't replace the much improved user experience of operating the software on a local server with zero latency inside the Firewall.
More and more, we also see that the impetus for these niche B2B software companies is not just the desire to serve their global US and European clients in China, but also teams at Chinese global companies outside of China pushing their China HQ to adopt an objectively better foreign ERP or LMS system in China and worldwide.
For SaaS companies of course, where the working product is already complete and the variable costs of creating new regional hosting of the software are marginal, why not enter a market which in enterprise software terms is still relatively immature and has major international clients beckoning you to come as a trusted global service provider?
The second observation I’d make is a continuing desire by clients to work with Chinese companies who simply make really good products. I’ve seen this most notably in the EV space and of course continue to see this in advanced manufacturing. For EVs, since so much of the battery infrastructure and massive and competitive home market exists in China, local players have begun to build a very, very good product at a very affordable price. These are not third rate cars, these as a good as most models sold outside of China but sometimes at a fraction of the cost.
And for companies which need things to be made in good quality, variety, and affordably, there is still no place that even comes close to competing with China’s manufacturing ecosystem. But even as Chinese labor costs continue to rise, supply chain disruptions happen (less so now), etc., and perhaps as much as manufacturers want to and should diversify their supply chain, Chinese manufacturers still often make best-in-class quality even if their prices are increasing.
We have come a very long way since Made In China had a negative perception. Maybe there is some degree of self-selection bias in the clients I speak with, they are already committed to coming to China when the time comes to work with me, so of course they are doing so because they value the quality of the manufacturing in China. True, I tend not to speak with the ones who aren’t coming to China or have left.
I’d say simply the ones I do work with have an incredible amount of respect for what Chinese companies can do, politics does not really enter the calculation too much, there is merely a desire to work with great companies that offer a great product or great solution. Or in the case of software clients, offer a great market pulled in by one or two anchor clients.
A short post today. Just some rapid fire things I’m seeing with current clients. Things like Tik Tok make all the news, but at a day-to-day, person-to-person, company-to-company level, people find a way to keep doing business together, and there are abundant opportunities where working together makes so much sense.
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