After years of making record profits in China, U.S. big tech companies now appear to be fighting a losing battle in the country. Apple and Tesla’s China sales have precipitously declined as Huawei and several Chinese electric vehicle (EV) manufacturers make increasingly competitive products. Combine this with China’s flagging economy, deteriorating business environment, and mounting concerns about the geopolitical risks of depending on the country, and it’s clear that the business honeymoon in China is ending. These challenges have already led several law firms, banks, and consultancies to downsize or eliminate their operations in China.

Policymakers are also pressuring U.S. companies to de-risk from China. Last year, U.S. National Security Advisor Jake Sullivan urged companies to consider their ties to China and pursue de-risking strategies to defend against potential Chinese abuses. The Biden administration has pushed tighter restrictions on U.S. tech exports to and investments in China. As for Congress, Chairman of the House Select Committee on China Mike Gallagher also called for U.S. companies like Apple to consider “selective economic decoupling.” 

Yet it is unlikely that U.S. tech firms will make a clean break from China anytime soon. In response to both economic and geopolitical challenges, as well as domestic pressure, these companies are simultaneously setting up production facilities in other countries while maintaining, and even selectively expanding, ties to China. In other words, they are hedging against political and economic risks and continuing to capitalize on China’s market, workforce, and manufacturing base. 

Apple, for instance, recently announced new investments in its China-based R&D and manufacturing operations and is reportedly considering partnering with Chinese tech giant Baidu to add AI capabilities to its iPhones. At the same time, the company is now assembling some goods in India and plans to make 25 percent of iPhones there within a few years. 

Tesla is constructing a battery factory next to its EV production facility in Shanghai. But it is also reportedly exploring building multibillion-dollar plants in Mexico, Italy, and India. In a move that sets the stage to roll out its autonomous driving system, Tesla recently announced a partnership with Baidu to use the Chinese company’s mapping and navigation functions. Meanwhile, Microsoft recently announced it would re-launch its lucrative video game business in China.

Despite the myriad business difficulties in China, intensifying geopolitical risks, and reputational risks facing U.S. tech companies at home, China continues to offer several advantages that these firms are loath to give up. 

For example, Apple, Microsoft, Tesla, Amazon, and Google have poured billions into China in foreign direct investment (FDI), and while not all of the companies produce large shares of their hardware in China, they have found that the country’s highly developed road, rail, port, and water and electricity infrastructure has made manufacturing and transporting goods relatively painless. Moreover, China’s large workforce and high volume of skilled engineers have allowed it to become the world’s manufacturing powerhouse. 

These advantages are unlikely to ebb over the short to medium term, and no other country can match them. This is why Apple assembles around 95 percent of its flagship products in China and Tesla produces over half of its EVs there.

Even if these companies wanted to relocate their manufacturing operations, the complexity of their supply chains makes it unclear whether they would succeed. Several U.S. tech companies rely on third-party suppliers to manufacture their products, and they would have to convince the companies that operate those plants to open factories abroad. Apple’s latest supplier list reveals that over 83 percent of its manufacturing partners operate at least one facility in China, a slight increase from the previous year. Moreover, its main production partner, Foxconn, has committed more than $37 billion in FDI to China over the past two decades according to the Financial Times’ fDi Markets database. This is a massive sum that would be difficult to recoup should Foxconn shift its focus elsewhere. Amazon, for its part, depends on over 700 China-based suppliers for its branded products. 

Selectively de-risking linkages to China could help companies be more resilient to the next geopolitical shock. At the same time, preserving ties to China may help stabilize otherwise rocky U.S.-China economic and technology relations. 

In contrast to Apple and Amazon, Tesla runs its own production facilities, the largest of which is its $5 billion Gigafactory in Shanghai. Its dependence on China for manufacturing reduces the chances it would decide to exit the country, at least in the short term.

Other big tech companies that focus primarily on conducting research in China may face another unique de-risking challenge; dismantling their R&D linkages could hobble corporate innovation. Both Amazon and Microsoft conduct AI research in China, and the latter’s Beijing-based center produces over 9 percent of the company’s total AI-related conference papers. Conversations with representatives from other companies reveal that they are reluctant to discontinue research activities in China because doing so would limit their access to the country’s world-class computer scientists and engineers.

Disentangling from China and diversifying to other countries are not as straightforward as they may appear. De-risking strategies require significant investments to navigate third countries’ regulatory environments and to inject FDI, especially in emerging markets that lack sufficient capital to develop their infrastructure, logistics, and human capital to allow U.S. companies to carry out the same quality and quantity of manufacturing and research as they do in China. 

For now, pursuing a strategy of maintaining some ties to China while exploring alternatives may be big tech’s best bet. Selectively de-risking linkages to China could help companies be more resilient to the next geopolitical shock. At the same time, preserving ties to China may help stabilize otherwise rocky U.S.-China economic and technology relations. 

As long as there are no better alternatives for these companies, U.S. policymakers should keep in mind this delicate balance when navigating the relationship between Beijing and big tech.

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