The US-China trade spat may have called a temporary truce but tariffs could soon be back on the agenda. The interwoven nature of cross border supply chains suggests that any escalation of trade barriers between these two countries will affect businesses and investors in other countries and across a range of sectors.
Take the tech sector. Chinese mass production has to a degree caused market saturation. Dethroned as the world’s most valuable company by market competitor Microsoft at the end of last year, even Apple is facing further challenges as 2019 gets underway. The tech giant has entered the new year with news that has disappointed investors, announcing it anticipates revenue of circa $84bn (£67bn) for the three months leading up to 29 December 2018. The disclosure saw shares for the electronic and software supplier drop by 7 per cent, amounting to a 28 per cent slide since November 2018.
So what does this mean for the tech industry?
Well, the West faces saturation. Consumers are of two camps: iOS and android, and there is very little movement between the two. This type of tribalism means that the likes of Apple are dependent on existing customers buying more products and entering new markets, notably those economies that are developing. The current trade war with the US and the slowdown of its economy, means that China is no longer the land of milk and honey for luxury brands. But there is also the argument that an upsurge in home grown brands (Huawei) and the continuing conflict with the US has resulted in a nationalist response by consumers who may be actively turning their backs on the Silicon Valley giant.
The other trade tension between the US and China relates to intellectual property protection. The US administration is likely to force US companies to not only reduce Chinese imports, but also to decrease the level of intellectual property transferred to Chinese manufacturers, probably on the grounds of national security concerns. This could have serious ramifications for the high-technology sector.
Turning to the UK middle market, the picture is a lot more optimistic. There is a very real demand by investors for tech businesses which are uninhibited (for the most part) by geo-political challenges and not limited by borders to ensure the success of their products and services. UK private equity tech deals have risen in the wake of Brexit with much of the activity focussed on the middle market. Only yesterday London was named as the top EU destination for tech funding according to funding database PitchBook.
The nature of the UK tech ecosystem encourages innovation and disruption, creating an environment in which there is a constant new flow of business. The establishment and growth of tech hubs outside of London in so-called Silicon suburbs, is enabling tech companies to spring up across the country. Apple’s discomfort is no cause for concern here in the UK middle market, at least not in the short to medium term.