Geopolitical tension with China would hit U.S. critical technology sectors hard, new study shows

Many of the largest tech companies in the United States are so intertwined with China that they likely would not survive a massive geopolitical crisis between the two countries, research from data services company J.H. Whitney shows. 

Such a crisis would also likely bump leading tech-associated companies like Meta (parent company of Facebook) and Tesla off the list of 10 largest companies by market cap. 

Whitney looked across 1,559 public companies with a market capitalization over $5 million dollars, of which, 576 were associated with one or more of 14 different critical technology areas. These include things like biotechnology, quantum science, and artificial intelligence—the same technology areas the Defense Department defines as critical to future U.S. military innovation, according to John O’Connor, the chairman and CEO of J.H. Whitney. O’Connor presented the research at an NDIA emerging technology conference this week.

Were the United States and China to suddenly cut off all trade and other economic relations with one another, because of some geopolitical crisis like conflict in the Pacific, the decoupling would result in a 10% drop in GDP, according to numbers from Rand. 

“That could be quite substantial. So think in terms of something on the order of a great financial crisis,” O’Connor told Defense One. 

Little is known about how such a decoupling would affect specific companies and sectors of the economy, he said, though biological sciences and pharmaceuticals would likely be hit the hardest due to their reliance on materials from China. That’s a big reason his company is using big data and large cloud analytics to understand how different companies are exposed to China. “Our modeling capacity is improving by virtue of all these tools,” he said. 

The Defense Department is not as “entangled” with China as other portions of the government, O’Connor said. The large, traditional defense contracting firms would do well according to Witney’s analysis, because they do not rely on China for parts or for customers—though some had business in non-adversarial countries with average political risk. (All scored a 2 or higher according to a scale that places the highest risk of exposure to China at 1.)

But the Defense Department is looking to decrease its reliance on traditional defense contractors and rely more on so-called dual-use companies—particularly in information technology—that can sell to the military and the public. Many of those companies are involved in China, adding risk to that strategy, said O’Connor. 

“There’s a different profile between Microsoft and Google. Microsoft is more entangled in the PRC than Google is, and Oracle is the least entangled,” he said of three cloud providers to the Defense Department. 

O’Connor says  the government should conduct stress tests on companies to better understand how a U.S. decoupling with China might affect them, tests similar to the ones the government ran on banks following the 2008 economic crash. 

Such tests would provide a clearer picture of which companies would face the biggest challenges if the U.S. and China relationship continues to worsen. But he said that while some companies understand continuing to do business with China presents dangers to their bottom line, other companies are not receptive to that message. More and more, he said, companies are resorting to sneaky but legal tricks to hide their involvement in China by referring to revenues that come from the PRC as simply from “Asia.” It’s the sort of thing that deep analysis can reveal.

Defense One