Production of laptops and sales of cloud platforms are surging in China, where conditions created by the trade war are providing domestic companies with steady sources of growth.
But as the Chinese companies gained ground at home against the Americans, analysts pointed to a disturbing trend developing at a snail’s-pace: the decoupling of the world’s largest and second-largest economies.
Nowhere is the growth of Chinese business more evident than its domestic market for cloud services, which increased by nearly 60% year-on-year in the second quarter of 2019.
While analysts at CanalysOpens a new window ranked Amazon Web Services third in the Chinese market, its growth failed to keep pace with the two leading domestic players, Tencent Cloud and Baidu Cloud, or even to match the sector’s rise.
Overall, spending by the Chinese start-ups, government agencies and enterprises for cloud computing and storage neared $2.3 billion in the quarter. Microsoft Azure and IBM Cloud, by contrast, both of which trail AWS in the American market, failed to register in the Chinese rankings by the Singapore-based research company.
Global markets saw a 38% rise in the outlay for as-a-service IT infrastructure in the quarter. China accounted for about 9% of the total worldwide. Combined IT infrastructure spending in the United States and Europe fell below 50%, Canalys said.
Impact of a Decoupling Looms
The tit-for-tat tariffs initiated by President Donald Trump have been drawing headlines, but what’s looming in the longer term is the structural impact of a decouplingOpens a new window  of economies.
Wary that the Trump administration wants to undermine China’s economic, military and political powers, its leaders have begun to dissuade and even prevent their companies from dealing with American partners. Meanwhile, US executives doing business in China gloomily foresee a weakening Chinese economy as the trade war persists and are rethinking their supply chains and relocating manufacturing to other countries like Vietnam.
As a result of the slow US draw-down, companies based in third countries are looking to step into the American void left in China’s market of 1.4 billion consumers.
Avoiding the Christmas Rush
Analysts at the International Data CorporationOpens a new window say that Chinese companies are benefitting as American companies rush to beat the imposition of a 10% duty on Chinese electronics set to take effect in December. Around 95 % of all laptops sold in America last year came from China and independent Taiwan.
Taiwanese companiesOpens a new window accounted for more than four-fifths of the nearly 40 million laptops that were produced in the quarter, which the Boston-based company said represented a 12% increase for the year.
Although products from Taiwan are not subject to the tariffs affecting more than $500 billion in goods, the island nation benefits from lower labor costs to assemble products manufactured on the Chinese mainland.
American laptop companies have implored Trump to retreat from the fight with Beijing that’s resulted in billions in lost revenue since it began last year. As a concession, the administration delayed imposition of the latest round of levies that had been set to apply from the start of this month to protect Christmas-season sales and encourage the Chinese to reopen talks.
China’s trade representatives are due in Washington later this month.
Seeking New Supply Lines
While the delay buys US manufacturers time to reconfigure their supply chainsOpens a new window , the prohibitions on doing business with some of China’s largest companies like Huawei aren’t doing much for the Americans’ market share. Companies including Google, Western Digital and AMD have been forced to pause partnershipsOpens a new window with Chinese companies.
Others such as Amazon have watched as Chinese firms fill the gaps. While growth of its cloud business surpassed that of market leader Alibaba Cloud, the 47% rise at AWS paled compared to the near-doubling of revenues at #2 Tencent Cloud and at #4 Baidu Cloud.
Original design manufacturers like Apple, Dell and HP that lead the US laptop market are looking to move about 30%Opens a new window of their production out of China. Microsoft also is seeking new production facilities for its X-Box game consoles.
Coupled with a shortage of silicon for lower-end units that’s resulted from Intel’s production changes to accommodate new chip architectures, the migrations are pushing up prices ahead of the Christmas season. Analysts expect laptops made in China to cost more than last year for like models even before the 10% import tax is applied in mid-December.