On Friday, 6th August, President Trump issued two executive orders banning U.S. transactions from WeChat, the Chinese ‘uber’ app owned by Chinese technology giant, Tencent, and TikTok, the viral streaming app owned by Chinese company, ByteDance. My daughters were much more concerned about the ban on TikTok, and I have first-hand evidence, in my own house, of the ironclad grip that TikTok has on the time of hundreds of millions of people all over the world. WeChat has an even more ironclad grip on the everyday lives of hundreds of millions of Chinese.

WeChat is a multi-purpose app used for an enormous range of activities including messaging, posting updates, making calls, buying movie tickets, making restaurant reservations, ecommerce, and, importantly, paying for almost everything. The app has over 1 billion monthly active users and is ubiquitous in China.

President Trump has moved to ban these apps because they “threaten the national security…of the United States.” via their access to troves of data on their users and their potential use to spread misinformation or to censor information and restrict freedom of speech beyond China’s borders. China can hardly complain, having made life very difficult for numerous western companies to operate in China, if allowing them at all. There are broader geopolitical forces at play here with western governments increasingly pushing back on what is seen as China’s exploitation of an unfair playing field, including forced technology transfers and the outright banning of many western companies (including Facebook and Google) from China.

The bans raise eyebrows as it involves the United States, the spiritual home of capitalism and free markets. This is not helped by Trump suggesting that, should a U.S. company buy the U.S. operations of TikTok , they should pay a fee to the U.S. government who made the opportunity possible. That would represent an epic shakedown, the likes of which would make the mafia blush.

The implications of the ban on WeChat are not yet fully known. U.S. companies like Nike, operate digital stores on WeChat. Costco, which recently opened in China, finds new members via the App, as well as using it for payment. 

A range of U.S. companies and organisations, including the National Basketball Association (NBA), Starbucks, McDonalds, Disney, GM, etc, operate in China, many using WeChat as a critical part of their marketing and operational activities. 

Does the executive order mean that they can no longer use WeChat, even for their China operations? Most worrying is Apple which might find itself squarely in the cross hairs. Does Apple have to remove WeChat from its app store in China? Even if it doesn’t under the terms of the executive order, might China retaliate by banning the sale of WeChat on the Apple app store?

This is more than an esoteric question. Apple generates 17% of its global sales from China. And who would win from this face off: iPhone vs WeChat? A survey of 1.2 million people, on the twitter-like Weibo service in China, asked people whether they would keep their iPhone or keep WeChat if forced to make a choice . 95% said that they would choose WeChat, turning their iPhones into “expensive ‘electronic trash’” .

These developments highlight that unpredictable political actions have the potential to materially impact the value of a portfolio, for better or worse, and that this risk is growing. 

The potential impact does not just effect technology companies, cutting across many industries and companies. 

Will industrial companies need to realign supply chains to reduce reliance on increasingly unpredictable, and possibly hostile, political actors? What will this cost, over what time frame and with what long-term product or service cost implications? Will pharmaceutical companies need to find alternative sources of critical API’s and/or see important international markets closed to their products? Will there be a backlash against non-Chinese companies by Chinese consumers, which has already affected companies from Korea, Japan and western companies in the past. Will there be a backlash by western consumers against western companies that are seen to be acquiescing to China or turning a blind eye to potential abuses of human rights, in the quest for the almighty dollar. The NBA recently found itself in a difficult situation balancing the demands of China, which is a massive market for the NBA, against the expectations of its U.S. consumers.

Where there is risk, of course, there can also be opportunity. While some companies see supply chain or end market disruption, other companies may see increased opportunity to be the new safe haven of supply or to enter markets that were previously inaccessible due to entrenched competitors that are now facing political resistance or a politically driven backlash by consumers.

Avenir’s Perspective

Access to international markets, particularly China, has, for many years, been viewed as a road to riches for large international companies. That road may now have some potholes. At Avenir, we incorporate a careful evaluation of the potential risks, and opportunities, that the changing geopolitical environment may entail for companies into our assessment of the attractiveness of potential investment opportunities. Because geopolitical developments are hard to predict, and the consequences hard to determine, doesn’t mean that they should be ignored.

Other ways we seek to shield our investments from geopolitical risks are to invest in companies that operate primarily within a country. For example, in China, we own Wuliangye Yibin and TravelSky, both of which generate almost all their revenue from within China and have strong growth driven, almost entirely, by developments within China. We also look for companies that may benefit from the growing antagonism between the U.S. and China. Infineon, for example, is a German analog semiconductor company that is well placed to benefit from the growth in electric vehicles. Infineon may see a demand boost as China seeks to diversify its supply of critical components away from the U.S. There are fast-growing companies in India that benefit from growth in an extraordinarily young population, as well as tailwinds from western countries seeking to reduce reliance on China for important products such as pharmaceuticals and API’s. Just two weeks ago, India banned 59 Chinese apps, including TikTok and WeChat, opening up opportunities for a range of local Indian companies.

Handicapping political risk/opportunity, and the potential impact on portfolio value, is difficult, but the dynamic, and worsening, geopolitical environment mean that it is no longer optional. 

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Avenir Capital is an Australian based investment manager, specialising in value-oriented global equity investments. Get our latest insights by hitting the follow button below.