IBM Shutters Its China R&D Division

It’s another day in the Long March out of China by Western firms.

This time around, it’s IBM’s turn. On Monday, the tech giant announced it would be shutting down its Chinese research and development team, shifting some operations to other international locations and affecting around 1,000 employees in the process. At this point, it would have been more surprising had it stayed. 

Made in China, Stayed in China

It’s not just Big Tech facing a great wall to commerce in China. The world’s 10 largest buyout firms have executed just five deals within the confines of the Middle Kingdom this year, according to a recent Financial Times analysis of Dealogic data. That’s well down from the roughly 30-per-year pace seen through much of the last decade. Geopolitical tensions, regulatory unpredictability, and economic headwinds have turned a “gold rush” into “more like panning for gold with a magnifying glass and tweezers,” Kher Sheng Lee, Asia-Pacific co-head for the Alternative Investment Management Association, told the FT.

Still, the sun may be setting faster for tech firms than any other industry. A Beijing-led campaign to “Delete America” from the tech infrastructure of major economic sectors has crushed revenue streams for American tech firms. Meanwhile, a massive increase in capital expenditures among China-based tech firms has made the transition all the more possible: Baidu, Tencent, and Alibaba have each doubled their capex compared to a year ago, per another recent FT analysis, with a focus on artificial intelligence.

That’s leaving firms like IBM with little room to grow — and, therefore, plenty of reason to leave:

• Last year, IBM reported that its revenue in China had fallen nearly 20%, compared to an overall increase of over 2% in the rest of the world. In 2022, the gap was even bigger, with revenue falling nearly 23% in China compared to a global increase of 5.5%.
• Still, the Asia-Pacific region as a whole contributed nearly 12% of IBM’s $62 billion in revenue last year, and many of the eliminated roles will be redistributed in the region, particularly in India, sources told The Wall Street Journal. When one growth market dies, another takes its place.

IBM had already shuttered a separate China-based R&D division back in 2021. The firm still has around 7,500 employees in the country, according to Chinese corporate records seen by the FT.

Chips on the Table: Of course, American policy has played a significant role in Silicon Valley’s China retreat, with strict export controls on advanced AI chips placing a literal cap on US business. But where there’s a will, there’s a way. According to a WSJ investigation published Monday, Chinese firms have found a workaround to the policies by paying for access to offshore gray market server farms powered by banned Western AI chips. “Delete America,” it seems, has loopholes.