Abu Dhabi AI firm G24 was pressured into divesting its China investments to further its relationship with the U.S. As the Sino-U.S. tech war deepens, more tech firms may have to follow suit and choose a side.
A major Middle Eastern technology group was recently forced by U.S. officials to offload its investments in Chinese companies, sending a strong signal that other firms may soon find themselves dragged into the geopolitical rivalry between the U.S. and China.
Abu Dhabi’s G42, chaired by Sheikh Tahnoon bin Zayed al-Nahyan, the UAE’s national security adviser and brother to the country’s president, had disclosed last month that it had opted to turn away from China and align itself with the U.S., owing to fears of an impending regulatory clampdown by Washington. U.S. officials had expressed concerns that G42 was in a position to acquire advanced American technology that could be transferred to Chinese companies or the government. Afterward, Congressman Mike Gallagher indicated that G42’s divestments had not resolved the matter.
“This announcement is a welcome first step to reduce exposure to the CCP [Chinese Communist Party] and I encourage other companies to do the same,” said Gallagher, who serves as the Republican chairman of the House Select Committee on the Chinese Communist Party. Gallagher had been a pivotal force that led to G42’s China divestment.
G42’s predicament serves as a cautionary tale for other companies in the Middle East which had forged close ties with China, while hoping to maintain relationships with U.S. tech firms. Business leaders in places like Dubai and Riyadh are now confronted with the realization that it’s not a matter of if, but when they will need to pick a side. And their decisions will help to shape the future trajectory of the geopolitical and technological rivalry between the world’s two most powerful economies.
Closer Ties Between China and the Middle East
During the past few years, Chinese companies have increasingly sought investments and market expansion in the Middle East, particularly as access to American capital and markets has dried up.
China and the Middle East already have deep economic ties, with Beijing tapping the region for its energy needs and actively participating in the development of infrastructure projects there.
Bilateral trade between China and the Arab states surged to $431 billion in 2022, nearly doubling from a decade ago, according to Xinhua. The Middle East constitutes a crucial component of Chinese President Xi Jinping’s Belt and Road Initiative. Last year, China's media sector launched an extensive publicity campaign to highlight Middle Eastern investments into China in the hopes of stimulating even more activity.
In the eyes of Chinese tech companies and venture investors, the Middle East represents an attractive partner. The region boasts some of the world's largest sovereign wealth funds, managing a combined $3.7 trillion, representing 36% of global assets.
Moreover, the 60 million strong high-income population in the gulf countries including Saudi Arabia, the UAE, Qatar, Kuwait, Oman, and Bahrain serves as an attractive launchpad for Chinese companies looking to expand globally.
Conversely, Middle Eastern countries are keen to transition from oil-dependent economies to innovation-driven ones. China, with a greater willingness to share its technology with its Arab counterparts, offers something the region finds difficult to obtain from the U.S. and other advanced economies.
Moreover, compared to Western nations that frequently raise human rights and surveillance issues, China’s non-interference policy and no-questions-asked approach is welcomed by many Arab capitals.
Sheikh Tahnoon bin Zayed Al Nahyan, left, shakes hands with the Secretary of Iran's Supreme National ... [+]
While comprehensive data on investment flows between the Middle East and China remains elusive, ample data is available to illustrate the deepening relationship.
For instance, Prosperity7 Ventures, a $1 billion growth-stage fund of Saudi Arabian oil company Aramco, has allocated approximately half of its investments to China. It has backed around 20 Chinese startups, including biotech firm Cispoly, autonomous driving startup Hongjing Drive, AI computing power solutions provider Virtaitech, and Brain-Machine Interface (BMI) technology firm NeuraMatrix.
Other high-profile deals inked in 2023 alone include $300 million of financing in China’s JD Industrials and another $300 million investment in Chinese pharmaceutical company Hasten Biopharma, both co-led by Abu Dhabi’s sovereign investment arm Mubadala Investment Co. Additionally, Mubadala also co-led a $2 billion round in Chinese fast fashion giant Shein, while a firm backed by the Abu Dhabi government is investing around $738.5 million in Chinese electric vehicle maker Nio Inc.
Another data point often highlighted by Chinese media is the rising investments from Arab investors in China’s publicly listed stocks. The percentage of Chinese stocks in Middle Eastern investor portfolios increased from 4.5% in 2019 to 23% in the first quarter of 2023. The Abu Dhabi Investment Authority and the Kuwait Investment Authority appeared in the top ten shareholders of dozens of A-share listed companies.
A Rush to Embed Chinese Tech in the Middle East
As capital flows from the Middle East to China, Chinese tech is spreading in the Gulf nations. Chinese logos are ubiquitous in the Arabian desert, appearing everywhere from check-in robots at airports to smart city and AI projects. Some business executives describe it as an "explosion" of Chinese tech in the region.
This is the result of China's push to broaden and deepen its technological integration with the Middle East. Besides economic prospects, strategic leverage is perhaps even more critical. As Chinese technology becomes embedded in Middle Eastern markets, the potential costs of breaking ties with China ramps up. This conundrum could thwart U.S. attempts to curtail Chinese ambitions in the Middle East and complicate the region’s power dynamics.
The rush to embed Chinese tech in the Middle East has accelerated in the past couple of years as the U.S. been tightening sanctions. Last summer, chip giant Nvidia said it would require a license to sell its advanced AI chips to certain Middle Eastern countries. AMD is reportedly implementing similar restrictions in the Gulf, as U.S. officials express concerns that closer ties between Chinese and Arab firms could compromise its standing in the region and the effectiveness of U.S. sanctions.
But years of cultivation has already led to a boom of Chinese tech in the Middle East. To start, Huawei has helped 14 telecom operators in the Middle East deploy 5G networks since 2018. TikTok usage is ubiquitous in many Arab nations with penetration said to be at more than 100% in Saudi Arabia (The high figure was partly attributed to duplicate and fake accounts, user age misstatements and data collection issues).
Chinese mobile games account for more than 40% of the market in countries like the UAE, Qatar, and Kuwait. Chinese e-commerce giants like Shein, Alibaba, TikTok and Temu also have significant operations across the region. Saudi Arabia’s futuristic mega-project Neom is filled with Chinese construction contractors to wind turbine producers and solar farm operators.
Huawei signs a memorandum of understanding with a Saudi company, as part of its efforts to expand ... [+]
But it’s advanced technology such as artificial intelligence, robots, and smart cities that are more likely to attract scrutiny in Washington. Chinese companies are particularly active in these areas as well.
SenseTime Group formed a joint venture with a Saudi firm in 2022 to provide AI solutions and build a high-end AI lab. Specifically, SenseTime provides smart city, smart commerce, and smart healthcare services. All of these services rely on SenseTime’s advanced facial and image recognition technologies to better manage communities and buildings, such as face-scan building entrance systems, license plate recognition systems in parking garages, and visitor tracking in retail stores.
Other areas of close collaboration between Chinese and Middle Eastern companies include large-scale AI models, robots, and autonomous driving.
Huawei Cloud is joining hands with Saudi firms to conduct pre-trained large-scale AI models in Arabic. King Abdullah University of Science and Technology (KAUST) collaborated with the Chinese University of Hong Kong, Shenzhen and the Shenzhen Big Data Research Institute to launch AceGPT, a large language model focusing on Arabic.
Chinese AI company Terminus, after supplying 152 service robots to the Dubai Expo in 2020, is deepening its integration in the Gulf. It has partnered with a unit of Abu Dhabi’s sovereign wealth fund Mubadala to work on data centers and AIoT (Artificial Intelligence of Things) platforms. One project is to upgrade the Sharjah Library in the United Arab Emirates with the company’s query and guide robots.
Chinese autonomous driving company Pony.ai, after receiving a $100 million investment from Saudi Arabia’s Neom project and its investment fund, plans to establish a joint venture firm to focus on autonomous driving research and development in the Arab country. Another Chinese driverless car firm WeRide obtained an autonomous driving road test license from the UAE and is conducting self-driving technology locally.
“No Interference” in Tech Transfers From China to the Middle East
Chinese companies and Beijing have no problem transferring technology to local Arab partners. This is perhaps because of fierce competition among Chinese firms: withholding technology risks losing out to competitors willing to share them. Beijing also supports deeper technological integration, viewing it as beneficial.
For the Gulf nations, this is a welcome development. The region's technological infrastructure, from technical talent to localized tech ecosystems, is still in its nascent stages. They require partners like China, willing to share technological expertise in exchange for capital and market opportunities.
For instance, as part of its joint venture deal, SenseTime also agreed to help educate local talent in computer vision and deep learning. The Chinese AI company is partnering with Saudi Data & Artificial Intelligence Authority to provide AI courses that are expected to train over 2,000 teachers and over 30,000 students.
Similarly, Pony.ai agreed to establish a regional research and development headquarters in Saudi Arabia as part of an investment from a fund associated with Noem. Terminus agreed to train local tech talent and fully provide its smart hardware solutions in the Middle East. Huawei has pledged to deepen cooperation in tech research between itself and the Saudi Telecom Group along with its 5G partnership.
Ironically, what Chinese tech companies encountered in the Middle East is reminiscent of China's own strategy at the beginning of the country's technological advancements decades ago, except that China now finds itself on the other side of the table.
Another notable difference is that the Middle East, with its deep pockets, tends to adopt more aggressive deal terms. A case in point is SenseTime being obligated to repurchase Saudi stakes if the joint venture between SenseTime and a unit under Saudi's sovereign wealth fund hasn't been sold or listed on a public bourse.
Uncertain Future in the Middle East
The ongoing tech rivalry between the U.S. and China is likely to continue for the decades to come, and how this plays out in the Middle East will form a pivotal battleground.
The Middle East is likely inclined to maintain relationships with both the U.S. and China, as each partner offers complimentary technological advantages. The U.S. will need to be cautious with its long-arm regulatory actions in the Gulf, avoiding excessive pressure that might drive Arab nations closer to China.
Meanwhile, China has to be concerned for the economic outcomes of many of its deals in the Middle East. As those flashy and overly ambitious projects in the Arab desert face tightened funding channels, their long-term viability could come into question.
But we don’t have to wait long to hear more similar stories to G42. With U.S. restrictions on chip sales in the Middle East taking effect this year, further regulatory actions from Washington are likely.
