Political leaders have recently taken actions to curb Big Tech through tax reform, anti-competition investigations, and are considering breaking up potential monopolies. These political developments pose commercial challenges and have shook investors. However, investors ought to consider long-term implications. Growing political tensions and an eastward movement of economic power may reinforce and strengthen the dominance of big firms; especially the internet giants.
A Bruising June for Big Tech
On June 3rd the four internet giants, Amazon, Alphabet, Apple, and Facebook, lost $134 Billion in market capitalisation, equating to almost the entire valuation of Netflix, as U.S. antitrust enforcers delineated jurisdiction for potential investigations. In contrast, fines have barely registered with investors. Share prices rebound swiftly and are more affected by weak earnings than penalties. Since November 2010, the fines which Google has paid represent less than a tenth of its $134 billion in profits. On July 13th, Facebook shares rose 1.4% after U.S. regulators fined it a record $5 billion; a fine they had predicted, which is only one-quarter of yearly profits. The unusually large 4.5% drop in the internet giants market value on June 3rd represents the shareholders fear of American authorities potentially forcing a change in their highly successful business models.
The growing power of other big firms is also being scrutinised. On June 11th, several U.S. states sued to block the $26 billion merger between Sprint and T-Mobile. The U.S. Department of Justice is being pressured to modernise antitrust laws, mainly to accommodate the digital industry. Additionally, leading Democratic US Presidential candidates are encouraging voters to “join the fight” to break up big tech companies.
Global efforts to impose a unified tax policy on internet giants also progressed in June. On June 9th, the G20 finance ministers agreed to develop further a tax reform plan signed off by 127 OECD countries. The proposed tax overhaul would limit companies’ ability to move profits from high to low tax jurisdictions. The tax would be applied to companies based on the location of their sales, rather than their offices, employees, and other assets. The low tax jurisdiction remote operating model massively favours the global reach big-tech companies, and this reform is likely to have significant ramifications for the balance sheets of the likes of Facebook.
Geopolitics and Big Tech
Despite this growing political pressure, the broader geopolitical and macroeconomic situation may still reinforce the dominant position of Big-Tech. Growing geopolitical multipolarity is politicising economics around the world, and this is encouraging political leaders to get behind what they see as their commercial champions. This holds even when it means supporting anti-competitive behaviour or unequal business environments. Further, the business trends in increasingly influential Asian economies also favour large firms.
In Europe, geopolitical tensions are corroding free-market beliefs. European political leaders, Merkel and Macron, in particular, are increasingly concerned about the EU’s falling share of global top-100 companies (by market capitalisation). Between 2008 and 2018, the U.S. and China increased their representation, while Europe’s decreased. European political leaders, who are ordinarily pro-market, are increasingly backing cross-border mergers in a variety of sectors; despite these being detrimental to competition. They aim to create “European Champions”, which would be able to take on Chinese and American rivals. Both Merkel and Macron supported the recent attempt to merge Germany’s Siemens and France’s Alstom to create a rail equivalent of Airbus, but this was eventually blocked by Margrethe Vestager, the EU’s Competitions Commissioner.
Trump’s America First approach has politicised economics by attacking foreign governments, both friends and foe, for currency management and trade surpluses. The U.S. has vigorously challenged attempts to ensure U.S. Big Tech paid appropriate tax, most recently attacking UK and French plans. While the Trump administration has changed its position to support recent international tax reform, this has been driven by protecting the U.S tax base after cuts in 2017. The Trump administration’s antagonism to foreign companies, such as Huawei, makes likely retaliation against U.S. companies. Such foreign challenge will undoubtedly engender strong U.S. political support for home-grown companies that have become banners for American identity such as Apple and Facebook among others – and further curb domestic scrutiny of them.
China provides another example of positive political support for its iconic commercial giants. Its government has stridently defended Huawei, particularly against U.S. sanctions. Some Chinese citizens have equally rallied around the company on social media, even calling for a boycott of Apple. China warned the UK of “substantial” repercussions to Chinese inward investment if Huawei was banned from the UK’s 5G network. Importantly, this case illustrates that, if geopolitical tensions become too charged, big iconic firms will be damaged as foreign governments target them. The Chinese government supports its national champions with generous subsidies and the protection of the domestic market from foreign firms. Heavy government economic intervention and large companies represent a growing global economic trend.
As Asian countries become increasingly powerful, their cultural ways of conducting business will progressively shape the global economy. Asian nations have long taken a different approach to business, embodied in China’s economy. Many Asian governments practice mixed capitalism with a significant role for the State in steering economic priorities and supporting large companies. For example, Samsung dominates South Korea’s economy, accounting for an estimated 15% of GDP, while eight conglomerates, called Keiretsu dominates Japan’s economy owning brands such as Sony, Nissan, and Canon. The ‘Asianisation’ of the global economy in future decades is likely to make commercial and political environments more amiable to large firms, particularly Big-Tech.
Big tech and other large firms can potentially face threats and risks when international politics becomes especially charged. However, a medium degree of geopolitical tension and the inclination of the global economy towards more Asian business values could provide them with a supportive environment in the long-term.
