Recent challenges in the U.S.-China economic relationship have been well-documented in the United States and debated from every point of view. But how is the trade war viewed by the U.S. business community in China? As an American working in Beijing, Ben Harburg, managing partner of MSA Capital, gives his interpretation of the short- and long-term effects of this tension in the relationship.
Benjamin D. Harburg is a managing partner of MSA Capital, a venture capital firm which has invested $1b over the last 4 years into Chinese technology companies. In 2018, the firm had one of the most successful years of any VC fund globally, with four IPOs and one major sale. MSA’s most recent venture fund already boasts 10 companies individually valued at over $1b. Prior to MSA, he worked for The Boston Consulting Group and founded several companies. He was a Fulbright Scholar at Freie University Berlin and Neubauer Scholar at Tufts University, where he also sits on the Board of Advisors of the School of Arts and Sciences. Mr. Harburg is a member of the Board of Advisors of the Carnegie Endowment’s Tsinghua Center.
Stephen A. Orlins: This is Steve Orlins, president of the National Committee on U.S.-China Relations and I’m today joined by an American who lives in Beijing, Ben Harburg, who is one of the managing partners of MSA Capital, which is a venture capital firm headquartered in China focusing on investing in AI, genomics, mobility, consumer internet, and SAAS. Notable portfolio companies include some of the best known companies in all of China, Uber – well, that’s a U.S. company – Mobike and BGI, Beijing Genome Institute. Tell us, has your business been affected kind of by the downturn in U.S.-China relations?
Ben Harburg: We certainly have had an impact. I wouldn’t say it’s all negative, though. And I’m kind of sitting in a weird position as an American investing in China with American capital but into Chinese technology companies. So the view on our side of the pond is that this has actually been somewhat beneficial to spurring growth in core technology sectors in China, so AI chips, quantum computing, a lot of places that we were already looking for transactions are companies that are now seeing a lot more investment both by the private sector, venture capital firms as well as government as well as we’ve seen now is kind of more humble entrepreneurs and lower valuations as a result of the overall kind of macro negativity.
Orlins: So you’re saying that the pricing has decreased in China in the private market, so it’s a better time to invest.
Harburg: As an investor, yes.
Orlins: Yes. What’s your perspective, sitting in Beijing, on kind of U.S.-China relations and what’s going on in the economic sphere?
Harburg: Yeah. The word that I’ve heard resonating a lot through this administration on the U.S. side is decoupling. And in China we view decoupling as disrupting the supply chains that once linked the United States with China, so relying less on Chinese manufacturing core inputs for American technologies, auto parts, whatever it is that we’re importing from China. And likewise, that’s cutting off the link of materials flowing from the U.S. to China. So chips, other key components of mobile phones and a lot of the technology that we’re investing in every day, the IoT devices that we use every day. And so I think the view from China is a little bit of surprise because there was a view that the relationship was working fundamentally very well and there was great benefits being provided to American investors, American corporations and, by default, American people. And so I think that there’s a lot of frustration and uncertainty on the Chinese side, a feeling that perhaps the midterm elections would have solved something which of course they didn’t. And now just a constant watch on the kind of touch points between Xi Jinping and President Trump, what kind of dialogue is coming out of those interactions and where positive spots might emerge.
Orlins: And where did the Chinese see the problem arising from?
Harburg: Well, I think that’s a key issue that the Chinese are certainly pointing their fingers this way. There’s not a lot of self-reflection today regarding things like IP theft, forced technology transfer, a lot of the kind of points that the administration certainly has picked on as motivators for this current trade action. And so I think the Chinese view this more as an American attempt to kind of curb the rise of China. They’ve seen China develop into a global leading economy in just a very short period of time, Chinese technology companies racing up the Fortune 100 list. And I think there’s an overall view from the Chinese side that this is an attempt to slow that rise. So if chips aren’t provided to Chinese cell manufacturing companies, then they can’t expand their presence as greatly or if they’re not able to import certain key components, again, the technology and development locally will slow.
Orlins: Talk about the effect on academia and the universities in the United States.
Harburg: Yeah. I mean, certainly, since coming to power, it’s been no secret that this administration wants to curb the numbers of foreign students or seem to be wanting to curb the number of foreign students and workers coming into the United States. The knock-on effects have been powerful. So 2017 was the first year when foreign student applications to the United States declined. Those students are now going elsewhere to Canada, the U.K., Australia. And the majority of those foreign students, of course, are Chinese. It’s somewhere around 350,000 Chinese students coming to the U.S. every year. Statistics say that about 90% of them are paying full freight, meaning that when they come to schools that are near kind of break-even, of which most academic institutions in America are today, including some of the very elite schools, that they are very much helping keep those schools in the black or near black, and in many instances they’re paying double the tuition of local students if it were like say at a state school.
And so as those foreign students numbers decline led by the Chinese – and certainly this was exacerbated recently by threats that perhaps all Chinese students would be banned from coming to United States – there is an active movement now away from the U.S. and this is really dangerous in my view for a couple of key reasons. One, foreign students make up about 70% of graduate departments particularly in the STEM areas, particularly engineer and computer science. Those graduate departments then build businesses whose technology is licensed and help support those universities at a kind of a macro-financial level. Further, those graduate departments spin out companies. The statistics are clear. Almost half the unicorns that have been built in the technology space in America over the last few years came from foreign-born individuals living in America operating largely through U.S. universities. And so these universities really have formed the next generation of Ellis Island as a funnel for foreign talent to come into the United States, find a network, plug into academic research, and then build a business around that. So we risk hurting those universities through that STEM component, through the hurting the building of those businesses which ultimately will employ millions of Americans and drive our economy forward.
And then most worrisome for me is that many of the universities that are being hardest hit by this falling international students are those in the middle of America. These are the types of schools which, again, are very much dependent on those foreign students and I’ve read multiple reports that as those students have declined just in the last couple of years, budgets are being slashed. I view those state universities, particularly those non-flagship, as kind of the key onboarding mechanism for the American dream. My family came through Eastern New Mexico University in Portales, and then ultimately, subsequent generations of my family were able to attend the Ivy League. So I view the chance that those universities are damaged by this action really as in the long-term harming our ability to realize the American dream.
Orlins: Talk a little about the investment restrictions that are starting to proliferate. I remember way back when in 2005 when CNOOC wanted to buy Unical and there were objections for national security grounds and ultimately Unical was sold to Chevron at a lower price and I argued that I thought the national security arguments were actually not very compelling and that the biggest shareholder of Unical was Calbers. So we punished retired teachers in California for a decision which was supposedly based on national security. So they got less money in their pension funds and have a lower retirement payment. But talk about what the implications today are of especially the restrictions on some of the Chinese unicorns, the big technology companies and who owns them.
Harburg: If you examine the cap tables, both of the existing kind of what are now blue chip companies like Tencent, Alibaba as well as these new entrants to the market, what you’ll soon very quickly realize is the older blue chip names like a Tencent, their cap tables and largest shareholders are populated by largely U.S. asset managers, the people that are maintaining the pension plans for millions and millions of Americans of all walks of life and all income levels. And likewise, if you look at the cap tables of the largest Chinese technology unicorns, those like Meituan, Pinduoduo in recent years, again, you’ll see a lot of venture capital firms who have raised U.S. dollars largely from U.S. endowments, foundations and pension plans, again, state pension plans across the United States, pension plans for public employees, firefighters, police, etc. all on the cap tables. They’re usually in the top two or three largest positions. And so, again, to kind of dance on the grave…and I’ve seen clips from this administration where they talked about the Chinese market being down substantially this year and that being a kind of big win for us and improving the impact of these trade tariffs. I would take a second to look at that because in many instances you’re probably damaging those endowments and pension plans substantially.
Orlins: You’re part of the next generation and you’re part of the next generation that has a pretty deep understanding of China and U.S.-China relations. What should your generation do about this downtrend?
Harburg: Very few people have taken the time to get on a plane and come to China, even fewer have obviously taken time to learn Mandarin. We have 8,000 students a year going from the U.S. to China, 350,000 going back this way. I’ve seen statistics close to 100,000 people across all ages and from elementary school to university in the United States studying Mandarin. In China, there’s arguably up to 300, 400 million people right now studying English. So I’m deeply concerned about our lack of knowledge about China. The common refrain is that you fear what you don’t know. And so I’d encourage people to get on a plane, come to Beijing, come to Shanghai, and view the rapid technological evolution that’s going on. Come see how in McDonald’s in China you can only pay with your mobile phone or your face because of biometric payment. Take a taxi where you can only pay with mobile payments. Come watch, as you saw today, AI-enabled newsreaders and things like that. I think people will be shocked by how far advanced China is in many ways compared to the U.S. and I think it would not only spur people to develop things more quickly around here, but also understand that largely the rise of China has benefited our technology companies, our universities and our average citizens.
Orlins: I think that is a perfect note to close on. Thank you so much for joining us from Beijing today.
Harburg: That’s right.
Orlins: We appreciate it.