How Microsoft and the UAE got caught in the crossfire of the U.S.-China tech war

Hi there! I’m Joanna Chiu, the China editor at Rest of World , filling in this week for Russell Brandom.

In my role as China editor, I’m excited to work with colleagues around the world to tell nuanced stories about Chinese people’s experiences with technology — and the migration of Chinese manufacturing and tech companies abroad. Anyone who has lived in China can attest to the unique ability of swathes of the population to quickly adopt new technologies and use platforms in remarkably creative and profitable ways.

Amid the ongoing U.S.-China tech rivalry, high-stakes stories are happening beyond either  country’s borders. I’m particularly interested in how a decoupling of U.S. and Chinese technology partnerships and supply chains would affect private companies and other nations — in unexpected ways.

For example, take Microsoft’s $1.4 billion investment in G42, the leading AI firm of the United Arab Emirates. The deal is important to Microsoft because it involves plans to build a massive geothermal-powered data center in Kenya for high-speed cloud and AI services, among other regional projects. The computing power needed to train AI requires an astonishing amount of natural resources . With space constraints and limited public support for large-scale projects in the U.S, the future of American companies’ AI prowess relies on partners abroad.

But even this deal — between an American company and an Emirati company — is being caught in the crossfire between the U.S. and China.

G42’s CEO, Peng Xiao, is very connected to China’s business community. And American spy agencies have warned U.S. officials that G42’s connections with large Chinese companies like Huawei could make it a conduit for the Chinese government to access sensitive information, according to a recent investigation by The New York Times .

Microsoft couldn’t get support for the deal from the Biden administration until G42 agreed to sever its Chinese business links. But doubts persist among Pentagon officials about G42’s compliance, Bloomberg reported last week, citing unnamed sources familiar with the matter. It could put the deal in jeopardy.

This wouldn’t be the only time the U.S.-China tech war has derailed lucrative deals in other countries. Europe’s most valuable tech company, Dutch chipmaking tool supplier ASML, has seen profits slump amid restrictions on the sale of its lithography equipment to China. I was the first to report that top Canadian universities were severing multimillion-dollar research deals with Huawei. The problem, disgruntled scientists tell me, is that governments haven’t stepped in to make up for the lost funding.

Matthew Pines, a director at cybersecurity firm SentinelOne, says the appeal of setting up American AI hubs in the Middle East is that several countries there have “basically blank cheques with no environmental restrictions or NIMBYism to contend with.”

“But at the end of day, if next-generation AI models are born in the Emirates, the ability for the U.S. to constrain or protect that knowledge from leaking to China is much harder to do than if it took place in Arizona or Illinois,” Pines told me.

That’s the dilemma U.S. officials seem to be tussling over. The end result could determine whether tech giants like Microsoft need to think twice about partnering with any company connected to China. ▰

Joanna Chiu is the China Editor at Rest of World.