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Hong Kong startup ICW eyes supply chain diversification demand amid trade war
For American importers, finding suppliers these days can be challenging not only due to COVID-19 travel restrictions. The U.S. government’s entity list designations, human-rights-related sanctions, among other trade blacklists targeting Chinese firms have also rattled U.S. supply chains.
One young company called International Compliance Workshop, or ICW, is determined to make sourcing easier for companies around the world as it completed a fresh round of funding. The Hong Kong-based startup has just raised $5.75 million as part of its Series A round, boosting its total funding to around $10 million, co-founder and CEO Garry Lam told TechCrunch.
ICW works like a matchmaker for suppliers and buyers, but unlike existing options like Alibaba’s B2B platform or international trade shows, ICW also vets suppliers over compliance, product quality and accreditation. It gathers all that information into its growing database of over 40,000 suppliers — 80% of which are currently in China — and recommends them to customers based on individual needs.
Founded in 2016, ICW’s current client base includes some of the world’s largest retailers, including Ralph Lauren, Prenatal Retail Group, Blokker, Kmart and a major American pharmacy chain that declined to be named.
ICW’s latest funding round was led by Infinity Ventures Partners with participation from Integrated Capital and existing investors MindWorks Capital and the Hong Kong government’s $2 billion Innovation and Technology Venture Fund.
Supply chain shift
In line with the ongoing shift of sourcing outside China, in part due to the U.S.-China trade war and China’s growing labor costs, ICW has seen more customers diversifying their supply chains. But the transition has limitations in the short run.
“It’s still very difficult to find suppliers of certain product categories, for example, Bluetooth devices and power banks, in other countries,” observed Lam. “But for garment and textile, the transition already began to happen a decade ago.”
In Southeast Asia, which has been replacing a great deal of Chinese manufacturing activity, each country has its slight specialization. Whereas Vietnam abounds with wooden furniture suppliers, Thailand is known for plastic goods and Malaysia is a good source for medical supplies, said Lam.
When it comes to trickier compliance burdens, such as human rights sanctions, ICW relies on third-party certification institutes to screen and verify suppliers.
“There is a [type of] qualification standard that verifies whether a supplier has fulfilled its corporate social responsibility … like whether the factory fulfills the labor law, the minimum labor rights or the payroll, everything,” Lam explained.
ICW plans to use the fresh proceeds to further develop its products, including its compliance management system, product testing platform and B2B-sourcing site.
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Huawei’s new OS isn’t an Android replacement… yet
If making an Android alternative was easy, we’d have a lot more of them. Huawei’s HarmonyOS won’t be replacing the mobile operating system for the company anytime soon, and Huawei has made it pretty clear that it would much rather go back to working with Google than go it alone.
Of course, that might not be an option.
The truth is that Huawei and Google were actually getting pretty chummy. They’d worked together plenty, and according to recent rumors, were getting ready to release a smart speaker in a partnership akin to what Google’s been doing with Lenovo in recent years. That was, of course, before Huawei was added to a U.S. “entity list” that ground those plans to a halt.
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A closer look at China’s smartphone market
In February 2013, China surpassed the United States to become the world’s largest smartphone market. More than half a decade on, it still proves an elusive target for international sellers. A glance at reports from the past several quarters reveals the top spots dominated by homegrown names: Huawei, Vivo, Oppo, Xiaomi.
Combined, the big four made up roughly 84% of the nearly 100 million smartphones shipped last quarter, per new numbers from Canalys. Even international giants like Apple and Samsung have trouble cracking double-digit market share. Of the two, Apple has generally done better, with around 6% of the market — around six times Samsung’s share.
But Apple’s struggles have been very visible nonetheless, as the company has invested a good deal of its own future success into the China market. At the beginning of the year, the company took the rare action of lowering its guidance for Q1, citing China as the primary driver.
“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” Tim Cook said in a letter to shareholders at the time. “In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.”
When it came time to report, things were disappointing, as expected. The company’s revenue in the area dropped nearly $5 billion, year over year. On the tail of two rough quarters, things picked up a bit for Apple in the country. This week, Tim Cook noted “great improvement” in Greater China.
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Lessons from the hardware capital of the world
A week is obviously not enough time to truly understand a market as massive and fascinating as China. Hell, it’s not really even enough time to adjust to the 12-hour time difference from New York. That said, each of the three visits I’ve taken to the country in the past two years has yielded some useful insights into my role as hardware editor here at TechCrunch.
Late last week, I got back from an eight-day trip to Shenzhen in the Guangdong Province of South China and nearby Hong Kong. In some respects, the cities are worlds apart, though a newly opened high-speed rail system has reduced the trip to 30 minutes. Customs issues aside, it’s the height of convenience. Though for political and cultural reasons I’ll not get into here, some have bemoaned the access it’s provided.
This particular visit was sort of a scouting trip. In November, TechCrunch will be hosting its first Hardware Battlefield event in a couple of years. Previous events had been held at CES for reasons of easy access to young startups. This time out, however, we’ve opted to go straight to the source.
The birthplace of hardware
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CFIUS Cometh: What this obscure agency does and why it matters to your fund or startup
Evan J. Zimmerman
Contributor
Contributor
Evan J. Zimmerman is an entrepreneur, investor, and writer. He is the Chairman of Jovono and Chairman of the Clinton Health Access Initiative technology council. He is a partner and director in Mighty Mug/Mighty Products, Inc, and chairman of Brush Up Club, an innovative oral health company.
On January 12, 2016, Grindr announced it had sold a 60% controlling stake in the company to Beijing Kunlun Tech, a Chinese gaming firm, valuing the company at $155 million. Champagne bottles were surely popped at the small-ish firm.
Though not at a unicorn-level valuation, the 9-figure exit was still respectable and signaled a bright future for the gay hookup app. Indeed, two years later, Kunlun bought the rest of the firm at more than double the valuation and was planning a public offering for Grindr.
On March 27, 2019, it all fell apart. Kunlun was putting Grindr up for sale instead.
What went wrong? It wasn’t that Grindr’s business ground to a halt. By all accounts, its business seems to actually be growing. The problem was that Kunlun owning Grindr was viewed as a threat to national security. Consequently, CFIUS, or the Committee for Foreign Investment in the United States, stepped in to block the transaction.
So what changed? CFIUS was expanded by FIRRMA, or the Foreign Risk Review Modernization Act, in late 2018, which gave it massive new power and scale. Unlike before, FIRRMA gave CFIUS a technology focus. So now CFIUS isn’t just an American problem—it’s an American tech problem. And in the coming years, it will transform venture capital, Chinese involvement in US tech, and maybe even startups as we know it.
Here’s a closer look at how it all fits together.
What is CFIUS?
Image via Getty Images / Busà Photography
CFIUS is the most important agency you’ve never heard of, and until recently it wasn’t even more than a committee. In essence, CFIUS has the ability to stop foreign entities, called “covered entities,” from acquiring companies when it could adversely affect national security—a “covered transaction.”
Once a filing is made, CFIUS investigates the transaction and both parties, which can take over a month in its first pass. From there, the company and CFIUS enter a negotiation to see if they can resolve any issues.
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Trump’s Huawei ban also causing tech shocks in Europe
The escalating U.S.-China trade war that’s seen Chinese tech giant Huawei slapped on a U.S. trade blacklist is causing ripples of shock across Europe too, as restrictions imposed on U.S. companies hit regional suppliers concerned they could face U.S. restrictions if they don’t ditch Huawei.
Reuters reports shares fell sharply today in three European chipmakers — Infineon Technologies, AMS and STMicroelectronics — after reports suggested some already had, or were about to, halt shipments to Huawei following the executive order barring U.S. firms from trading with the Chinese tech giant.
The interconnectedness of high-tech supply chains coupled with U.S. dominance of the sector and Huawei’s strong regional position as a supplier of cellular, IT and network kit in Europe suddenly makes political risk a fast-accelerating threat for EU technology companies, large and small.
On the small side is French startup Qwant, which competes with Google by offering a pro-privacy search engine. In recent months it has been hoping to leverage a European antitrust decision against Google Android last year to get smartphones to market in Europe that preload its search engine, not Google’s.
Huawei was its intended first major partner for such devices. Though, prior to recent trade war developments, it was already facing difficulties related to price incentives Google included in reworked EU Android licensing terms.
Still, the U.S.-China trade war threatens to throw a far more existential spanner in European Commission efforts to reset the competitive planning field for smartphone services — certainly if Google’s response to Huawei’s blacklisting is to torch its supply of almost all Android-related services, per Reuters.
A key aim of the EU antitrust decision was intended to support the unbundling of popular Google services from Android so that device makers can try selling combinations that aren’t entirely Google-flavored — while still being able to offer enough “Google” to excite consumers (such as preloading the Play Store but with a different search and browser bundle instead of the usual Google + Chrome combo).
Yet if Google intends to limit Huawei’s access to such key services, there’s little chance of that.
(In a statement responding to the Reuters report Google suggested it’s still deciding how to proceed, with a spokesperson writing: “We are complying with the order and reviewing the implications. For users of our services, Google Play and the security protections from Google Play Protect will continue to function on existing Huawei devices.”)
Going on Google’s initial response, Qwant co-founder and CEO Eric Léandri told us he thinks Google has overreacted — even as he dubbed the U.S.-China trade war “world war III — economical war but it’s a world war for sure.”
“I really need to see exactly what President Trump has said about Huawei and how to work with them. Because I think maybe Google has overreacted. Because I haven’t [interpreted it] that way so I’m very surprised,” he told TechCrunch.
“If Huawei can be [blacklisted] what about the others?,” he added. “Because I would say 60% of the cell phone sales in Europe today are coming from China. Huawei or ZTE, OnePlus and the others — they are all under the same kind of risk.
“Even some of our European brands who are very small like Nokia… all of them are made in China, usually with partnership with these big cell phone manufacturers. So that means several things but one thing that I’m sure is we should not rely on one OS. It would be difficult to explain how the Play Store is not as important as the search in Android.”
Léandri also questioned whether Google’s response to the blacklisting will include instructing Huawei not to even use its search engine — a move that could impact its share of the smartphone search market.
“At the end of the day there is just one thing I can say because I’m just a search engine and a European one — I haven’t seen Google asking to not be by default in Huawei as search engine. If they can be in the Huawei by default as a search engine so I presume that everyone else can be there.”
Léandri said Qwant will be watching to see what Huawei’s next steps will be — such as whether it will decide to try offering devices with its own store baked in in Europe.
And indeed how China will react.
“We have to understand the result politically, globally, the European consequences. The European attitude. It’s not only American and China — the rest of the world exists,” he said.
“I have plan b, plan c, plan d, plan f. To be clear we are a startup — so we can have tonnes of plans, The only thing is right now is it’s too enormous.
“I know that they are the two giants in the tech field… but the rest of the world have some words today and let’s see how the European Commission will react, my government will react and some of us will react because it’s not only a small commercial problem right now. It’s a real political power demonstration and it’s global so I will not be more — I am nobody in all this. I do my job and I do my job well and I will use the maximum opportunity that I can find on the market.”
We’ve reached out to the Commission to ask how it intends to respond to escalating risks for European tech firms as Trump’s trade war steps up.
Also today, Reuters reports that the German Economy Minister is examining the impact of U.S. sanctions against Huawei on local companies.
But while a startup like Qwant waits to see what the next few months will bring — and how the landscape of the smartphone market might radically reconfigure in the face of sharply spiking political risk, a different European startup is hoping to catch some uplift: Finland-based Jolla steers development of a made-in-Europe Android alternative, called Sailfish OS.
It’s a very tiny player in a Google-dominated smartphone world. Yet could be positioned to make gains amid U.S. and Chinese tech clashes — which in turn risk making major platform pieces feel a whole lot less stable.
A made-in-Europe non-Google-led OS might gain more ground among risk averse governments and enterprises — as a sensible hedge against Trump-fueled global uncertainty.
“Sailfish OS, as a non-American, open-source based, secure mobile OS platform, is naturally an interesting option for different players — currently the interest is stronger among corporate and governmental customers and partners, as our product offering is clearly focused on this segment,” says Jolla co-founder and CEO Sami Pienimäki .
“Overall, there definitely has been increased interest towards Sailfish OS as a mobile OS platform in different parts of the world, partly triggered by the on-going political activity in many locations. We have also had clearly more discussions with e.g. Chinese device manufacturers, and Jolla has also recently started new corporate and governmental customer projects in Europe.”
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