US lists Chinese tech giants over military ties

US lists Chinese tech giants over military ties

The U.S. Department of Defense has added Chinese companies Tencent, a social media and gaming giant, and CATL, the world's largest battery maker, to a list it says are working with the Chinese military.

Consequences of listing for companies

Inclusion on the Pentagon's list does not result in immediate sanctions, but could damage the reputation of affected companies and hinder their business progress, especially if they intend to do business in the United States.

Shares of Tencent, which owns Chinese super app WeChat, fell 6.5% in Hong Kong on Tuesday, while Shenzhen-listed shares of CATL fell more than 3%.

The two companies join dozens of other alleged Chinese military companies on the list that the Defense Department classifies as operating directly or indirectly in the United States, according to a statement notice, which was published Monday in the Federal Register.

Pentagon's strategy for military-civilian fusion

The Pentagon emphasized, that the so-called 1260H list, which is updated annually, represents “an important ongoing initiative” to illuminate and counter China’s “military-civilian fusion” strategy. The goal of this strategy is to develop the most technologically advanced military power in the world by reducing barriers between the country's civilian research and economic sectors and the armed forces.

Reactions of the companies affected

In a statement to CNN, Tencent called its listing a "mistake." A spokesperson said: "We are not a military company or supplier. Unlike sanctions or export controls, this listing has no impact on our business. We will nonetheless work with the Department of Defense to resolve any potential misunderstandings."

CNN also reached out to CATL, which supplies batteries to Tesla and plans to offer its "knowledge" and services for producing lithium-ion batteries to Ford a factory to be offered in Michigan.

Technological race between Washington and Beijing

The technological competition between Washington and Beijing has intensified ahead of the inauguration of US President-elect Donald Trump this month. Last week, Beijing announced it plans to restrict exports of technologies used to extract minerals key to the global electric vehicle (EV) industry.

In December, the outgoing Biden administration imposed new export controls on U.S.-made semiconductors that Washington fears Beijing could use to make the next generation of weapons systems and artificial intelligence (AI).

The US Commerce Department said the aim of the restrictions was to slow China's development of advanced AI tools that can be used in war and weaken the country's domestic semiconductor industry, which is seen as a threat to the national security of the US and its allies.

Integration of the military and private sectors in China

Since taking office in late 2012, China's top leader Xi Jinping has initiated sweeping reforms to transform the Chinese military into a powerful fighting force. A key element of this modernization strategy was to better integrate the country's private sector and the defense industry through the exchange of resources, talent and high technologies.

While efforts to break down barriers between China's military and civilian sectors date back to the 1990s, the strategy of military-civilian fusion was increasingly promoted under Xi and elevated to a national strategy in 2014. This is part of Xi's vision to transform China into an economic, technological and military superpower.

Differences between US military and PLA

The People's Liberation Army (PLA) is fundamentally different from the U.S. military because it represents the armed wing of the Chinese Communist Party (CCP), said Isaac Stone Fish, CEO and founder of Strategy Risks, a China-focused management consultancy.

“Beijing is demanding its companies support the PLA,” he said. “U.S. companies that have important partnerships with large Chinese firms, such as Ford with CATL, must understand that the regulatory, economic and public relations risks of these partnerships will continue to increase.”

Ivan Su, a senior equity analyst at Morningstar, expressed approval that Tencent's business model focused on social media and gaming gives it "a good chance of securing potential exemptions through U.S. courts," similar to what Chinese electronics maker Xiaomi achieved in a separate case in 2021.

Legal hurdles and agreements

In January 2021, the Ministry of Defense added Xiaomi to another list under Section 1237 stood and subjected them to strict restrictions, including one Ban on American investments. Before the ban could take effect, a federal judge granted the Chinese company a temporary stay because Washington had failed to provide "substantial evidence" to support the claim that Xiaomi is owned or controlled by the Chinese military. In May of the same year, the US Department of Defense and Xiaomi reached an agreement to lift the ban.

Reporting by Hassan Tayir, CNN. This story has been updated with additional information.