Microsoft’s $150 million check for G42 shows growing divide between U.S. and China

Microsoft is making a major push into one of the region’s richest oil nations as the Gulf region gains strategic importance in the tech war between China and the United States.

Late Monday, Microsoft announced a $1.5 billion strategic investment in Abu Dhabi-based G42, which has emerged as a major force behind the United Arab Emirates’ ambitions to become a global leader in artificial intelligence. The minority stake will give Microsoft Vice Chairman and President Brad Smith a seat on G42’s board of directors.

The deal represents more than just a business collaboration between the two AI giants. This is evidence of both countries’ strategic positioning amid heightened geopolitical tensions.

The release of the funds comes as U.S. politicians are increasingly concerned about the G42’s relationship with China. In January, the bipartisan House Select Committee on Chinese Communist Party sent a letter to Commerce Secretary Gina Raimondo calling for G42 to be placed on the Entity List, which would bar the Emirati company from accessing sensitive U.S. technology.

This move will subject G42 to the same security concerns as Huawei. Huawei was placed on the Entity List in 2019 and has since been restricted from accessing key U.S. technologies, including high-end chips and certain Android services.

Now, Microsoft’s deal is a judgment call on which camp the superpower G42 aligns with.

delicate dance

As the UAE maintains a delicate balance between the United States and China, its artificial intelligence paragon, the G42, inevitably becomes a symbol of the technological competition between the two superpowers. Although a long-standing economic and military ally of the United States, the UAE has deviated from Washington’s foreign policy in recent years and expanded its partnership with China, a development that worries Washington.

Last year, UAE President Mohamed bin Zayed attended Russia’s flagship economic forum, but Western countries have largely shunned the forum amid protests over the war in Ukraine. The UAE has also stepped up military cooperation with China, including planning its first joint air force training last year.

On the business front, the UAE is attracting an increasing number of Chinese venture capitalists and entrepreneurs who have been shut out of the U.S. market. As U.S. limited partners exit China, managing directors of Chinese funds have turned to the United Arab Emirates and its wealthy Middle Eastern neighbors for capital. Chinese electric carmakers have been aggressively promoting plug-in models in the market, building on the UAE’s commitment to electrifying its economy. Last year, high-end electric car maker NIO received a massive investment of $738.5 million from Abu Dhabi-backed funds.

Given the increasingly close economic ties between the two countries, it is not surprising that G42, a typical representative of artificial intelligence in the UAE, has also established ties with Chinese companies. However, what appears to be a business relationship has caused great concern among U.S. politicians.

In a letter to Raimondo, the House Select Committee on China noted that the G42 maintains relationships with companies including Huawei, biotech giant Beijing Genome Institute (BGI) and Tencent.

The committee also highlighted the background of G42 CEO Peng Xiao, who previously held senior positions at a subsidiary of DarkMatter, a company that develops “spyware and surveillance tools that can be used to spy on dissidents, journalists, politicians and U.S. companies.”

Given these alleged China ties, the Committee is concerned that the G42 could serve as a way for Chinese companies to acquire U.S. technology that would otherwise be subject to export controls. G42 and its affiliates maintain “extensive commercial relationships” with companies including Microsoft, Dell and OpenAI.

picking edge

The deal between two private tech giants is an unusual case involving public backing from their respective governments. According to the announcement, this “commercial partnership is supported by assurances from the U.S. and UAE governments through the first-ever binding agreement that will apply world-class best practices to ensure safe, trusted and responsible development and Deploying artificial intelligence.”

If the deal goes through, Microsoft will be designated as G42’s official cloud partner. Under the agreement, the UAE company’s data platform and other key technology infrastructure will be migrated to Microsoft Azure, which will power G42’s artificial intelligence product development. G42 has begun a partnership with OpenAI in 2023.

The partnership with Microsoft appears to be a continuation of G42’s ongoing efforts to reduce its influence in China. The company has pulled out of China-related investments, including in TikTok parent ByteDance. Xiao said late last year that the company planned to phase out Chinese hardware because “we can’t work with both parties.”

What Microsoft gets in return is broad market access in the region, with its AI business and Azure set to be implemented across a range of industries including financial services, healthcare, energy, government and education. Through the partnership, the two parties will also launch a $1 billion fund in the UAE and wider region to “help developers improve their artificial intelligence skills.”

As technology companies have learned over the past few years, it is increasingly difficult to avoid taking sides between the United States and China, whether in terms of technology solutions, markets or capital. Developments at the G42 suggest that even a country like the UAE, which has sought to be a neutral position between two warring countries, will eventually be forced to take sides.