Should CDOs Prepare to Decouple Digital?

From the onset, the CDO's job was clear: drive agility, encourage innovation, and maximize efficiencies. The tariff war between China and the U.S. just made this immensely tricky. It puts a backstop on a global formula that companies have used to build global efficiency.

“Neither the U.S. nor the China tech industry wishes to decouple. Given the cost of arbitrage involved in high tech manufacturing, the U.S. and China have become interdependent for manufacturing. Indeed, Western consumers have reaped the benefits too, in terms of lower prices,” said Peter Bullock, partner at law firm King & Wood Mallesons.

Mainly, the tariff wars have laid the interdependent global economy bare. As tit-for-tat responses by both governments continue, CDOs are caught between. Digital transformation is supposed to make their companies agile, competitive, and efficient -- but at what risk and cost?

But Bullock cautioned CDOs against framing the current issues as a manufacturing or supply chain matter. Many U.S. companies are seeking Chinese talent as education “drifts away from STEM studies in the West.” They are also looking to take advantage of the returning Chinese talent from the U.S.

Technology Transfer Vs. Collaboration

One area that is creating ripples for CDOs and the source of contention between China and the U.S. is technology transfer. In particular, forced technology transfer.

Bullock sees the issue of technology transfer already impacting supply chain contracts. “We have already seen legal problems arising from U.S. restrictions. Contracts along tech supply chains are written to ensure strict continuity of supply. If they are disrupted, this can lead to claims.”

Steve Lo, managing partner for Technology, Media & Telecommunications at EY, noted that it is challenging to define technology transfer. "You can call it technology transfer or you can say collaboration. The transfer can happen in multiple ways and directions.”

He also believed that technology transfer is occurring all the time. A lot of solutions already use a variety of components from different countries and solution providers. “In that sense, there may be a portion of technology transferred across countries. There is no single country or company that can do everything by themselves.”

However, going forward Bullock noted that CDOs need to weigh the consequences carefully. It is no longer a legal matter.

Hidden Opportunities

While the tariff wars have unearthed a lot of anxieties, it does offer CDOs some opportunities.

For example, Adrian Lee, senior director analyst, Gartner, highlighted that it may be a good time for CDOs to work with the CEOs to review their current digital business models.

"This will take the shape of examining the four main components - customer, finance, capabilities, and value proposition. Taking into account that their capabilities and value proposition is unlikely to change radically, global companies need to address both the customer and finance components,” said Lee.

He believed that it may be a good time for global companies to leverage ecosystem partnerships or create ones that are adjacent to the current ones. In the same vein, CDOs and CFOs need to study whether the current revenue models are risk worthy.

It also gives CDOs a chance to change how companies drive innovation. "CDOs should consider bringing some functions in house, especially the core functions and technologies," Lo said.

Old Problem With a New Name

Bullock pointed out that decoupling the global infrastructure is not anything new. Such considerations were already de facto when working within China. “Foreign companies have always been wary of simply rolling out their vanilla architecture in China.” 

Even before the tariff war began, companies faced restrictions on specific technologies like using VPN. They also had to meet Chinese requirements for mandated access to the information within the country and work with the "great Chinese firewall" that required Chinese authorities to turn off externally hosted services as needed. The new data localization requirements add another dimension to these challenges.

What has changed is the speed at which new regulations and demands are being asked of CDOs. “Foreign companies will be looking to rehearse ways to pull back from China at short notice. Likewise, in relation to business, it is unlikely that overseas companies will be keen on proceeding with investments in new offerings in China if they believe that tariffs or non-tariff barriers are just around the corner,” Bullock said.

In the long term, EY’s Lo noted that time and cost will play in the CDO's favor. “The real issue is whether we can tolerate this kind of inefficiency in the market and the business world.”

Reaching a New Business Normal

EY’s Lo admitted that the current risks from the trade war would not be going away in the near term.

“It will only increase over time. The CDO should look at how they should take into consideration all the risks. In the past, they may be dealing with a certain risk when it pops up. But going forward, risk should be a core part of their whole function. It is what we call trust-by-design,” he said.

Gartner’s Lee added that this is currently part of the CDO job scope. “Digital business transformation requires continuous calibration and learning. That can't be based solely on the feedback coming from companies' current operational plans. Because there is a complex array of economic, social, and governmental interrelationships, these are all factors largely out of a company’s direct control.”

What is certain is that CDOs need to become savvier in their legal and risk exposures. “They need to work with the chief risk officer and the legal team more closely, so they can continue to focus on creation,” said Lo.