Microsoft’s $1.5B investment in G42 signals growing US-China rift

As the Gulf region gains strategic importance in the tech war between the U.S. and China, Microsoft is making a big move into one of the Middle East’s oil-rich countries.

On Monday evening, Microsoft announced a $1.5 billion investment in Group 42 Holdings (G42), the Abu Dhabi-based AI company that has become a major force in the United Arab Emirates’ effort to be a global leader in artificial intelligence. The minority stake will give Brad Smith, Microsoft’s vice chair and president, a seat on G42’s board of directors.

The deal signifies more than a commercial collaboration between two AI titans — it serves as evidence of two countries’ strategic positioning amid rising geopolitical tensions.

The funding comes as U.S. politicians’ grow increasingly concerned about G42’s ties with China. In January, the bipartisan House Select Committee on the Chinese Communist Party sent a letter to Commerce Secretary Gina Raimondo, urging the Department of Commerce to investigate G42 for inclusion on the Bureau of Industry and Security’s Entity List, which would bar the Emirati company from accessing sensitive U.S. technologies.

Such a move would put G42 under the same security concerns umbrella as Huawei, which was placed on the Entity List in 2019. Huawei has since been restricted from acquiring critical U.S. technologies, including high-end chips and certain Android services.

Microsoft’s investment this week appears to be an indication of which superpower G42 has aligned itself with.

Delicate dance

Though a long-time economic and military ally of the U.S., the UAE has in recent times diverged from Washington’s foreign policy, and expanded its partnerships with China, a development that worries Washington.

Last year, the UAE’s president, Mohamed bin Zayed Al Nahyan, attended Russia’s flagship economic forum, which was largely shunned by Western countries in protest of the Ukraine war. The UAE has also increased military cooperation with China, and has even planned their first joint air force training last year.

On the business side, the UAE is attracting a wave of Chinese venture capitalists and entrepreneurs who are increasingly excluded from the U.S. market. Managers of Chinese funds have also turned to the UAE and its affluent Middle Eastern neighbors for capital as limited partners in the U.S. retreat from China. Capitalizing on the UAE’s commitment to electrify its economy, China’s electric vehicle manufacturers have been aggressively touting plug-in models in the market. Last year, premium EV maker Nio secured $738.5 million investment from an Abu Dhabi-backed fund.

Given the two countries’ burgeoning economic alliance, it’s no surprise that G42, which is spearheading the UAE’s AI development, has also forged ties with Chinese firms. These commercial relationships, however, have greatly concerned the U.S.

In its letter to Raimondo, the House Select Committee on the CCP noted that G42 maintains relationships with entities like Huawei, the Beijing Genomics Institute (BGI) and Tencent.

The Committee also highlighted the background of G42’s CEO Peng Xiao, who previously held a senior position 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,” the committee wrote.

Given these alleged Chinese ties, the committee is concerned that G42 can be a way for Chinese firms to access U.S. technologies that are otherwise under export controls. The Committee is in particular wary of its “extensive commercial relationships” with U.S. tech companies including Microsoft, Dell, and OpenAI.

Picking sides

Microsoft investment in G42 is an uncommon example of a deal that’s received overt backing from their respective governments. According to the companies’ statement, this “commercial partnership is backed by assurances to the U.S. and UAE governments through a first-of-its-kind binding agreement to apply world-class best practices to ensure the secure, trusted, and responsible development and deployment of AI.”

If the deal goes through, it will designate Microsoft as G42’s official cloud partner. Under the agreement, the Emirati company’s data platform and other key infrastructure will migrate to Microsoft Azure, which will power G42’s product development. G42 already has a partnership with OpenAI that commenced in 2023.

The partnership with Microsoft appears to be part of an ongoing effort at G42 to tone down its Chinese influence. The firm divested its China-related investments, including its shares in TikTok parent ByteDance, this February. Xiao also said late last year that the firm planned to phase out Chinese hardware, saying, “We cannot work with both sides.”

What Microsoft gains in return is extensive access to the region’s market. Its AI business and Azure will get access to a range of industries like financial services, healthcare, energy, government and education. The partnership will also see the pair launching a $1 billion fund “for developers to boost AI skills” in the UAE and the broader region.

As tech companies have learned in the past few years, it has become increasingly difficult to avoid choosing sides between the U.S and China — whether in terms of technology vendors, users or investors. The developments around G42 demonstrate that even a country like the UAE, which has sought to maintain a neutral stance, may ultimately be forced to take a side.

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