G42 Made Secret Pact With US to Divest From China Before Microsoft Deal

(Bloomberg) -- Microsoft Corp.’s just-announced partnership with Abu Dhabi’s G42 followed behind-the-scenes negotiations between the US government and the Middle Eastern firm, which agreed to divest from China and pivot to American technology.

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G42, a holding company focused on artificial intelligence, held talks with the US Commerce Department’s Bureau of Industry and Security and came to an understanding last year, according to people familiar with the discussions. Under the arrangement, G42 agreed to pare back its presence in China or face potentially punitive measures from Washington, they said.

The talks were part of a broader effort by the Biden administration to rein in China’s technological prowess and line up support around the world. G42 is backed by Sheikh Tahnoon bin Zayed Al Nahyan, an influential member of Abu Dhabi’s ruling family, and looks to become an AI superpower in the Middle East.

G42 Chief Executive Officer Peng Xiao told Bloomberg News in February that the firm would divest from China, but the details behind that decision weren’t public. According to the people familiar with the talks, US officials — led by BIS, with the blessing of the National Security Council — approached the UAE last summer and told executives they would have to choose between the US or China.

The BIS negotiations involved Xiao, Sheikh Tahnoon, UAE Ambassador Yousef Al Otaiba, and veteran Paul Hastings lawyer Marty Edelman, who serves as G42’s general counsel.

A representative for BIS declined to comment. In a statement, a G42 spokesman said that the divestment decision stemmed from a desire “to partner with the most sophisticated AI technology companies in the world — the ones in the US and, in some cases, Europe.”

“Geopolitical factors affect every international business, including ours,” the spokesman said. The chance to work with Microsoft and its partner OpenAI “were authentic economic and technological transformative opportunities for us. Clearly these opportunities required a movement away from Chinese relationships, equipment and services, and we are in the process of making that transition in a verifiable way.”

In exchange for the Chinese divestment, G42 was assured that it would have continued access to US technology that powers AI applications, one of the people said. That includes chips from Nvidia Corp. But the agreement came at considerable cost to G42, according to one of the people, because it had to remove some Chinese technology from its systems.

The divestment plan also helped lay the groundwork for Microsoft to invest $1.5 billion in G42 — an agreement announced Tuesday. As part of that pact, Microsoft President Brad Smith will join the board of G42, which will use the software maker’s Azure cloud for its AI applications. The agreement, which builds on an existing partnership, was reached after consultation with the UAE and US governments.

G42, the largest AI company in the UAE, came under scrutiny from Congress in recent months, with a key lawmaker calling for sanctions over its ties to blacklisted Chinese businesses Huawei Technologies Co. and Beijing Genomics Institute. The firm “categorically” denied that it had “connections to the Chinese government and their military industrial complex.”

Read More: US Lawmaker Urges Probe of UAE Firm G42’s Ties to China

The deal with the Biden administration followed warnings from the State Department and elsewhere that putting G42 on an export blacklist would be catastrophic for the US-UAE relationship. The firm, which aims to apply AI to everything from medicine to space exploration, is a prized asset of Sheikh Tahnoon. The G42 spokesman said that US officials didn’t threaten sanctions during the talks.

Commerce Secretary Gina Raimondo visited the UAE in March to discuss G42’s progress in shifting away from China, among other topics, according to some of the people.

It’s the latest example of Washington’s increased focus on AI and semiconductor ambitions in the Middle East, where Saudi Arabia and the United Arab Emirates are both vying to become major tech hubs.

The Commerce Department expanded export controls last year on semiconductor technology. It now requires a license for the sale of advanced chips and tools to countries that officials worry China could use as intermediaries to skirt US controls, including several in the Middle East. Wealth funds from that region have also drawn scrutiny from the Committee on Foreign Investment in the United States over their ties to Beijing.

But the region is also a favorite among American companies and executives, including Microsoft and OpenAI’s Sam Altman, which are bolstering their Middle Eastern presence as sovereign wealth funds pour billions into cutting-edge technology.

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