How a Washington crackdown on Huawei could backfire for everyone
Business Management

How a Washington crackdown on Huawei could backfire for everyone

A full-on tech trade war between the United States and China just got another step closer after Washington opened an investigation into whether Huawei broke US sanctions on Iran. The US Department of Justice has already slapped tariffs on $60 billion worth of Chinese steel and aluminium, with China raising tariffs on US goods in response, but punishing Huawei could have more serious repercussions.

Imagine the panic in US tech boardrooms if the world’s number one manufacturer of electronic components decided to ban or restrict exports to America. All bets are off in this new high-stakes geopolitical stand-off. In the longer term, these retaliatory measures could even accelerate China’s metamorphosis into a self-sufficient tech powerhouse.

 

Will Huawei suffer the same fate as ZTE?

The Justice Department investigation into Huawei recalls a similar probe into whether Shenzhen rival ZTE broke US sanctions by exporting devices containing American components to Iran. ZTE was found guilty last year not only of breaking the sanctions, which resulted in an $892 million fine, but of breaking the settlement deal’s terms by failing to punish those involved. The resulting seven-year ban on US firms selling to ZTE will severely hamper its growth efforts because it relies on chips and other components from the likes of Qualcomm and Micron Technology.

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The probe of Huawei, which is said to have been ongoing since early 2017, could result in similar punishment if the firm is found guilty of breaking sanctions. Washington has belatedly realized that China is supplanting the US as the world’s pre-eminent tech superpower, resulting in increasing efforts to corral the number one telecom equipment maker and third-largest smartphone maker in the world. National security concerns have been used to keep Huawei down, first in 2012 when it and ZTE were de facto banned from the US telecoms infrastructure market after a damning congressional report, and more recently when AT&T and Verizon were compelled to drop plans to sell the latest Huawei smartphones, and Best Buy stopped selling its devices.

Like ZTE, Huawei could be severely restricted if it is hit with a US components ban. But Washington would likely be shooting itself in the foot with such a heavy-handed approach.

 

A tech trade war with China looms

First, China and its new leader-for-life Xi Jinping is more than ready and willing to stand up against what it sees as unfair trade practices by the Trump administration. It has already fired back with tariffs on US food imports and will do so again if a proposed additional $100 billion in tariffs from the US goes through. By the same rationale, could China respond to a ban on sales of US components to Huawei by prohibiting the sale of China-made components to US tech firms?

Potentially, believes China-watcher Bill Bishop.

“The US-China technology war may run much hotter than the overall conflict over trade. Xi continues to make clear that China can no longer rely on foreign technology and must go all out to end its reliance on it,” he wrote in his popular Sinocism newsletter. “Technology CEOs the world over with supply chain dependencies in China — so probably all of them — should be increasingly nervous and focused on their firms' efforts to have viable contingency plans for a US-China technology cold war.”

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Beijing-based Forrester principal analyst, Charlie Dai, tells IDG Connect the potential for disruption to US supply chains could be “significant.”

“It’s hard to find effective contingency plans and the only way is to have everyone, especially the US government, to realize the importance of collaboration,” he adds.

“In a world where the global supply chain and value ecosystem have already become critical drivers for the business growth of large countries like US and China, any further action like ZTE’s case will hurt the economic relationship between the US and China, which is the last thing that companies and customers want to see.”

 

China’s march toward self-reliance

US action against Huawei could be the reminder Beijing needs that it must become self-reliant in technology to achieve its “rightful” place as the number one global superpower. This has been a goal of Xi’s for years. In fact, that’s what the controversial Made in China 2025 initiative is all about – reducing reliance on foreign suppliers.

“Heavy dependence on imported core technology is like building our house on top of someone else's walls: No matter how big and how beautiful it is, it won’t remain standing during a storm,” Xi said as far back as 2016. The Chinese government has already set up a fund which aims to raise up to 200 billion yuan ($31.7 billion) to back a range of domestic firms including processor designers and  equipment makers. Although chips are the number one target, China’s efforts to become self-sufficient in tech expand to other spheres. It has long been trying to nurture a home-grown rival to Windows, although efforts so far have not been hugely successful.

It’s not just Chinese firms the US must be wary of, according to James Lewis, SVP at the Center for Strategic and International Studies.

“The seven-year ban on US components will only encourage foreign suppliers to rush into the space vacated by US companies,” he said of the ZTE case. “It will reinforce the Chinese government’s desire to replace US suppliers with Chinese companies. And it will lead others to begin to make things they did not make before, causing permanent harm to the market share of US companies.”

One final word of warning to US tech CEOs: if China is looking to close the gap on technology capabilities, be prepared for a new wave of cyber-espionage attempts focused on stealing IP. Innovation may be the first of Xi’s “five major concepts of development,” but that hasn’t stopped the nation pilfering in epic quantities in the past to gain parity with the West.

 

Can China go it alone?

The modern technology industry is fundamentally reliant on a global network of technology development and manufacturing partnerships. The prospect of China separating itself from that ecosystem seems unlikely on the face of it.

“It’s impossible for most countries, if not all, to be self-sufficient in all tech components,” claims Forrester’s Dai. “One chip relates to many different hardware and software components. It requires continuous investments which are hard to realize in the short-term.”

That may be so, but bet against China at your peril. If any country has the resources, and now the determination to do it, it’s the Middle Kingdom.

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Phil Muncaster

Phil Muncaster has been writing about technology since joining IT Week as a reporter in 2005. After leaving his post as news editor of online site V3 in 2012, Phil spent over two years covering the Asian tech scene from his base in Hong Kong. Now back in London, he always has one eye on what's happening out East.

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