China trade war continues: US blacklists key Apple supplier

Accused by the Americans of forced-labour abuses against Muslims in western China, O-Film is a key Apple supplier, and one of the latest Chinese firms to be blacklisted.

The US-China trade wars continue to rumble on, with another connection between the two economies disrupted last month and supply chains shaken up once more as Washington blacklisted a key Apple supplier over alleged abuses against China's Uyghur Muslim minority.

O-Film Group, a major producer of smart device cameras, fingerprint readers and touch sensing equipment, was one of 11 Chinese firms added to the US Commerce Department's Entity List on 20 July. The Shenzhen-listed company is a prominent part of some significant consumer electronics and automotive supply chains: O-Film supplies many other American companies apart from Apple, including Microsoft, HP, Dell, General Motors and Amazon. It also has major global firms outside the US on its client list, including Samsung, Huawei, Oppo and Sony.

The US Commerce authorities say that the 11 new firms, including O-Film, have been added to the Entity List because they are "implicated in human rights violations and abuses in the implementation of the People's Republic of China's (PRC) campaign of repression, mass arbitrary detention, forced labor, involuntary collection of biometric data, and genetic analyses targeted at Muslim minority groups from the Xinjiang Uyghur Autonomous Region".

Other Chinese tech companies have previously been blacklisted on related grounds. Several prominent manufacturers of surveillance equipment and technologies designed to exploit surveillance data, including well-known globally active firm Hikvision, were listed late last year. This was presented as an effort to rein in the burgeoning Chinese surveillance panopticon in Xinjiang, where cameras on every street corner can reportedly pick out members of the Uyghur ethnic group and target them for detention and interrogation by security forces. This can easily mean the targeted individual disappearing into an extra-judicial "re-education" facility; or perhaps nowadays, becoming a forced labourer in a tech factory.

Another way to view the listings, of course, is as a US effort to prevent China acquiring its technologies and competing with its industries.

"Beijing actively promotes the reprehensible practice of forced labor and abusive DNA collection and analysis schemes to repress its citizens," commented US Secretary of Commerce Wilbur Ross, announcing the blacklist extension. "This action will ensure that our goods and technologies are not used in the Chinese Communist Party's despicable offensive against defenseless Muslim minority populations."


You can sell, but you can't buy

Addition to the Entity List means that a company faces restrictions on its access to US produced technology and commodities. This can be extremely troublesome for Chinese tech companies: networking giant ZTE almost collapsed in 2018 when supplies of US chips were cut off. Huawei has faced similar issues, as well as further significant problems in smartphone production after its access to the Android operating system was withdrawn.

Companies added to the Entity List must apply for special licences if they wish to access American technologies, and the Commerce Department announcement specifies that availability of such licences in this case will be "limited". Shares of O-Film fell by almost four per cent in Shenzhen following the announcement, against a slowly rising market.

Apart from O-Film, two of the other companies added to the Entity List are also global supply-chain players: Shanghai-based firms Tanyuan Technology and KTK Group. Tanyuan is a producer of heat-dissipating materials for use in consumer electronics, and KTK intends to commence smartphone manufacturing in India as well as producing transportation components. The other firms added to the list are mostly textile companies, some involved in supplying prominent Western fashion brands, and two companies deemed by the US to be involved in genetic analysis used in China's campaign of oppression against Uyghurs and other minorities.

American companies are not legally prohibited from dealings with blacklisted Entity List firms, so long as the business activities do not involve the exporting or reexporting of US technologies. Apple can continue to use O-Film supplies in its own products, but it would need to be very careful about the ultimate sources and underpinnings of any such purchases. Analysts generally take the view that it will be simpler and safer in the long run for US companies to avoid doing business with firms on the Entity List.

O-Film became part of the Apple supply chain in 2017 and its components are used in both iPads and iPhones. On the back of this prestigious business O-Film has since been able to compete against giants of the supply chain world, confronting Sharp and LG Innotek in cameras and Taiwan's TPK in touch sensing components. The company was founded in 2002 and listed on the Shenzhen exchange in 2010, and today its market cap is more than US$7bn. In the latest semi-annual rankings of China's top 500 listed companies by market value from Chinese financial-data house Wind, published in July, O-Film ranked 302.

O-Film has manufacturing sites across China including several in Nanchang, which are understood to be the sites of concern to the US government. It is O-Film's Nanchang subsidiary, in fact, which has been specified on the Entity List. The company also has R&D sites around the world, including two in Japan and one in San Jose, California.


Tim Cook says O-Film workers lead happy lives

Apple CEO Tim Cook visited one of O-Film's factories in 2017 and praised the company's tech expertise and work culture. An O-Film press release described Cook's comments at the time:

"Cook stated that Apple takes quality of products as the most important criteria on selecting suppliers, the company should be the best in a category rather than strive for quantity. Secondly, a company should respect the employees and treat them well. Through the visit, Cook thought OFILM is treating the staff with humanity, employees could develop themselves while working in OFILM and live a happy life."

Apple's most recent supplier list specifies that three O-Film factories supplying Apple are located in Nanchang. However it isn't necessarily the case that the blacklisted Nanchang O-Film subsidiary controls these specific factories: the structure of O-Film is complex and it has more than one entity with involvement in Nanchang.

Since the blacklisting, Apple has informed various media that it closely monitors conditions at O-Film facilities producing Apple supplies, including surprise inspections, and has not discovered any situations of concern.

The Chinese government immediately condemned the US Commerce Department move. In Beijing, a foreign ministry spokesman said the United States was trying to oppress Chinese companies and slander China's policies in Xinjiang under the pretext of protecting human rights.

"We urge the US to correct its mistakes," Wang Wenbin told a news conference on 21 July, adding that China would take all necessary measures to protect its companies' legitimate rights.


This trade war may not be ending for a long time

Like most major Chinese tech companies, O-Film is closely connected with the Chinese state via various mechanisms. Just in its public announcements the company stated in July that it had received 36 million yuan in subsidies from the Shenzhen City Government and in June it announced it will build a research and development centre in Hefei with local government support providing land, infrastructure and funding.

O-Film will face headwinds following its blacklisting, which is sure to disrupt its relationship with primary client Apple, as well as its many other major American partners. The specific effects of this month's extension to the US Entity List remain to be seen, and they may not of themselves be seismic. The blacklisting is probably more significant as yet another indicator of world trends, alongside such other occurrences as the UK's recent belated move to extricate itself from dealings with Huawei.

The free-market globalisation of recent decades would seem to be giving way more and more to initiatives by the West and its allies to disengage from China: and particularly from its powerful state-backed technology industry.