Bad call

Huawei is the world’s biggest supplier of telecommunications equipment, particularly of the next-generation wireless networking service known as 5G. It also recently overtook Apple to become the world’s second-largest mobile phone maker by units sold, behind Samsung Electronics Co. Its handsets are sleek, armed with a powerful camera and run on the Android operating system. The Android OS and Apple’s iOS command virtually 100% of global market share. About 60% of Huawei’s devices are sold outside of China.

But, on May 16, it was announced that the Chinese company, along with its 68 global affiliates, was now on the US’ Entity List, essentially a blacklist published by the US Department of Commerce that lists foreign businesses, individuals and institutions that are subject to licence requirements for exports, effectively barring them from doing business with US companies. On the list are people and companies from countries such as Russia and Iran, and it represents what the US government sees as threats to its national security.

Soon after the announcement of Huawei’s inclusion on the list, Google, responsible for the Android OS on which more than half of the world’s phones run, said it would no longer supply Huawei with the software and updates to the system. This affects all of Huawei’s new devices, particularly the millions it is aiming to sell outside of China.

And it is not just Google. Huawei’s devices use chips from Intel and Broadcom and glass from Corning. Other US suppliers such as Qualcomm and Texas Instruments, as well as software firms such as Oracle and Microsoft have suspended shipments to Huawei while they await guidance from the US Commerce Department’s Bureau of Industry and Security (BIS). Companies in countries that are allies of the US are also considering how to respond. On May 22, British and Japanese telcos dropped Huawei devices from their 5G network launches. ARM Holdings, a leading UK chip designer for mobile handsets, has also suspended ties with Huawei.

Yet, as officials in the US have quietly admitted, there is not quite an alternative to Huawei. It leads the global market for mobile networking equipment — Scandinavian rivals Ericsson and Nokia are much further behind in terms of market share. There is no significant US mobile networking equipment maker to speak of.

Indeed, Tim Cook, CEO of Apple, explained in 2017 that the company chose to make its high-tech products in China because of the availability of a wide range and depth of skills there. Contrary to perception, China was no longer a low-cost manufacturing centre. “The products we do require really advanced tooling, and the precision that you have to have, the tooling and working with the materials that we do are state-of-the art. And the tooling skill is very deep here,” Cook told attendees at Fortune Global forum in Guangzhou. “In the US, you could have a meeting of tooling engineers and I’m not sure we could fill the room. In China, you could fill multiple football fields.”

Déjà vu

The US Department of Commerce has given Huawei a 90-day grace period to ease the blow on US smartphone owners and smaller US telecom players that have to remove and replace Huawei-made infrastructure equipment.

In any case, the move is reminiscent of the US ban on ZTE Corp in 2018, when the telecommunications equipment company was also placed on the Entity List. There are differences, though. For one, Huawei is a significantly larger company than ZTE. And, its executives say it is not all that dependent on US technology and would be able to manage with its stockpile of components.

“The initial ZTE announcement was a kill shot. This is a body blow, but definitely not a mortal one,” says William Carter, deputy director and fellow, Technology Policy Program, Center for Strategic and International Studies (CSIS) in Washington, DC. “[Huawei] has been expecting this move for a long time. They have a stockpile of key components they currently get from US suppliers to see them through any temporary disruption, and they are already on an outreach blitz to Japanese, Korean and other global companies to find alternative sources.

“Huawei already has a Google-free OS and app ecosystem that they use within the domestic Chinese market, and they have been working on a proprietary global OS for a while. Android also has an open-source version that they can leverage without direct support from Google, and Android phones are open to third-party apps.”

On its part, Huawei has highlighted its role in the development of the Android OS. “As one of Android’s key global partners, we have worked closely with their open-source platform to develop an ecosystem that has benefited both users and the industry,” the company says in a statement. “We will continue to build a safe and sustainable software ecosystem in order to provide the best experience for all users globally.”

Meanwhile, Huawei remains a privately held company, which means that unlike ZTE, it is not under pressure from investors for a resolution. ZTE’s lenders had also pulled their credit facilities at the time of the US ban.

But some observers remain doubtful about Huawei’s prospects. “The firm cannot stockpile software, and there is no conceivable way the firm could survive for an extended period, let alone push the development of 5G networks in China, without access to global supply chains for key components and software. In addition, its chip design arm HiSilicon is also on the Entity List, meaning it will be cut off from critical electronic design automation tools that are only available from US firms,” says political risk advisory firm Eurasia Group.

National interests

Indeed, the broader issue at play is the US’ accusation that Huawei is involved in corporate espionage and theft of intellectual property (IP), as well as concerns that Huawei-built network infrastructure is susceptible to Chinese interception. Earlier this year, the Federal Bureau of Investigation reportedly carried out a sting operation on Huawei at the Consumer Electronics Show in Las Vegas to catch the manufacturer violating US regulations around controlled materials. Even before that, in separate cases, in Brooklyn and Seattle, prosecutors slapped multiple charges on Huawei, including fraud, conspiracy and theft of trade secrets.

“[Putting Huawei on the Entity List] is also a long-overdue response to its abusive and illegal business practices that are an issue regardless of what happens with trade,” says CSIS’ Carter. “Huawei engages in predatory pricing and financing and flagrantly steals IP, they facilitate Chinese espionage and coercion, and they violate international sanctions. Their behaviour is criminal, harms US national security and is hollowing out global industries.”

Huawei is not the first company or entity that has been accused by the US of spying or stealing trade secrets. Last month, it was reported that a former engineer who worked for General Electric Co and a Chinese businessman had been charged with economic espionage and conspiring to steal trade secrets from GE to benefit China. In 2018, a former International Business Machines employee was sentenced to five years’ jail for economic espionage, theft and possession and distribution of trade secrets after stealing the source code to IBM software for the Chinese government.

There was also the controversial Bloomberg Businessweek report on server equipment maker Super Micro Computer (Supermicro), whose products were made in China. The report alleged that the Chinese government had added microchips with hardware backdoors to its servers, which were then sold to US government agencies and companies.

According to Carter, the latest sanctions are inextricably linked to the protracted trade dispute between the two sides, even as US administration officials have insisted otherwise. “This is very much a part of the broader trade dispute, and it is no coincidence that the 5G executive order and the BIS decision came out immediately after the trade talks broke down,” says Carter. “The US has been concerned about Huawei’s anticompetitive practices and theft of IP for years, and the only thing that stopped the Trump administration from taking these steps months ago was the hope [of] a favourable trade deal with China.”

But the US’ measures come across as a move to try and contain China economically, by crippling its fast-growing national champion. “Beyond trade wars, the US is clearly keen on preventing China’s emergence as a technology superpower,” says Taimur Baig, chief economist at DBS Group. “If carried through, the ramifications [of the blacklist] would be beyond the financial viability of Huawei; it would cause a sharp deterioration in the relationship between the US and China, severely slow the rolling-out of 5G networks around the world in the coming years and ultimately begin the process of decoupling between the two nations. By decoupling China from US markets and technological know-how, the goal of this approach would be to slow down severely China’s rise.”

Zhang Zhiwei, chief economist and head of equity strategy, China at Deutsche Bank, says: “This is a particular policy targeting a Chinese company.”

China can very well retaliate, with significant impact on business in the US. “China can try to limit US access to Chinese markets more, including investment,” says Chong Ja Ian, associate professor of political science at the National University of Singapore. “There is speculation that [President] Xi Jinping’s visit to rare earth producers in Jiangxi points towards an export ban of rare earth materials to the US.”

But Zhang believes Beijing will continue to exercise restraint. “China decided in the summer not to go after US businesses operating in China and that was a very important decision,” he notes. “A number of international, including US, businesses, have onshore joint ventures with local Chinese companies, so it is not in their interests to escalate tensions. International business investment onshore brings FDI [foreign direct investment], employment and knowledge transfer, which contributes to China’s economy.

“There’s a concern that these are factories in China with Chinese employees, so you hurt both sides. And if China takes that step, it effectively means war as a whole — not just a trade war.”

Additionally, a harsh retaliation may spook companies from other countries that have a significant presence in China, notes Lim Tai Wei, an East Asian specialist at the Singapore University of Social Sciences. “It may make US-Sino relations worse and push it beyond any possibility of trade talks. [Chinese vice-premier and chief trade negotiator] Liu He and team, along with the remaining globalists in the Trump administration, still nurse some hope or possibility of some form of reconciliation in trade,” he adds.

Zhang points out: “If the US moves to punish more Chinese firms as it did Huawei, it does make Chinese retaliation against US firms more likely.”

Ultimately, the trade war is a facet of the broader US-China strategic competition, as trade and economics are intertwined with national security issues.

“Economic power is a key driver of technological leadership and domestic political stability, and in a world in which the risk of nuclear escalation makes it difficult, if not impossible, for major powers to get into traditional military conflicts, economic competition has become a dominant form of global power projection and strategic competition,” says CSIS’ Carter. “There is also an element of national security concerns being leveraged to motivate policymakers to take action on economic and trade issue.”

NUS’ Chong notes: “Even the Cold War was fundamentally a competition between economic and political systems that took on a strong security flavour.”

Alternate reality

Whatever the case, it bears remembering that China has a “Great Firewall” that has allowed alternatives to the Google search engine and Silicon Valley-based social networking platforms to flourish. And, armed with political will and deep pockets, the country has also surged ahead of its Western rivals in the areas of artificial intelligence and ­biotechnology, controversial as the latter is in the case of gene-editing, for instance.

Huawei is said to have developed its own mobile OS, and the loss of the Android platform could very well be what it needs to gain traction. Similarly, should Huawei’s 5G wireless network roll-out be stymied by sanctions by the US and pressure on its allies, rival networking equipment makers could close the gap, or new players emerge.

Rather than fear the dominance of one party over another, it may be that the greatest opportunity from this seemingly escalating tussle is the potential for technological development and expertise to be spread among more than just the dominant one or two players. — With additional reporting by Kok Xinghui

See also:

‘A trade war within a Cold War: What does that mean for the region?’

‘US chipmakers prepare for China trade fight: All will “suffer”’