Strategy and Technology

Wars are often fought to win over strategic resources.

Huawei is the #1 telecom supplier in the world¹, and the #2 smartphone maker² after Samsung. It’s also a major player in next generation 5G network technology. “As of April 2019, Huawei tops the global rankings in nearly every category of 5G development, from its ‘contributions’—a technical term meaning standards proposals—to the number of standards meetings around the world that company representatives attend³“, writes The Wall Street Journal.

On May 15, U.S. President Donald Trump declared a national emergency, signing an executive order that expanded the government’s powers to protect communications networks⁴. Shortly after, the Commerce Department banned U.S. companies and any company using U.S. technology from doing business with Huawei, alleging “that there is reasonable cause to believe that Huawei has been involved in activities contrary to the national security or foreign policy interests of the United States ⁵”.

There has been a “long-held belief from lawmakers and the U.S. intelligence community that Huawei acts on behalf of the Chinese government⁶”. While Huawei says it respects intellectual property rights, “competitors and some of its own former employees allege company goes to great lengths to steal trade secrets⁷”. On January 2019, the “U.S. Department of Justice (DOJ) (…) charged Huawei with bank fraud and stealing trade secrets. In a 13-count indictment DOJ charged Huawei, its chief financial officer, and two affiliated firms with a laundry list of crimes including conspiracy, money laundering, bank and wire fraud, flouting U.S. sanctions on Iran, and obstruction of justice⁸.”

The ban will certainly impact Huawei’s cellphone business, and the damage to their telecom business can be even greater. For example, the World’s leading chip designers and suppliers, Intel, Qualcomm, Broadcom, and ARM among them, have announced that because of the ban they will no longer be able to supply Huawei⁹.

Weapons of War and Perfect Timing

The timing of the ban is perfect, just in the middle of the U.S. trade negotiations with China. According to the Washington Post, “Trump has signaled in the past that these sorts of decisions can be used as bargaining chips in broader negotiations¹⁰”. In fact, some days after the ban, “Trump raised the possibility of easing restrictions on Huawei as part of a broader trade deal with Beijing¹¹“. How can a national security issue be eased on “a broader trade deal”?

The ban on Huawei is not based on technical arguments, nor mentions Huawei’s rampant intellectual property theft. The alleged cause, national security, is very convenient because it prevents China from presenting a formal WTO challenge to the U.S..

It’s worth noting that none of the U.S. major telecom players use Huawei technology, and neither does the U.S. Government. (However, thanks the lower cost of its equipment, Huawei plays an important role for wireless carriers in rural America¹².) Also, Huawei doesn’t sell phones within the U.S..

Some people raise the flag that the U.S. administration is doing “what’s right”, alluding Huawei’s rampant piracy practices and the fact that it works hand in hand with a government that restricts some very basic freedoms. However, the U.S. government doesn’t seem too much concerned when U.S. companies help oppressing regimes with implementation of censorship and information control infrastructure. Consider, for example, the Great Firewall of China¹³, one of the Chinese government’s favorite repression tool, which was build thanks to huge contracts with U.S. companies, using hardware provided by U.S. companies like Cisco¹⁴. A more recent examples is the funding by US Universities and Retirees funds of censorship technology like SenseTime and Megvil.

The Race for 5G Supremacy

The U.S. government has been trying to persuade Europe and other commercial partners to stay away from Huawei for their next generation 5G networks. But 5G networks are extraordinary expensive. China is heavily invested in 5G and Huawei is one of the leading companies in 5G technology in the world¹⁵, with very competitive prices. Nick Read, CEO of Vodafone —the world’s second-largest mobile operator— said that barring Huawei could delay 5G in Europe for at least two years, and structurally disadvantage Europe¹⁶.

EU nations don’t like to be bossed around by foreign governments. On March 11, 2019, the Trump administration told the German government that it would limit intelligence sharing with Berlin if Huawei was allowed to build Germany’s next-generation mobile-internet infrastructure. The same day, Chancellor Angela Merkel announced that Germany would define its own security standards for their new 5G networks, and that they have no plans to stop Huawei from participating if the company complies with the security requirements¹⁷.

Other European countries have followed suit. “If nations as wealthy as Switzerland and Saudi Arabia are picking Huawei (and their bank accounts) in the face of U.S. displeasure, we cannot realistically expect developing countries without such deep pockets to choose differently.¹⁸”

Technological Gaps

While the U.S. is leading when it comes to design and the technology behind electronic components, manufacturing is lead by a companies in Asian countries like Taiwan’s TSMC (the world’s largest semiconductor foundry) and others. U.S. semiconductor companies like Qualcomm, Nvidia, AMD, MediaTek, etc., are “fabless”. That is, they outsource the fabrication of their designs to specialized semiconductor foundries.

Big players like Apple manufacture products like the iPhone in China because it allows them to lower assembly costs significantly. But most of the iPhone technology and parts are not desiged nor produced in China. It’s estimated that China makes only $10 of the cost of an iPhone, and only $2 of the amount are labor costs. Touch screen display, memory chips, microprocessors and other components are manufactured by Japanese, Korean, and U.S. companies, among others¹⁹, and are imported to China for assembly and later exported back as a finished product.

This is one of the reasons why, aside from the huge capital expenditure involved, moving factories to the U.S. for Apple would certainly increase assembly costs and lower Apple’s margins. (Even if the Trump administration has granted companies like Apple exception from import taxes over components.)

China is taking giant steps innovating in fields like AI and genetics. But when it comes to hardware and design of basic components like microprocessors, it continues to depend on the U.S.. The Huawei ban exposes this vulnerability. “China now has no choice but to pursue technological independence, and will burn the cash to achieve it²⁰“. It will take time, but China will certainly take the necessary steps to close this dependency on foreign technology.

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Photo by Thomas Jensen on Unsplash