Commentary on Political Economy

Thursday 16 May 2019

BYE-BYE HUAWEI! (Ugly Han Chinese Beastly Spies Strangled By Trump!)

This report just out in The New York Times
BEIJING — The Trump administration has filed criminal charges against Huawei for stealing technology. It has all but snuffed out the Chinese tech giant’s sales in the United States, calling the firm an espionage threat. And it has tried to convince other governments to do similarly.
But Washington had not taken a straight shot at Huawei’s ability to do business anywhere in the world until late Wednesday, when the Commerce Department announced restrictions on the company’s access to American technology.
American companies including Qualcomm, Intel and Broadcom sell Huawei microchips and other specialized parts that go into its smartphones and telecom equipment. Google’s Android software powers its phones. Of the $70 billion that Huawei spent on components and other supplies last year, $11 billion went to American companies, a Huawei spokesman, Joe Kelly, said.
If Huawei is cut off from these suppliers, the effect could be catastrophic for the millions of people who use Huawei smartphones — and for the mobile networks, across a wide swath of the planet, that run on Huawei gear.
It would be “the trade equivalent of a nuclear bomb,” said Kevin J. Wolf, a partner at the law firm Akin Gump Strauss Hauer & Feld and a former assistant secretary of commerce under President Barack Obama.
Much remains unclear, however, about the scope and potential impact of the Commerce Department’s move. The department says it is putting Huawei on its “entity list” of firms that need special permission to buy American components and technology. How it decides to grant such permissions, and how broad a range of products the policy covers, will determine how badly Huawei’s business is disrupted.
Given the spiraling tensions between China and the United States on tariffs, the move against Huawei may also be short-lived. Talks to resolve the trade fight have stalled, and both sides are digging in their heels. The pressure is on to find common ground ahead of a potential meeting next month between President Trump and China’s top leader, Xi Jinping, in Japan. Washington’s campaign against Huawei could become a bargaining chip.
“In every other administration, the entity listing was purely a tool of law enforcement and national security,” Mr. Wolf said. “The thing to watch is whether this will become a tool of trade policy and used as leverage in the negotiations.”
In a statement on Thursday, Huawei said the Commerce Department’s move was “in no one’s interest.”
“It will do significant economic harm to the American companies with which Huawei does business,” the company said, and “affect tens of thousands of American jobs.”

China’s Ministry of Foreign Affairs and Ministry of Commerce condemned Washington’s decision in regularly scheduled news briefings on Thursday.
“We urge the United States to stop these wrongful practices and to create favorable conditions for normal cooperation between the two nations’ companies,” said Gao Feng, a spokesman for China’s Commerce Ministry.
[Read more about the executive order on foreign-made equipment.]
Tensions between the Trump administration and Huawei escalated after American officials arranged the arrest of Meng Wanzhou, the company’s chief financial officer and a daughter of its founder, in Canada late last year. The company and Ms. Meng face criminal charges in the United States in connection with alleged theft of industrial secrets and violations of sanctions against Iran. Ms. Meng remains in Canada while officials there decide whether she will be extradited.
Washington’s action this week against Huawei puts the company in the same position that ZTE, a much smaller Chinese rival in telecom equipment, found itself in a few years ago.
The Commerce Department added ZTE to the entity list in 2016 after determining that it had violated United States sanctions by selling American-made goods to Iran. Eventually, the department relented, and ZTE agreed to a hefty fine. But a year later, the Commerce Department said ZTE had failed to comply with the terms of the agreement, and American technology companies were barred outrightfrom selling to the company.
Cut off from American microchips and other parts, ZTE halted production and was near collapse until President Trump intervened and softened the punishment to appease the Chinese leadership.
The episode galvanized China’s government and business community. It revealed the extent to which the country’s growing technological prowess had been built on American know-how, and how important it was for China to innovate on its own if its economy was to thrive.
Huawei also got a stark demonstration of the power Washington wielded over it.
The company has since stockpiled components “for uncertain times,” Guo Ping, a Huawei deputy chairman, told reporters in March. The firm has also worked to build up a geographically diverse network of suppliers, Mr. Guo said.
“Huawei has made sustained and deep investments over the past 30 years, and I believe that has been of great help to Huawei’s global supply,” he said.
In particular, the company has invested for many years in producing its own microchips, a key area in which most Chinese firms are laggards. Sravan Kundojjala, an analyst based in Hyderabad, India, with the technology research firm Strategy Analytics, estimates that three-quarters of the smartphones that Huawei ships today contain chips developed in-house.
Mr. Kundojjala acknowledges that he was skeptical when Huawei’s semiconductor unit, HiSilicon, began building its own high-end smartphone chips.
“Initially, I thought this was not going to work out,” he said. “It’s maybe a pet project. Maybe they just want to play games with their suppliers.”
Instead, HiSilicon has become a formidable asset for Huawei, with chip technology that analysts say rivals that of market leaders such as Qualcomm.
Yet Huawei still depends on American suppliers for enough critical components that an all-out export ban from Washington would create a sizable headache, even if it does not lead to near-ruin as it did for ZTE.
“When you’ve got something as complicated as router or a cellphone, even if there’s one part you’re not able to get, you can’t deliver, because you don’t have that widget to make the cellphone or router function,” Mr. Wolf, the lawyer, said.

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