As Washington Investigates Huawei, is it Time for US Tech CEOs to Get Nervous?

Here’s a version of a piece I wrote for IDG Connect recently about the escalating tech trade war between the US and China. While Trump is blowing hot and cold on what to do with ZTE, an even  bigger potential problem is looming.

A full-on 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 Department of Justice (DoJ) has already slapped tariffs on $60bn worth of Chinese steel and aluminium, but this turn of events could have arguably more serious repercussions.

On the one hand it could cause panic in US tech boardrooms if China ends up banning sales of electronics components made in the Middle Kingdom. But in the longer term, this could accelerate China’s push towards self-sufficiency, locking out US firms like Qualcomm for good.

A seven-year ban?

The Justice Department investigation is said to have stemmed from a similar probe into whether Shenzhen rival ZTE broke US sanctions by exporting kit with American components in it to Iran. It was found guilty not only of breaking the sanctions, which resulted in an $892m fine, but of breaking the 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, especially as it relies on chips and other components from the likes of Qualcomm and Micron Technology.

The probe of Huawei, which is said to have been ongoing since early 2017, could result in a similar punishment if the firm is found guilty of breaking sanctions. Washington has belatedly realised that the US is being supplanted by China as the world’s pre-eminent tech superpower and that has meant increasing roadblocks put in the way of the number one telecoms 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 lent on 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 is Washington shooting itself in the foot with this heavy-handed approach?

A global problem

First, China and its new leader-for-life Xi Jinping is more than ready and willing to fight back against what it sees as unfair trade practices by the Trump administration. It has already fired back with retaliatory tariffs on US food imports and will do so again if a mooted additional $100bn in tariffs from the US goes through. By the same rationale, could China respond to orders banning sales of US components, by banning 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.”

Beijing-based Forrester principal analyst, Charlie Dai, told me 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 realise the importance of collaboration,” he added.

“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.”

Towards self-reliance

In the longer term, this could be the reminder Beijing needs that it must become self-reliant in technology to achieve its “rightful” place at the global number one 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 ($31.7bn) to back a range of domestic firms including processor designers and  equipment makers. But 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 deluge 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.

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