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.”
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.
I’ve been doing a bit of work researching a piece on the latest Lenovo bombshell to hit the tech world – its $2.9bn bid for Motorola Mobility. Now, in my innocence, I reckoned there might be quite a few hurdles for Lenovo on this one, but the analysts I spoke to were pretty upbeat on the deal.
Remarkably, most were pretty confident this was a good buy and that it’ll help propel the firm to third in the global smartphone stakes in a matter of a couple of year.
It’s easy to see why on paper. Here’s what Canalys APAC MD Rachel Lashford told me were the main benefits for Lenovo:
· Immediate entry to the US market, Motorola’s major market, as well as key markets in Western Europe and Latin America.
· A unique relationship with Google.
· Credibility with operators and consumers worldwide.
· Existing US operator relationships and a handful of global ones.
· Additional experienced phone sales teams.
· Additional and highly rated phone engineers.
· Additional tablet and phone shipments, as it becomes the key manufacturer of Google’s Nexus line.
Hard to argue with that lot. It’s also hard to see how Lenovo could have done better than Motorola – there wasn’t much choice out there, after all (BlackBerry? HTC?). Except that doesn’t mean it’s going to be a success. Although it has high brand recognition in the US, Motorola is a fading star, with neither innovative designs or huge volume sales to its name.
I wonder then if it’s really going to give Lenovo that huge leg-up into the US smartphone space it desperately wants. I’ll be even more surprised if Lenovo merges the two brands, as various analysts told me will happen eventually, unless Plan A has succeeded perfectly.
The thing I imagined would cause the biggest potential roadblock is a US political backlash. Lawmakers can be a pretty obstinate bunch, especially when they feel their country is being invaded by ‘foreign hordes’.
It’s certainly right to say that Lenovo has a better relationship with the US government – where ThinkPads are still used – than most Chinese firms, and that consumer smartphones are hardly a national security matter, unlike telecoms infrastructure (sorry Huawei, ZTE). But I still think there’s the potential for a unwelcome bit of political interference here, especially if some more news comes to light on Chinese spying and state links to tech firms.
Given the stakes, it’s not surprising Lenovo has apparently hired some big name attorneys, some of whom have worked for the CIA and Homeland Security, to help it lobby the deal through.
Lashford even speculated that “announcing two deals in one month will ease its progress, not complicate it”. I suppose we’ll all have to wait and see on that one.
One thing’s for certain: Motorola employees will be a happy bunch. I wonder how may will be queuing up for Lenovo CEO Yang Yuanqing’s annual $3m employee bonus giveaway?
Lenovo is the number one PC maker in the world and rapidly gaining popularity in the smartphone space, where it’s second in China, yet it’s been forced to delay its planned entry into the US mobile space by up to 3 years.
Reports from CES last week had Lenovo execs lowering expectations in front of the media rather than the usual ambitious predictions and bravado that characterise the world’s biggest consumer electronics show.
However, at CES Lenovo’s Americas president Gerry Smith told journalists it could be another 2-3 years, and that the firm was waiting for the “right time”, the “right product” and looking to boost marketing/branding spend first.
It’s certainly a given the firm will eventually take on Apple in its own back yard, but with PC sales tanking globally, why such a long lead time?
I spoke to some local analysts to find out.
IDC’s Melissa Chau argued that it comes down to brand recognition and industry partnerships.
“The biggest challenge any smartphone player has in breaking into the US has to do with partnerships. Even Nokia found it a problem building the right relationships with carriers and I wouldn’t be surprised if Lenovo is finding the same,” she told me.
Lenovo needs also to find a unique selling point – something to differentiate it from the likes of Huawei, ZTE and others which have already shown they can produce decent handsets for US punters at low cost.
Canalys analyst Jessica Kwee was more optimistic, arguing that Lenovo already has good brand recognition thanks to its Thinkpad laptop line.
“Lenovo is one of the most well-known Chinese brand with a good brand image even in the US, which may help it do better than some of its Chinese peers when it does launch its smartphones there, although there are plenty of other reasons that will help determine its success, such as the products, channels, marketing and timing,” she told me.
In the end there’s nothing wrong with a company like Lenovo taking its time before launching into an important market.
But I have a feeling that it will make a move sooner rather than later. Giving your rivals – especially Chinese ones like Huawei – a 2-3 year head start is never wise, let alone in a fast-moving and highly competitive space like the US smartphone market.
Well, it’s a name which may well become more familiar to tech-watchers in 2014 if its sales predictions for the year turn out to be more than the usual new year marketing hype.
The Shenzhen-based firm, which is slightly better known under its Coolpad brand, said it’s hoping to shift 40 million 4G handsets this year in China, in addition to 20m 3G devices.
Some local media reports have the company claiming this will help it topple global leader Samsung in the 4G stakes, even though the Korean giant is currently way out in front in the Middle Kingdom with a market share of nearly 20 per cent – almost double that of Yulong.
They would appear to be a combination of mis-reporting and vendor hype, though, as Samsung told me it hasn’t even released any predictions on how many 4G handsets it will sell this year.
A Lenovo spokeswoman, meanwhile, said: “It’s not our practice to comment or make prediction on unannounced products.”
That aside, however, Coolpad has been gradually creeping up the smartphone rankings in its home country over the past few years, largely without the media attention that has greeted Huawei, ZTE, Lenovo and, of course, Xiaomi.
That might be because it has neither Xiaomi’s flair, Huawei’s big bucks, nor ZTE’s propensity to court controversy.
It’s currently third in the rankings just behind Lenovo, according to IDC stats for Q3 2013. If it’s to continue to climb it’ll need to make sure it’s competitively priced relative to Samsung, around the 1-2,000 RMB mark, IDC’s Bryan Ma told me.
Apart from that, “speed to 4G” will also count, he added. To this end, Yulong has already struck a deal with China Mobile to sell its TDD/FDD-LTE handset the Coolpad 8920 and there’ll certainly be more to follow.
So will the firm join Huawei, ZTE and others in aggressive overseas expansion? Well, it already is selling in markets like the US, but headway there has been more difficult given its low brand recognition.
It might have overtaken Apple in the Middle Kingdom last year but 2014 will be a tough year for Yulong and its parent company China Wireless to make an impact abroad – that is, outside of emerging markets where the appetite for cheap smartphones is greater.
As a hack whose inbox has been deluged with this kind of dross for weeks now, I’m going to look ahead to 2014 with a more focused question, namely: “how will Western companies fare in China next year, and vice versa?”
Well, first up the signs aren’t looking good for US tech firms. Washington has turned up the anti-China rhetoric fiercely in 2013 and with high profile reports like Mandiant’s finally tying Beijing to cyber espionage, things were already looking tricky for US firms in China.
Then Edward Snowden happened – a gift from heaven for the Chinese government which can now portray itself as victim of spying, not a perp, with an even straighter face.
Expect the backlash to come from Beijing, partly because of this, but also because China has some world class companies of its own now, especially when it comes to networking equipment (Huawei and ZTE), PCs (Lenovo) and mobile devices (all of the above plus Xiaomi, Oppo, Meizu, Coolpad, etc etc), so it can afford to be more self-reliant.
IBM and HP have both announced they’re shedding jobs in the PRC, despite the strategic importance of the market.
IBM just announced a new cloud partnership which will see it team up with Azure partner 21 Vianet to provide managed private cloud capabilities to business customers there, however it admitted in October a 22 per cent sales slump in China. Ouch.
Cisco has seen a recent 6 per cent sales slump in China with John Chambers admitting on a November earnings call: “China continued to decline as we and our peers worked through the challenging political dynamic in that country.”
Then there’s Qualcomm, which counts China as a $1bn market, has worked with countless local OEMs to support their products and yet now finds itself at the centre of an anti-monopoly investigation which could see it fined in excess of $1bn.
The rule in Beijing seems to be; if you can’t beat ‘em (and China still has some way to go before its chip makers are world class), fine ‘em.
Expect more of the same next year.
So what of the great Chinese invasion? I spoke recently to Deloitte TMT partner William Chou about this.
In the hardware space historically only the likes of ZTE, Lenovo and Huawei had a chance to grow their offerings abroad, but with VC firms now splashing the cash, more innovative local firms will be able to invest in R&D and expand their footprint internationally, he argued.
Coolpad, Meizu and Xiaomi, to name but three, could be names to watch for 2014.
“There are a lot of these smartphone manufacturers but the ones which will be winners are not really the handset manufacturers but the ones which can combine hardware, software and internet services, like Xiaomi,” Chou told me.
Others he mentioned included a Shenzhen-based handset firm looking at JVs in France and South Africa and an unnamed private company “aggressively” looking to expand in the European market.
On the internet side there are fewer potential breakaway global brands which could make a real impact in 2014.
Tencent’s WeChat is definitely one of them, although Chou argued that Google-beater Baidu will struggle as it seeks to “re-engineer its business model from search to mobile internet”.
There are also a host of little-known software and online firms under-the-radar ready to pounce, including one of the China’s online travel giants which is looking to acquire in Germany, Chou revealed.
In fact, the recently announced Deloitte Fast 500 list of fastest growing APAC start-ups had more companies from the Middle Kingdom than any other represented, although none made the top ten.
Going into 2014 entrepreneurs who are able to “apply technology to other industries” will stand the best chance of success, Chou said.
“China has an ageing population and a one-child policy so healthcare is a serious problem, so how you apply e-health will be a trend,” he explained. “Another major challenge is pollution, so clean tech will be a major area for entrepreneurs to consider as well.”
Whatever happens, things are never quiet in this part of the world. Let’s see what you’ve got 2014.
It was Microsoft and Nokia’s big week this week and I’m sure the two will be hoping to hog the headlines going forward as much as they did over the past seven days. Now some might have unkindly described the alliance as “the sounds of two garbage trucks colliding”, but I’ve been getting the low down on why the deal should matter to APAC, or more realistically, why APAC should matter to Microsoft.
Let’s get one thing straight, APAC is essential to Microsoft’s future success in the smartphone space, not just because it has the world’s largest and fastest growing market – China and India respectively – but because Nokia has a really good legacy footprint there thanks to its feature phone biz.
The problem for Redmond, however, is that we’re not talking about feature phones any more, but smartphones. These markets are increasingly demanding smartphones, albeit low-end handsets, not feature phones. It’s why local players like Huawei, ZTE, Micromax and others are growing at such speed.
Nokia’s stock is greatest in India, where it has been voted most trusted brand for two years in a row, despite on-going tax problems with the authorities. Yet according to IDC’s Melissa Chau its relationship with operators isn’t particularly great anymore, so to large extent Microsoft is going to have to start from scratch here.
Building a budget Lumia will be vital and Chau told me Microsoft could do two things to help achieve this:
- Remove licensing charges – at the moment it’s built into the cost of the phone – which would wipe about $10 off per handset
- Use its combined internal expertise now with software and hardware to tweak Windows Phone so that it can run on hardware specs more suited to a lower price point.
It also needs to sort out Asha, she told me, starting with making the handset more attractive by sticking some Microsoft apps on it, and then hopefully in time transitioning those customers to a low cost Lumia.
This ain’t gonna be easy. The competition is fierce out there and with Nokia’s star waning and a severe lack of apps in the ecosystem the best Redmond can probably hope for is cementing it in third place behind the deadly duo of iOS and Android. With four of the Lumia’s top selling markets in APAC (including no. 1 and 2) however, it must make the region a priority.
Time will tell how successful it is, of course, but time, as we all know, is probably something Micr-okia doesn’t have.
Lenovo has been talking up its move into the US smartphone market this week, as global PC sales continue to stagnate, but the analysts I spoke to are far from convinced that the Chinese hardware giant can repeat its success in the traditional computing space.
CEO Yang Yuanqing told the WSJ that the firm would be taking aim at the US mobile space within a year. You can’t argue that it doesn’t represent a “new opportunity” for growth, given that PC shipments are still falling in most markets around the world.
In Western Europe they declined by the biggest ever amount in the last quarter – down 20 per cent year-on-year – and even in the still healthy Chinese market they are only forecast to grow by 3-4 per cent this year.
So can the hardware behemoth, which recently became the world’s number one PC vendor, tap a user trend which is seeing more and more gravitate towards mobile devices instead of traditional notebooks and desktops?
Well, Gartner has forecast it will take the lead in its domestic market – the world’s biggest for smartphones – as early as this year, but the US would seem harder to crack.
“The only way Lenovo would have a way to even have a chance would be to have a key carrier support it by lining up one or more of their products in the portfolio. Even this way, I believe consumers will not necessarily see the brand as sexy,” Gartner research VP Carolina Milanesi told me.
“Lenovo’s position in the corporate PC market might give them an opportunity in the prosumer segment especially if they brought to market an Android based device with an enterprise class security and manageability feature set. Bottom line: it’s a tough job and Lenovo would be better off capturing more of the tablet market first so that they could get one step closer to consumers.”
Canalys research director Nicole Peng was not much more optimistic of its chances in the near term, telling me China sales would continue to make up the majority of its global volume.
“The competition landscape in the US smart phone market is far more challenging for new comers, with Apple and Samsung dominating over 70 per cent share,” she added. “However to start selling smart phone in the US, more importantly to gain carrier support is strategically important for Lenovo’s overall PC+ strategy globally.”
All reasonable comments and I think they’ll be true in the short term, but I wouldn’t be surprised to see Lenovo up there in the top three or five US smartphone vendors in a couple of years’ time. ZTE, with all of its problems and negative publicity in the US, has already nabbed third place, according to new stats from ITG Market Research.
With a hefty R&D team and vaulting ambition, Lenovo will be hard to ignore, even if its brand image is not exactly an enticing one for smartphone users Stateside at the moment.
It’s not been an easy year for it or Shenzhen rival Huawei, who were both named as a national security risk in a US congressional committee report released at the tail end of 2012 in the bi-partisan hubbub typical of pre-election months.
In addition, ZTE has been under lengthy investigation by the FBI on suspicion of selling embargoed US-made tech to Iran and then covering it up when found out. Then there were the false rumours of swingeing job cuts at the firm and a $5bn cash injection from the Chinese government.
Despite its problems, however, ZTE remains on the move in the smartphone space, an innovator in telecoms infrastructure with its LTE offerings and has plans to grow the enterprise business despite the kind of government roadblocks put up in Australia, the US and now India.
Head of handset strategy Lv Qian Hao battled manfully with the flu to show me the firm’s latest high-end handset, the 5.7in Grand Memo (no pics I’m afraid). It comes across as a smallish version of Huawei’s massive six-incher the Ascend Mate and probably benefits from not being quite as large – in other words I could just about use it as a phone without looking daft.
In the rapidly developing smartphone space, specs like 13 megapixel camera, quad core 1.7Ghz Snapdragon processor and a 720p screen – specs which might once have elicited gasps of awe from the assembled masses – are now pretty standard at the high-end.
This is no criticism of ZTE but it certainly makes its job of climbing up the smartphone rankings and a goal of 50 million shipments this year that bit harder.
So where can it differentiate? Well, with high-end specs almost commoditised now, design is obviously one key area. With the best will in the world ZTE is not know for its beautiful design, but it’s hoping to change that with Hagen Fendler on board.
Pinched from cross-town rival Huawei, Fendler’s appointment and a new design centre in Shanghai certainly serve to highlight the firm’s vaulting ambitions in this space.
Fendler explained that his job is to create a design DNA which can be seeded throughout the firm’s handsets to help create a brand identity. It got off to a flyer with the launch at CES of the Grand S, an HD handset which at 6.9mm is currently the world’s thinnest.
It won’t be an easy job creating handsets that are both beautiful and distinctively “ZTE” but with 400 staff working on design alone, they’ve as good a chance as any.
It can be a frustrating time for a journalist talking to a designer, because so many of the concepts they tend to reference are abstract, ethereal and emotive rather than the nuts and bolts practicalities of engineering.
However, Fendler did reveal that much of his design inspiration comes from outside the immediate environs of the smartphone space – from books, magazines and films.
1982 sci-fi classic Blade Runner was singled out for particular praise for sparking interesting ideas about “how humans interact with the technology around them”.
Just don’t expect to see the ZTE Blade Runner phone anytime soon. Actually, Google already got there with the Nexus, didn’t it?
Just finished an interesting piece on what to expect from Chinese tech firms in 2013 so thought I’d précis the key points below.
To be honest as with any year end predictions to an extent there’s always more-of-the-same than anything else, and to that point there’ll be greater international expansion on the mobile handset front by ZTE, Huawei, Lenovo, and potentially TCL-Alcatel.
Aside from the big names, Canalys analyst Nicole Peng told me there could also be attempts by feature phone vendors like Gionee and K-Touch to make it overseas, claiming that the technical and business support offered by chipset companies like Qualcomm and MediaTek is making it easier than ever to break into new smartphone markets.
But away from hardware, what about China’s growing raft of web companies?
It would be easy to write a story saying “the Chinese are coming, look out Facebook, Twitter et al!”, but the honest truth is that the likes of Tencent, Sina, Alibaba and others have become successful in China in part by copying their US rivals and in part thanks to local restrictions banning their rivals.
Where they have done well is in localising their platforms for the domestic user – something Alibaba and Baidu are doing now even for their mobile OS platforms – and innovating on top of what has gone before.
Aside from the odd service like Tencent’s WeChat which has managed to cross the Great Firewall to acceptance elsewhere, I’m sceptical that these firms will expand successfully in 2013, and to an extent, with less than half of the vast Chinese population online, there’s probably enough untapped growth left domestically to keep them busy for now.
Peng is slightly more optimistic, however.
“Many of the local mobile services/applications we have seen in China, such as Tencent Weixin, Sina Weibo provide great user experience and innovative features that we could not find from the international big name,” she told me.
“As long as they continue to innovate and own their IPs, I do not see Chinese internet companies having any major disadvantages in competing, as mobile services become device/OS agnostic in the future.”
Perhaps. But with local incumbents like Twitter, Facebook, Google et al, mature Western markets will certainly be too tough a nut to crack.
On top of this, Chinese tech firms will have to put up with increasingly hostile attitudes from various national governments.
National security concerns will continue to dog Huawei and ZTE on the telecoms infrastructure front, and there are signs that US regulators may soon begin the process of de-registering Chinese firms from US stock markets for failing to comply with domestic securities laws.
Oh, and there’s the small matter of a potential conflict over that bunch of barren rocks known as Diaoyu/Senkaku.
Plenty to look forward to, then, in 2013!