After Huawei, Trump’s blacklist may lead to a global tech schism

Bloomberg.- Bluster is a key weapon in the trade war between the U.S. and China. So it’s natural to want to dismiss the latest salvo—a U.S. Department of Commerce ban on doing business with Chinese national champion technology company Huawei—as another short-term negotiation tactic of the Trump administration. Even if that’s what it is, however, the ramifications likely won’t stop with a trade resolution.

If carried out to its full extent, the U.S. government’s blacklist could temporarily hobble Huawei Technologies Co., which relies on parts and software from American companies such as Qualcomm Inc. and Google to build and market the 200 million mobile phones it ships annually, plus the billions of dollars’ worth of networking gear it sells globally. But it could also disrupt the supply chain permanently. Alex Capri, a senior fellow at the Business School of the National University of Singapore and onetime U.S. customs official, puts it bluntly: “Long-held relationships between supplier networks and global ecosystems will fall apart,” he says. “Markets will fragment, and there will be a decoupling of China and the U.S. into two distinct tech supply chains.”

It’s unclear how long the blacklist will last. When President Trump pulled a similar stunt during last year’s trade talks—banning the other big Chinese telecom gear maker, ZTE Corp., from doing business with American companies—the restriction was effectively reversed less than three months later after ZTE agreed to pay a $1.4 billion penalty. There’s already been a 90-day reprieve granted to some broadband and wireless companies using Huawei equipment, allowing Google to continue updating existing mobile apps on Huawei phones, including Mail and Maps.

Regardless of the length of Huawei’s tenure on the blacklist, the upheaval is already prompting Apple Inc., Cisco Systems Inc., and other big U.S. companies to reassess their sprawling stable of offshore contract factories. America’s war on Huawei has also hastened China’s resolve to control more of its own destiny by reducing its dependence on U.S. technology, spending to develop sectors such as semiconductors and artificial intelligence, and asking companies such as Huawei to manufacture more of their own components or source them from Chinese suppliers instead of relying on U.S. companies.

This will be crucial if Huawei wants to maintain its dominance in the global rollout of next-generation 5G mobile technology. Deputy Chairman Ken Hu told a World Economic Forum panel in Davos in January that Huawei helped build 5G networks in more than 10 countries and expects to do so in an additional 20 over the next 12 months.

The company’s role in setting global 5G technology and equipment standards has reignited the fears of U.S. officials who’ve accused it of spying for the Chinese government. While the updated technology isn’t necessarily simpler to hack than the 4G network, it connects many more devices that create billions of entry points for bad actors. The U.S. and some of its allies worry that 5G equipment, software, and chips supplied by Huawei could be outfitted to collect information on customers in other countries or disrupt sensitive infrastructure such as the electrical grid or national highway network. Huawei denies claims that it’s spied on other countries for Beijing and that its 5G infrastructure is insecure.

Citing security threats, the U.S. has urged allies to block Huawei from their telecommunications networks. The campaign has had mixed success: Australia and New Zealand have sided with the U.S., while France has decried the administration’s efforts. Canada, Germany, and the U.K. are conducting reviews. All this deliberation will likely result in a slowdown in global 5G adoption, which could cause other countries to rethink their ties with Huawei and open up the field to more competitors.

The Commerce Department structured the ban to require American companies—and international ones whose products rely substantially on U.S.-made parts—to apply for special licenses to do business with Huawei. That ensures the fate of the Chinese company lies directly with the Trump administration, which could potentially cherry-pick which businesses Huawei gets to work with. Commerce Secretary Wilbur Ross said on Bloomberg Television on May 17 that the department’s actions against Huawei aren’t tied to the trade war—but he also said the Chinese equipment maker’s record of alleged espionage “is the kind of behavior the trade negotiations are hopefully going to mitigate.”

Huawei’s 5G plan won’t be affected by the U.S. ban, and “others will definitely not be able to catch up with Huawei in high-end products and 5G technologies for two to three years,” Chief Executive Officer Ren Zhengfei told Chinese media on May 21. Determined not to get caught flat-footed like its rival ZTE, the company started stockpiling components as early as the middle of last year. It could operate as usual for at least three months, people familiar with the matter told Bloomberg, or longer if it behaves conservatively. U.S. government officials also warned Huawei executives privately last year to explore supply chain alternatives that skirted U.S. businesses, the people said, asking not to be identified discussing internal company affairs.

In the meantime, Huawei has accelerated plans to design its own chips. HiSilicon, its semiconductor subsidiary, is on track to become one of the largest makers of core processing chips, according to Bernstein analyst Mark Li. It’s growing fast: HiSilicon brought in almost $8 billion in revenue last year, up from $2.4 billion four years ago, Bernstein estimates. Still, Huawei spent about $11 billion on components from American suppliers. That can’t be easily replaced in a few months.

Half of Huawei’s chips come from U.S. suppliers, Ren said. It has a backup plan to sustain itself through a supply shortage, he told Chinese media, but he prefers if companies in China and the U.S. instead “grow together.” He added: “We cannot be isolated from the world.” —Shelly Banjo and Gao Yuan

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