The US, Huawei And The Belt & Road’s New 5G Supply Chains
Op/Ed by Chris Devonshire-Ellis
Who are the replacement manufacturers China could now turn too?
With the United States effectively indicating its policies are unreliable, a remarkable 24 hours has seen Washington ban US technology companies from selling to Huawei, then roll back the majority of this for the next 90 days.
At stake is the technology prize of effective control over the next generation of communications networks – the much lauded 5G system. Both the United States and China are locked in a tech battle over where ultimate control of this will lie, with the US at present somewhat lagging behind.
However, much of the global 5G network is very close to being launched, while the technology is important as it allows much faster and clearer download times, as well as ushering in technologies such as driverless cars, integrated consumer devices controllable from your Smartphone, and lower costs. New products, services and employment will emerge from its introduction. Beijing estimates that 5G will add 3% to its GDP growth and add about 3 million new jobs by 2025.
Washington’s initial move to ban all sales to Huawei is driven in large part to prevent the Chinese from gaining more ground. Yet Huawei is far more interconnected that perhaps the Americans realized – hence the decision to reverse the ban for an initial three month period, to allow a more considered approach to what such a move would actually mean to American tech companies and the global communications market. Even so, where we currently stand in this mess of US policy is that from mid July, Washington will again reintroduce some measures against Huawei to prevent it from using US technology in its network systems.
The impact of this will effectively serve as a pointer as to how strong the United States really is in the global supply chain for electronics. The Huawei issue is important for businesses not just in China but across emerging Asia and including the Belt & Road Initiative where Huawei are building a great deal of national telecoms networks. Will complete of partial exclusion from the ability to purchase US technologies damage Huawei’s ability to deliver, leaving the way open for US companies to take up the marketplace, or will Huawei prevail and continue to provide telecommunications networks in emerging markets? It is a decision that will change the global supply chain, and could possibly see an entire decoupling of the United States from global infrastructure development. Is Huawei’s US predicament a curse or a blessing? These are the questions that will shape tomorrows future.
In terms of sales to Huawei, the United States ban on selling U.S. high-tech products to Huawei has taken the form of the United States Department of Commerce, Bureau of Industry and Security placing Huawei and numerous Huawei subsidiaries on its Entity List, albeit with a three month period of grace. Being placed on this, as has just happened with Huawei, means that it will no longer be able to purchase any U.S. made product listed on the Department of Commerce Commodities Control List This listing includes a vast array of equipment, materials, software and technology and essentially includes virtually all technical products and services that Huawei is currently purchasing from United States suppliers. However, given Washington’s backtracking on the ban, literally anything could happen. At the very least, it has shown how unreliable the United States has become as a trading partner. Huawei will be making contingency plans, if they haven’t already. But the issue affects more than just a Chinese company – as Huawei are developing all, or part of the new 5G networks for Governments worldwide, what happens next directly impacts on how 5G will be implemented, and whose equipment they will be using.
Hardest hit in the US are the semi-conductor manufacturers, who were/maybe banned from selling any product to Huawei. But is that such an issue? For sure, it would present a supply chain obstacle for building 5G networks, but American semi-conductor suppliers are not the only game in town, as can be seen below:
Worlds Largest Semiconductor Manufacturers
1) Intel (US)
2) Samsung (South Korea)
3) Taiwan Semiconductor (Taiwan)
4) Qualcomm (US)
5) Broadcom (US)
6) SK Hynix (South Korea)
7) Micron (US)
8) Texas Instruments (US)
9) Toshiba (Japan)
10) NXP (Netherlands)
Bubbling under the top ten though are companies almost exclusively based in Asia, with Japanese, South Korean, Taiwanese and Singaporean manufacturers all featuring prominently. This means that the reality is that when faced with an opportunity to sell equipment to what will eventually morph into a global network, profits will overtake any partner loyalty to the United States. Asia is far closer to China than the United States is, and all these economies have adapted to a dominant Chinese economy with very few bumps in between. Any ban on selling US products to Huawei would be inconvenient and delay the introduction of 5G. But it probably will not stop it – Chinese money would pour into Asian semiconductor manufacturers and related tech companies and find a way around an American ban. It is almost certainly happening right now. And in any event, Huawei only purchases 50% of its tech supplies from American companies, while its CEO, Ren Zhengfei has said “The US 90-day temporary license does not have much impact on us. We are ready.” indicating that Huawei has contingency plans in place should the US reinstate in part or in full the ban on their purchasing US technologies.
In any event, the first three countries currently on track to launch a global coverage of 5G are expected to be South Korea, China and Japan. South Korea trialed its 5G network at last Winters Olympic events in Seoul, with Japan planning to do the same at the Summer Olympics next year. Russia trialed its 5G network at last summers World Cup Soccer finals, Indonesia did the same at last years Asian Games, while the GSMA estimates that China will account for some 40% of the global 5G market by 2025.
In other words, it’s a bit late in the day for the United States to be attempting to stop this and impose its own sovereignty on global 5G. Meanwhile, 5G networks are being laid out across the Belt & Road countries. Huawei has signed over 50 agreements with other national governments to roll out 5G. Along the Belt & Road, these are some of the players; nearly all are using Huawei equipment as part of their networks:
This is why, 24 hours after Washington announced the ban on US companies selling technologies to Huawei, it was rescinded. It also illustrates that Washington quite probably has no idea of its policy or even developments elsewhere around the world. The downside is that it also illustrates that the United States is an unreliable diplomatic and trade partner. The American perspective, well demonstrated in yesterdays China Law Blog post “The Huawei Sales Ban Brrrrr” is that the Huawei issue is part of a deeper US-China trade battle and that trade will enter into a deep freeze. That’s a very American perspective on China, but they are correct in that now is not a good time to be an American company in the US trying to sell to China. However, American companies already in situ in China have been making contingency plans for their own Governments lack of sustainable policy and are already making inroads into Asia. Dezan Shira’s US client base of several hundred companies in China has seen most of them stay put – but with the addition by about 50% of them also establishing manufacturing operations elsewhere. There has been significant US investment for example in the semi-conductor industries in Taiwan, South Korea, India and Vietnam. Many of those investments have been made on the back of profits originally realized from their China operations.
Washington potentially banning Huawei is a battle over who builds the global 5G network, its nothing really to do with China trade policy, its just being dressed up that way. But its very late in the game to be taking sides and trying to prevent an already trialed network from taking root. The damage to the United States, in terms of financial downsides to its tech industry, as well as its international reputation if it holds up 5G roll outs will be incalculable. In this particular race, China has won. It’s also a good time to invest in Asian tech stocks, as China’s commitment to supply 5G will see it reduce dependence on the United States tech industry. That’s a shame, because many of them are great companies with a huge amount of global potential, yet hampered by a totally unreliable Government. Alternative Asia beckons.
Silk Road Briefing is produced by Dezan Shira & Associates. Chris Devonshire-Ellis is the practice Chairman. The firm has 26 years of China operations with offices throughout China, Asia and Europe. Please refer to our Belt & Road desk or visit our website at www.dezshira.com for further information.