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US sanctions on Huawei could backfire

The Edge Singapore
The Edge Singapore • 4 min read
US sanctions on Huawei could backfire
SINGAPORE (May 27): It was only to have been expected. After nearly a year of pressure that failed to stop Huawei Technologies Co’s expansion -- especially in the rollout of the next generation 5G wireless network globally -- in its tracks, US President
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SINGAPORE (May 27): It was only to have been expected. After nearly a year of pressure that failed to stop Huawei Technologies Co’s expansion -- especially in the rollout of the next generation 5G wireless network globally -- in its tracks, US President Donald Trump signed an executive order effectively barring American firms from doing business with the Chinese telecommunications equipment company.

The inclusion of Huawei on the US Department of Commerce’s Bureau of Industry and Security’s (BIS) Entity List means that companies would need to apply for a waiver to supply goods with 25% or more US-originated technology or components. It is also known to some as the “death penalty”, and is a targeted attack on Huawei, observers say.

The intended effect was almost immediate: Google, developer of the Android mobile operating system, said it would stop delivering updates for the tens of millions of Huawei handsets in the worldwide market. Not long after, global tech firms, including British chip designer ARM Holdings, owned by Japan’s Softbank Group, announced they were cutting ties with the Chinese company. Japan’s Panasonic said it would halt some business with Huawei, in compliance with the ban. Meanwhile, even mobile service providers outside of the US are suspending, or reconsidering, launching Huawei’s 5G-enabled phones.

The US has maintained that the inclusion of Huawei on the Entity List is a matter of national security. Trump’s executive order bars US companies from using telecoms equipment from manufacturers that are deemed a risk to national security. Commerce Secretary Wilbur Ross characterised the order as ensuring that “Americans will be able to trust that our data and infrastructure are secure”.

The statements, however, do little to dispel the opinion most people hold: The Huawei ban is a weapon in the protracted trade war that the US and China are waging against each other. And that could potentially backfire.

For starters, the companies that supply to Huawei and now have to stop doing so are revising their business outlook for the coming quarter. Inphi, which supplies high-speed data connections, said revenues for its second quarter are expected to be 5% lower owing to the executive order. Huawei accounted for 14% of its sales last year. Qorvo, the radio frequency chipmaker, said it expected to take a US$50 million ($69 million) hit. Huawei represented 15% of its business.

Meanwhile, Japan and South Korea are apparently already experiencing the downside of the trade war. Korean exports have fallen nearly 12% this month; shipments to China are down 16% while semiconductors are off by a third. In Japan, April exports declined for a fifth month running; shipments of semiconductor equipment and components slumped 41% and 21.5%, respectively.

More importantly, as the world’s largest telecommunications equipment maker and a leading global supplier of 5G network equipment, Huawei also represents just how firmly plugged in China is in today’s globalised business. China may have been characterised as a nation of copycats, but it has surpassed its masters and its national champions are now the ones to beat.

Further, it also effectively controls much of the supply chain for global tech companies — from raw materials to manufacturing. Should it decide to retaliate against Trump’s sanctions, the impact on human development would be great: The country is one of the largest producers of lithium and lithium carbonate, key raw materials for the batteries of electric cars. It also accounts for 90% of the global production of rare earths, or the raw materials integral to the production of tech products, from magnets and hard drives to earphones and electric car batteries. The minerals are among the few items excluded from the US list of Chinese products to be taxed. China is also the largest foreign creditor to the US government, holding more than US$1.2 trillion in US Treasury bonds, or roughly 7% of the total.

To be sure, many observers are confident China will exercise rationale and restraint, and not do anything that hurts investment and the growth of its economy, although one cannot rule out any response should the US push harder and act against other Chinese companies.

In any case, the “death penalty” of being on the BIS Entity List could well be a new lease of life for the development of alternate technology, namely a mobile operating system or Android “fork” that would break the US duopoly on the industry. With political backing, and Huawei’s likely deep reservoir of resources, it would not be that hard to do.

This story appears in The Edge Singapore (Issue 883, week of May 27) which is on sale now. Subscribe here

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