Amid the blame game over the origin of the Covid-19 coronavirus, a tech war between China and the US seems to be revving up as well.
The US government’s increased pressure on Chinese telecommunication giant Huawei has greatly alarmed Huawei top leaders, prompting its rotating and acting Chairman Eric Xu to declare on 31 March: “The Chinese government will not just stand by while Huawei is slaughtered on the chopping board.”
The US government has blacklisted Huawei since May last year citing national security concerns. It has restricted business engagements between US enterprises and Huawei, and has escalated the China-US tech war. However, to reduce disruptions to US enterprises, the US later extended the license for its companies to continue doing business with Huawei five times, until 15 May this year.
Even as it became the new epicentre of the Covid-19 pandemic, the US did not stop imposing new sanctions on Huawei. Last week, Reuters’ sources said that various top-level officials from different departments of the Trump administration have agreed to impose new restrictions on Huawei by limiting Huawei’s supply of cutting-edge microchips.
According to the new rules, foreign companies using US chip-manufacturing equipment must first gain approval from the US before they can supply certain chips to Huawei. This implies that the Taiwan Semiconductor Manufacturing Co (TSMC) that supplies chips to Huawei’s HiSilicon division will be greatly restricted under these rules, which could have a devastating impact on Huawei.
Amid worries over its supplies, Huawei has changed its usual PR tactics towards the US and has begun adopting a tougher stance.
In response to new restrictions, Chinese state media hinted last weekend that the Chinese government would retaliate against the US. A commentary published in China Daily on 29 March warned that if new measures were implemented, the Chinese government would “have no choice but to do the same to US companies”.
Close to a year after sanctions were imposed, Huawei’s latest annual report released on 31 March continued to record a growth in revenue in 2019, but it is already exhibiting fatigue from the tech war. Huawei’s net profit for 2019 was 62.7 billion RMB (roughly S$12.6 billion). While it has increased by 5.6%, it is the weakest growth in three years, and a far cry from the 25% increase achieved in 2018.
According to reports, Huawei’s significant drop in earnings is mainly due to a fall in overseas sales and the restrictions imposed by the US.
Faced with sanctions and the Covid-19 pandemic, Xu predicted that 2020 would be Huawei’s “most difficult year” yet as they have been “put on the US Entity List throughout the year” (which means being subject to stringent license requirements) and have begun to deplete their stockpile of inventory. “Therefore, 2020 is going to be a very crucial year to test whether Huawei’s supply continuity program can really work,” Xu explained.
Amid worries over its supplies, Huawei has changed its usual PR tactics towards the US and has begun adopting a tougher stance. In a nod to the support it hopes to get from the Chinese government, Xu said in a high-profile message at the company’s annual report launch, “I don't think the Chinese government will just watch and let Huawei be slaughtered on a chopping board. I believe the Chinese government will also take some countermeasures.”
It is significant that the aforementioned speech — that sounded more like a response from a Chinese foreign ministry spokesperson — came from a top leader in Huawei. It is also the first time Huawei openly associated itself with the Chinese government, implying a total fallout with the US, and highlighting the fact that Huawei can no longer hold back in the face of much stricter sanctions. However, it remains unclear if Huawei had reached an understanding with the Chinese government before it seized the opportunity to take the offensive after maintaining a defensive stance.
Xu even asked, “Why wouldn’t the Chinese government ban the use of 5G chips or 5G chip-powered base stations, smartphones and other smart devices provided by American companies, for similar cybersecurity reasons?”
In response to China’s possible counterattacks, renowned Chinese financial commentator Ye Tan analysed in an article published on 31 March that should China restrict US 5G chips and its related products from entering the Chinese market, US companies would suffer huge losses. The annual potential losses of Apple and Qualcomm alone would amount to over US$70 billion (roughly S$100.3 billion), a figure equivalent to Boeing’s revenue last year.
In 2019, Qualcomm earned a total of US$24.7 billion, of which 47% (US$11.6 billion) was attributed to its business with China. If Chinese mobile phone manufacturers cease to do business with Qualcomm, it would lose at least 40% of the global market share and also its ability to invest heavily in research and development. In fact, it could be forced to exit from the 5G telecommunications market. Hence, the repeated extensions of license to work with Huawei could be due to the enormous pressure such limitations have placed on US companies.
On 9 March, the Boston Consulting Group released a report predicting that the US would potentially lose 8% of the global share and 16% in earnings should it maintain the restrictions on access to US technology by Chinese companies on the US Entity List. If it totally bans semiconductor companies from doing business with Chinese clients, the technological field will experience decoupling from China and potentially lose 18% of the global share and 37% in earnings.
With the “Chinese virus” card gradually losing its effect, the China-US tech war is another card that waits to be played at Trump’s command.
With implications and losses to be incurred from both sides, will the China-US tech war be revived under the implementation of these new restrictions? The tense relations between China and the US have in fact loosened a little recently, following US President Donald Trump’s public declaration to stop using the phrase “Chinese virus” and Chinese President Xi Jinping’s phone call to Trump in a bid to improve bilateral ties.
For Trump, however, China and Huawei remain as tools to divert the focus of the country’s public opinion and are beneficial to his re-election. With the “Chinese virus” card gradually losing its effect, the China-US tech war is another card that waits to be played at Trump’s command.