In an internal memo this week, Huawei founder Ren Zhengfei forecast that the global economy would not improve in the next three to five years and warned his employees against wishful thinking. While the memo was intended to “send a chill to everyone”, the entire Chinese stock market felt the shiver.
‘No bright spot’ in the world
After Ren’s memo came to light, three of China’s major indices plunged on 24 August — the Shanghai Composite, Shenzhen Component and GEM index fell 1.86%, 2.88% and 3.64% respectively at closing — severely hitting sectors such as semiconductors and consumer electronics. Some netizens said mockingly that Ren should have sent this “chill” to heatwave-stricken Chongqing.
As Huawei is not a listed company, Ren’s memo should not have affected the stock market, but there seems to be no other explanation for the tumble. Considering Ren and Huawei’s repute in the industry, it is possible that Ren’s warning sent jitters running through the stock market. Just imagine, the bleak outlook of the economy is evident when even a heavyweight like Huawei is struggling.
Ren said he expected the next decade to be “painful” as the global economy continued its decline with no respite in the next three to five years. There would be “no bright spot” in the world as consumption continued to fall.
Aside from talking about Huawei, Ren said he expected the next decade to be “painful” as the global economy continued its decline with no respite in the next three to five years. There would be “no bright spot” in the world as consumption continued to fall. Huawei would also face dual pressures from the supply side and the market.
Ren further urged his employees to focus on cash flow and profits for Huawei to “break through” the 2023-2024 financial period. He told his employees to “stop telling stories” and “stop having any illusions, or risk having to foot the bill themselves”, adding that the priority was to “survive”, because only then could they ensure a future for the company.
He also said that Huawei would shrink or cease operations that Huawei had blindly invested in; reduce scientific research budgets for smart vehicles; terminate businesses that did not create value; and cut off underperforming marginal businesses.
Struggling tech enterprises
While Ren has always been highly crisis-conscious and repeatedly dished out warnings to his employees, ever since Huawei was added to the Entity List of the US’s Bureau of Industry and Security in May 2019, its focus has been on “survival”. However, the current memo is more clearly spelt out than the previous ones. Also, as Huawei’s first-half profits fell as much as 51.9% year-on-year, people are expecting to see a mass retrenchment at Huawei soon.
It is believed that major Chinese tech enterprises such as Alibaba, Tencent, JD.com and iQIYI have laid off about 10% to 30% of their workforce since the start of the year. Market confidence has already plummeted amid the spate of hardships — sectors such as real estate, fintech and education have yet to emerge from the shadow of China’s recent crackdowns; and the Covid-19 lockdown in the economic powerhouse of Shanghai during the first half of the year dealt a big blow to the Chinese economy and consumer confidence. Ren’s memo only serves as a “chill” to an already-dire situation.
It is not just China’s domestic economic situation and policies that are worrying, but also the growing China-US rivalry, the dynamics of geopolitical competition, and the prolonged war in Europe. All of these affect the world economy and China, which in turn affects the other.
US President Joe Biden signed the US$280 billion CHIPS and Science Act into law on 9 August, which provides US$52.7 billion in subsidies and tax credits for semiconductor manufacturing in the US, and a further $200 billion for scientific research into artificial intelligence, robotics and quantum computing, among others. The Act clearly targets China as it prohibits the beneficiaries from expanding semiconductor manufacturing in China, and pressures Taiwanese and South Korean semiconductor manufacturers not to expand production in mainland China.
It seems that China’s semiconductor shortage will extend until it is able to fully manufacture advanced chips by itself.
The US is also actively calling for the establishment of a semiconductor alliance (Chip 4) with Taiwan, Japan and South Korea. Analysts believe that the US intends to push out mainland China from the global supply chain of semiconductors. It seems that China’s semiconductor shortage will extend until it is able to fully manufacture advanced chips by itself.
In line with the voice of leaders and elites
Next is the global economic recession. In fact, apart from entrepreneurs such as Ren, various politicians and elites are also pessimistic about the global economic outlook. French President Emmanuel Macron recently warned that the world is “in the process of living through a tipping point or great upheaval” and of what could be “the end of abundance”.
Singapore Prime Minister Lee Hsien Loong also pointed out during his National Day Rally speech this year that the “international economic conditions have fundamentally changed”. He said that the days of rapid globalisation and trade liberalisation, when Chinese exports lowered global production costs and kept global prices stable, are a thing of the past. Instead, China’s growth and exports are slowing. Some countries have raised tariffs against each other, putting economic resilience and self-sufficiency above cost considerations, raising costs and pushing up inflation everywhere.
For the next few years, countries around the world will have to learn to survive the economic winter. It is already a blessing if there is not another war.
Indeed, Ren’s claims in his memo are not groundless. He spoke about the risks that are apparent to the world’s politicians and elites. While the politicians speak from a macro perspective, entrepreneurs are more candid, and thus have a greater impact on the stock market.
Due to the Russia-Ukraine war and anti-Covid measures, China’s GDP only grew 2.5% in the first half of the year, far from the growth target of around 5.5%. Under the sluggish economic situation, the consumption and living standards of China’s grassroots level have already been affected.
Can the Chinese economy turn the corner next year? Or will the negative effects of declining growth further spread to the middle class? This problem is seldom discussed but poses a great concern. Meanwhile, economists also believe that the US will fall into recession by the middle of next year. No one would benefit if both the Chinese and US economies are in decline.
For the next few years, countries around the world will have to learn to survive the economic winter. It is already a blessing if there is not another war.
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