Once a little-known regional telecoms company, Huawei has grown into a tech behemoth and one of China’s biggest success stories. But over the past decade, it has increasingly faced scrutiny from the West, and in the process become embedded in escalating Sino-American tensions.
The global push to build 5G networks has repeatedly made headlines because of the central role played by Huawei’s technology. But, despite the US’s best efforts to lobby other countries to keep Huawei out of their networks, it remains a key market player, providing 28 per cent of the global 5G base station (a part of the 5G infrastructure) market in 2019.
This has left the US and its allies with a difficult choice: implement Huawei’s tech and risk the alleged threat to national security that would bring, or reject it and potentially fall behind in the technology arms race. This question speaks to the shift in US priorities since the turn of the century, as foreign and economic policy have been subsumed by broader national security objectives. This has greatly accelerated over the past four years, as Trump has ramped up pressure on Huawei and other leading Chinese tech companies, and in the process driven the US to the brink of a tech cold war with China.
Semiconductors are taking centre stage
In response to Huawei’s continued dominance, Trump introduced export limits on the US’s world-leading semiconductor sector in May and August 2019. The US controls large segments of the world’s most advanced chip manufacturing, while China is a large importer – in 2019, it accounted for 23 per cent of global semiconductor imports – so it was thought that these restrictions would undermine Huawei’s consumer electronics and telecommunications hardware businesses.
But it soon became apparent that the US had caused a problem for itself, cutting off a valuable source of income for domestic producers, while failing to eliminate the chip pipeline to China, which pivoted its supply chain to neighbouring Taiwan and South Korea. One quarter of the US semiconductor industry’s annual revenue originated from sales to Huawei and other Chinese companies, but only 5 per cent of the China’s chip imports were from the US.
The problem with the first round of export controls was that they undercut domestic producers, but failed to allay national security concerns, said Chad Bown, Reginald Jones senior fellow at the Peterson Institute for International Economics (PIIE),
“Selling to Chinese companies in China is a huge revenue source for American semiconductor companies,” he said. “They need that revenue to be able to continue to do the research and development to stay at the frontier, to come up with the next generation of chips.”
The result was that in May and August 2020 the Trump administration extended the export controls to cover companies that use US semiconductor technology and software in chip design in an attempt to indirectly cut off access to semiconductors. Affected companies include many of China’s alternative chip suppliers, such as TSMC in Taiwan and Samsung in South Korea.
But many US producers feared the government had overestimated the strength of domestic industry and underestimated foreign competition. In 2019 Japan accounted for 28 per cent of semiconductor manufacturing equipment exports, 9 per cent more than the US. Trump’s restrictions also encouraged China’s efforts to become self-reliant, a goal it had already made significant progress towards as part of its Made in China 2025 strategy.
There is no doubt that the trade restrictions accelerated China’s attempts to de-Americanise supply chains, said Alexander Capri, research fellow at the Hinrich Foundation and visiting senior fellow at the NUS Business School.
“The Chinese are going to double down on being able to become self-sufficient in key strategic technologies and, of course, semiconductors is one of those,” he said. “We know that Huawei purchased $60bn-$70bn worth of technological equipment from multinationals, a lot of which was semiconductor related prior to the restrictions, but it remains to be seen exactly how measurable the true impact has been on American companies.”
Launching a technology arms race
This marks the start of what Capri calls “essentially a technology Cold War” – a battle between the US and China not only for tech supremacy, but also between two competing ideologies. The fear for US companies is that, hamstrung by punitive export controls, they cannot compete with China’s state-backed, techno-nationalist mercantilism.
“If you look at how [China] leverages scale… [companies] don’t have to be very efficient; they don’t have to be absolutely leading edge,” he said. “They can be pretty good, or very good but not necessarily the best, and they can still dominate. That’s exactly what happened with Huawei.”
Whether China will replicate the Huawei success with semiconductors is not clear; it has failed in other areas such as jet engines and computing operating systems despite massive spending, adds Capri.
“I can’t make the assumption that the Chinese will eventually dominate when it comes to semiconductor production,” he says. “But I can make the prediction that they’re going to creep up and capture more and more of the middle bandwidth consumer demand in the marketplace for things like smartphones.”
The decoupling of the US and China is already beginning to hit tech companies, with around $400bn of revenue at risk in total for all US businesses – around 15 per cent of their market capitalisation, or $2.5tn in value – according to the Boston Consulting Group.
While the collateral damage to US tech is clear, some commentators, such as Dan Ikenson, director of the Herbert A Stiefel Center for Trade Policy Studies at the libertarian think tank the Cato Institute, believe it might be a cost worth paying.
“We are really hurting US companies by cutting them off from their markets,” he said. “But while there are costs, they’re buying us something: security.”
If the US wants to win the “battle for technological pre-eminence”, Ikenson added, it is going to need to play by new rules. That means, despite identifying as a “hardcore free trader”, it should set more targeted export and investment controls to curb the national security threat from China.
Tech Monitor: Dark factories and decoupling: China-US tensions suggest a tectonic supply chain shift Part of New Statesman Media Group
“Technology is very similar to the arms race,” he said. “There are lots of first-mover advantages – commercial, security, intelligence – and so by being passive about theft of intellectual property or not competing to be first, we are jeopardising our future.”
Ikenson believes a degree of supply chain interdependence can act as a “mutually assured destruction principle”, compelling both sides to cooperate so that US companies can continue to benefit from the expansive Chinese market.
US-China relations under Biden
Now that Joe Biden has taken office, will the US’s hard line with China continue? Orit Frenkel, CEO of the American Leadership Initiative, thinks it will – but with less of a scattergun approach and more industry consultation, and hopefully an overhaul of the US approach to tech.
“There’s no question, if we continue operating the way we are now, we will be challenged,” she said. “China has invested a tremendous amount in its technology, and frankly the US is falling behind in a lot of areas. But I think with the right policies we definitely can be competitive and that’s something that there’s bipartisan agreement on.”
Frenkel’s vision is for a modern “digital Marshall Plan” to provide access to low-cost financing so that providers outside China can compete with the country’s heavily subsidised tech in developing economies.
“This is important because they’re not just selling their equipment, they’re selling their values and standards as well,” she said. “The West has a vision of the internet that is more democratic [and] transparent – and a lot of those countries want our vision, but they can’t afford it.”
Tech Monitor: Biden presidency could boost chipmakers at home and abroad Part of New Statesman Media Group
The case for greater international cooperation is clear. In many areas, such as 5G, the US relies on European giants Ericsson and Nokia to take on Huawei, and the failure of Trump’s first round of export controls has exposed the limitations of unilateral trade restrictions.
Capri draws parallels with the public-private partnerships that grew out of the Cold War-era American moon shot programmes, where government-led funding created highly successful commercial spillover effects.
Tech Monitor: What does Biden’s victory mean for an emerging silicon ‘Cold War’? Part of New Statesman Media Group
“The potential for public private partnerships in the United States over the long term, to produce a new moonshot-like environment is absolutely within the realm of possibility,” he said. “The biggest obstacle to this is political paralysis in the United States.
“If Biden can’t get bipartisan consensus, then a lot of this stuff won’t happen and that will be detrimental to US tech firms in the mid- to the long-term; but if it does happen, then again we have a Balkanised, more regionalised and localised world of value chains where these companies can be active in all those areas and still do very well.”