Two high-ranking European government officials told Asia Times in background discussions that a US ban on sales of electronic components to Huawei Technologies wouldn’t stop the Chinese telecom firm from rolling out 5G mobile networks in Europe.
Europe doesn’t really have a choice in the matter, the officials emphasized in background briefings, because the United States doesn’t offer a competing product, and Huawei’s competitors – Ericsson and Nokia – don’t have the capacity or the knowledge to replace the Chinese giant.
The two Scandinavian firms don’t offer serious competition to Huawei, but rather work in close cooperation with the much larger Chinese firm. Huawei’s research and development budget is roughly double that of Ericsson and Nokia combined, according to public sources.
So intertwined were the activities of Huawei, Ericsson and Nokia in European telecom infrastructure that it is impossible to ban the sale of parts to one of them without affecting the others, an official explained. The official, who oversees telecom policy for one of the Group of 10 economies, doubted that Washington’s action would have much impact.
German Chancellor Angela Merkel and Dutch Prime Minister Mark Rutte told reporters Thursday that they would not ban the Chinese firm, adding that policies were in place to safeguard their security. French President Macron told a technology conference Friday that France’s “perspective is not to block Huawei or any other company. France and Europe are pragmatic and realistic.” Macron stressed that France would balance security with access to good technology.
After the Trump Administration suspended US exports of handset chips to the smaller Chinese telecom firm ZTE in the spring of last year, Huawei undertook a crash program to produce its own advanced chips. I reported exclusively in April that the Chinese firm had reached self-sufficiency as of December 2018.
Huawei’s Kirin chipset, designed by subsidiary HiSilicon and fabricated by Taiwan Semiconductor Manufacturing and other firms, effectively replaces the Qualcomm chips that power most high-end handsets.
A memo from the CEO of HiSilicon, made public last week, confirms that Huawei is independent in chip production, comparing the firm’s program to achieve self-sufficiency to the Chinese Communist Party’s Long March of 1934-1935.
Huawei imports several dozen electronic parts from American firms. Nikkei Asian Review and other media reported last week that Huawei has stockpiled a year’s inventory of critical components. Finding alternative sources or simply reverse engineering the products is a much less difficult challenge for Huawei than developing its own chipsets.
Google has suspended updates of its Android operating system for Huawei handsets, Reuters reported on Sunday. Huawei has developed its own handset operating system as a backup, but the Google ban would restrict Huawei’s use of Google apps, including Gmail.
China may retaliate with a price war for advanced chips. Huawei announced a full portfolio of artificial intelligence-enabled chipsets under the Ascend brand, powering large data processors as well as handsets.
After seizing a dominant position in telecom equipment, Huawei now competes head-on with America’s best chip design firms, including Qualcomm and Nvidia, in the processor space. Industry experts speculate that China might retaliate against America’s export ban by drastically lowering the prices of its AI-enabled chips, pushing the American firms out of Asian and European markets that comprise the majority of their sales.
The US export ban might backfire, locking Asian and European buyers into China’s emerging chip technology. Huawei became the dominant player in the telecom equipment market by undercutting its competition, forcing competitors out of the market, and hiring their best talent.
Of Huawei’s 188,000 employees, 40,000 are foreign, many employed in twenty-one research centers that the Shenzhen firm supports around the world. If the Trump Administration fails to hinder Huawei’s 5G rollout, as European leaders have indicated it will, Huawei may also emerge as a dominant player in chip design and manufacturing.
Not surprisingly, semiconductor stocks were among the worst performers on US exchanges last week. Nvidia was the worst performer on the S&P 100, losing 7.2% over the week. Trade war worries dominated sector performance in the S&P 500. Farm machinery was the worst performing sector in the broad index, an unsurprising result given the vulnerability of US farm exports.
The best-performing sectors all had a negative correlation to term yields: utilities, real estate investment trusts, consumer staples and homebuilders.
I continue to recommend defensive sectors in the US in a barbell with Chinese equities.