Semiconductors rally as US and China step back from the brink

Semiconductor stocks including Intel (+2.2%) and Nvidia (+1.35%) were among the top performers in an otherwise listless New York session. The signal development of the day was a meeting between executives of US technology companies at the White House with economic adviser Larry Kudlow and Treasury Secretary Steven Mnuchin, a forum for the tech industry to ask the administration to ease the ban on sales to Huawei. No news has emerged from the meeting, but the announcement of the meeting itself signals a shift in administration strategy.

During the past two weeks, the White House concluded that America’s campaign to dissuade US allies from engaging Huawei to roll out 5G mobile broadband had become a national embarrassment. As I wrote in my “Spengler” column July 7, the American claim that Huawei might steal data through back doors built into its network failed to convince the Europeans.

The issue, rather, is that the next generation of mobile broadband soon will incorporate quantum cryptography, a foolproof security system pioneered and field-tested by Chinese scientists. America’s public threat to reduce intelligence-sharing with countries that host Huawei networks lacked credibility because America’s dominance in signals intelligence (SIGINT) will shrink when 5G comes online.

A gauge of Huawei’s success is the poor performance of the stock price of its largest competitor, Ericsson. Ericsson’s stock price dropped 11% after it announced respectable quarterly results July 16, but admitted that it had secured no additional business at the expense of Huawei.

The ban on exports to Huawei raised the prospect of a segmentation of the global market into American and Chinese zones, to the marked disadvantage of the United States. As I reported, the ban on American exports to Huawei would have prevented the Chinese telecommunications giant from using Google’s Android operating system for its handsets. Huawei made its own handset operating system, brand-named Hongmen. China buys 400 million handsets a year, enough to force developers to rewrite Android applications for the Huawei system. That would break the American duopoly of Apple and Google.

Huawei had already set in motion the rollout of its operating system when the Chinese company’s chairman Liang Hua unexpectedly announced July 12 that it would not launch the new product. Industry observers concluded that the White House had decided not to cut off Huawei’s access to Google’s Android system.

The previous week, senior Google executives reportedly warned the Trump Administration that a competing Huawei system would endanger national security. According to news account, Google argued that a Huawei system would be less secure than Android, but that seems beside the point: The national security concern arises from the prospect that Huawei would muscle into a critical business controlled until now by American companies.

American chipmakers are just as concerned. Huawei began a crash program to build its own chipsets for phones (the Kirin line) and large-scale processors (the Ascend chip series), designed by its subsidiary Hisilicon. The chipsets are fabricated by Taiwan Semiconductor Manufacturing and others. Qualcomm, Nvidia and other producers of high-end chips fear a trade and price war that might box them out of the Asian market.

That’s what makes today’s meeting between Trump administration officials and technology executives especially timely. It points to a resolution of the US-China trade dispute with the support of a pragmatic president preparing for a re-election campaign.