Winning the Tech Battle With China: The Example of Huawei

COMMENTARY Technology

Winning the Tech Battle With China: The Example of Huawei

May 24th, 2022 6 min read
COMMENTARY BY
Min-Hua Chiang

Research Fellow and Economist, Asian Studies Center

Min-Hua is a research fellow and economist in the Asian Studies Center at The Heritage Foundation.
The federal government put restrictions on Huawei’s business expansion in the U.S. starting in 2018 over concerns about the potential threat to national security. Sheldon Cooper/SOPA Images/LightRocket / Getty Images

Key Takeaways

Beijing has assigned technology a central role in its global rivalry with the U.S. Allowing it to succeed would threaten Americans at home and our interests abroad. 

Huawei’s failure shows China’s inability to reach technological self-reliance.

If China wants to fight it out, the U.S. must do what it has to in order to prevail. It has the economic model to do it.

Whenever China policy is talked about in the U.S., the conversation often turns to how the Trump administration “got China’s attention.” It did, indeed—specifically, by complicating its plans for tech dominance—a policy that should continue in the current administration.

Beijing has assigned technology a central role in its global rivalry with the U.S. Allowing it to succeed would threaten Americans at home and our interests abroad. 

A great case in point in the tech battle with China is what the U.S. has done with Chinese telecommunications equipment and consumer electronics manufacturer Huawei. 

The federal government put restrictions on Huawei’s business expansion in the U.S. starting in 2018 over concerns about the potential threat to national security and the buildout of 5G networks here and around the world.

Those concerns included Huawei having the ability to use its network access to spy on the U.S. or to shut down communications within the U.S. in the event of a cyberwar between the two countries.

Huawei’s close relationship with the Chinese communist government would likely lead to the government using the company’s assets for China’s own interest. Several Huawei employees, including its CEO, Ren Zhengfei, have been closely affiliated with either China’s People’s Liberation Army or Chinese intelligence.

The U.S. is not the only country that blocked Huawei over national security concerns. The United Kingdom and Sweden have banned their domestic telecommunications providers from installing Huawei’s equipment in their 5G networks since 2020. France and Germany also imposed restrictions on Huawei’s 5G use in their countries’ telecom networks. Several Eastern European countries signed declarations with the former Trump administration to exclude Huawei from their 5G networks. TaiwanJapan, Australia, and New Zealand also blocked Huawei from building 5G networks; and Singapore picked up Ericsson and Nokia for its 5G network instead of Huawei.

The Chinese tech giant’s business has been hurt the most severely by the U.S. banning it from buying semiconductor chips for its products from U.S. companies since May 2019. The restrictions tightened even further in August 2020 and included 152 Huawei affiliates in over 20 countries. The U.S. also essentially banned important chipmakers in the world such as TSMC in Taiwan and Samsung in South Korea from selling chips to Huawei.

The negative effect on Huawei’s business then came two years later, as the company had already stockpiled essential chips from foreign companies before the ban took effect.

Huawei’s plunging sales revenue began in 2021, declining by almost 30% compared to 2020. In 2022, Huawei’s annual report indicated a sharp decline in its first-quarter revenues of nearly $20 billion in April, sliding 13.9% from a year earlier. In comparison, Huawei’s two important competitors in the smartphone business—Apple and Samsung—announced their biggest revenue surges ever.

The consumer business (smartphones, computers, tablets, etc.) in China is Huawei’s largest source of revenue. In 2021, Huawei’s total sales in China fell by 31% and the consumer business worldwide declined by almost 50%, according to Huawei’s annual report.

Despite the sharp fall in business, China’s market still comprised 65% of Huawei’s total sales revenue, followed by Europe and the Middle East (21%), the Asia-Pacific (8%), and the Americas (5%). Looking at the sales by product segment, Huawei’s consumer business shrank from 54% in 2020 of total sales to 38% in 2021. As a result, the commercial telecom carrier business took a greater share in the company’s sales revenue (44%).

Taiwan’s TSMC is the most important provider for the most advanced semiconductor chips in the world. The ban on TSMC chips has kept Huawei from making the most developed devices, and Huawei is no longer a major global smartphone vendor.

In 2019, Huawei was the second-largest smartphone producer, only behind Samsung. Its share in the global smartphone market has now dropped from 15% in 2020 to 3% in 2021. Its share in China’s smartphone market also fell significantly from 31% to 10% during the same period.

On the other hand, Apple, Samsung, and other Chinese companies (such as Xiaomi and OPPO) benefitted from Huawei’s business loss and took greater market share in China and the world as a result.

With the ongoing chip bans, Huawei has shifted its focus from consumer business to the enterprise market (government, corporate, and institutional business) and from making hardware to creating software in areas such as cloud computing.

Huawei’s failure shows China’s inability to reach technological self-reliance. Despite the Chinese government’s strong financial backing and great ambition to catch up to other chip manufacturers, China’s largest chip foundry, SMIC, is still several generations of technology behind Samsung and TSMC. This indicates how difficult it is for a latecomer to develop a level of technology similar to more advanced economies.

China has tried to develop its technology through foreign investment. However, foreign companies’ investment in China still aims to take advantage of its less expansive production costs and its huge market for consumer products while the key technology and essential research and development activities remain in their home countries.

The ban on exporting semiconductor equipment and restrictions on exporting certain high technology products to China’s chipmakers begun during the Trump administration have further hampered China’s ability to advance its level of technology comparable to Taiwan’s and South Korea’s.

The Chinese government’s strong support for developing high technology at home did not generate globally competitive companies in the end. Chinese companies are lagging other leading companies in innovation and technological improvement. Of the top 10 spenders on research and development in the world in 2020, six are companies in the U.S., two are from Taiwan, and another two are from South Korea. No Chinese companies were on the list.

Those top companies in terms of research and development expenditures are also top semiconductor companies by sales revenues, according to IC Insights. The greater sales enabled those companies to invest more in research and development and improve their technology. Additionally, part of their profit is derived by producing products in lower-cost countries such as China.

In sum, China has been trapped in a rigid division of labor in the global production system. It has not been able to escape its role as a final assembly place and low technology provider in the supply chain network.

Although China has the largest chip production site in the world, most of its chip production is done by foreign companies in China. The chips made by Chinese companies themselves only account for less than 7% of global semiconductor sales.

Huawei’s business crash revealed China’s vulnerability in the geopolitical confrontation with the advanced economies, the key technology holders at present.

Economically, China’s inability to catch up also shows that industrial upgrading and technology advancement based on substantial government subsidies has only led to inefficiency. Government-led industrial and technology development has its limits and can’t be sustained in the market-oriented global economic system in the long run.

The current confrontation with China on tech is not something the U.S. sought. Beijing precipitated it with policies like Made in China 2025 and the dual circulation model that openly attacked the strengths of the U.S. economy.

That said, if China wants to fight it out, the U.S. must do what it has to in order to prevail. It has the economic model to do it. The case of Huawei shows it has other potent tools as well.

This piece originally appeared in The Daily Signal

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