My Thoughts on The US-China Trade Wars’ Effect on US Tech Dominance

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The arrest of Huawei’s CFO, Meng Wanzhou in Vancouver in December 2018 at the request of the US brought to fore the ongoing trade war between the US and China which is mostly instigated by US president Donald Trump. The arrest came after the U.S. Department of Justice accused Meng (she’s also the daughter of Huawei CEO Ren Zhengfei ) for allowing SkyCom (a Huawei subsidiary), to do business in Iran, violating U.S. sanctions against the country and misleading American financial institutions in the process. This action attracts a jail term of over 30 years in the US.
Hot on the heels of her arrest were concerns that the perceived close ties Huawei has with the Chinese communist government, would allow the Chinese state to spy on any country that runs Huawei telecom equipment especially the upcoming 5G network. It is alleged by the US that Huawei has ‘backdoors’ to all their hardware that can allow unhindered entry into any network and conduct espionage or even shut down the equipment. The US has therefore banned all US telecom operators from using Huawei equipment in their networks especially in 5G deployment.

Why 5G and not 4G?
Unlike 4G which was backward compatible with older 3G and 2G technologies, 5G is the first generation of mobile technology that is not backward compatible. This means that to roll out 5G, a totally new network is needed compared to previously where an upgrade from 3G to 4G was mostly done by upgrading the software of several network components and adding few more components. 5G therefore means building an entirely new network from scratch for mobile operators.
Another factor is that 5G is designed to power the next generation of connected devices and enhance the adoption of IoT worldwide. What this means is that in the near future, vehicles, furniture, and factory machinery will all be connected; surgeries, remote robot operations and many of today’s manual activities will be done by machines that will be connected via the 5G network. In a global economy that is increasingly dependent on connectivity to derive any economic and technical efficiencies, the desire to have full control of the 5G network is obvious. Take a scenario where the entire US transport, agriculture and manufacturing sectors runs on 5G network equipment that Chinese government has a direct access through backdoors created by Huawei for the Chinese state. This is what Trump fears. Indeed he is somewhat justified to habour these fears, but the question is whether they are valid fears. I will not delve into the politics of it but will instead look at the possible scenario of the effect of America’s actions towards Huawei and the industry dynamics.

Trade Wars and Cybersecurity
With the escalating Trade war between US and China, Donald Trump last week declared a national emergency on cybersecurity. Trump signed an executive order declaring a national emergency relating to securing the US cybersecurity supply chain. Under the order’s provisions, the U.S. government will be able to ban any technologies that could be deemed a national security threat. The order, “Securing the Information and Communications Technology and Supply Chain,” opened the door for the US government to classify companies like Huawei as a national security threat and ban the company’s technology from the US and also forbade US companies from trading with Huawei unless they have special permission/license from the government.

This order has resulted in companies such as Intel, Qualcomm and Alphabet (Google’s parent company) stopping the supply to Chinese firms of components that use American technology. One of the most notable announcement was by Alphabet stopping Huawei from accessing the licensed Android Operating System that it uses for its smart phones. With Huawei being the largest telecom equipment manufacturer and 2nd largest smartphone manufacturer in the world (Samsung being the leader and Apple being number 3), this ban will have far reaching effects on Huawei’s business plans. However, if the rumors are true, Huawei has been anticipating this day and already have an in-house developed mobile OS that is believed will takeover from Android OS. They have also been stockpiling chips and components that can last them 3 more months as they seek alternatives.

In their 2011 book “That Used to be Us: How America Fell Behind in the World It Invented and How We Can Come Back”, Thomas Friedman and Michael Mandelbaum list the major problems the US faces today and possible solutions. These problems are: globalization, the revolution in information technology, the nation’s chronic deficits, and its pattern of energy consumption. They also go ahead and state that to reclaim their position, the US must approach this revival with ‘war-like’ conviction. Something Trump seems to be doing to the letter.

US Tech Dominance is Waning
There are several events that have shown that the US is losing its dominance in technology space and is doing all it can to try protect that privilege.
Early in 2018, the US banned ZTE, a Chinese mobile equipment manufacturer from sourcing electronic parts from US suppliers, the reason for the ban again was the flouting of the Iran sanctions by supplying Iran with telecom equipment. The ban resulted in ZTE seeking alternative suppliers and also led to more investment in the chip manufacturing sector in China. A month before, Trump vetoed the proposed takeover of the US based microchip manufacturer Qualcomm by Broadcom, (a US founded firm but domiciled in Singapore) due to the ownership structure. FYI, Qualcomm holds several key patents on 3G and 4G which are one of its biggest revenue streams. all 3G and 4G phones purchased globally pay a royalty fee to Qualcomm for using its patents.
With the upcoming massive uptake of 5G and the rollout of a connected global economy, the US fears that Broadcom’s takeover of Qualcomm would make the US lose control of the 5G technology space. With Huawei having developed their own 5G microchip and the global market for 5G chipsets in smartphones expected to grow at a compound annual rate of 75 per cent between 2019 and 2024, The US is fearful that the cheaper and better Huawei 5G chips will erode Qualcomm’s revenues and dominance.

The recent settlement between Apple and Qualcomm inadvertently put Huawei as a top contender for the 5G chip market. This is because when Apple agreed to pay Qualcomm the disputed royalties for Apples’ use of Qualcomm patents, they also agreed to now use Qualcomm chips in all their subsequent 5G phones. Since 2016, Apple has been using Intel chips as the court battle raged, this gave Intel an opportunity to finally ride the mobile wave crest it nearly missed some years ago. However, the shock announcement by Intel that its pulling out of 5G chip research and development hours after Apple and Qualcomm settled their dispute placed Huawei as a possible major 5G chip supplier. All this time, Huawei has been developing 5G chips for its own internal consumption (used on Huawei equipment only), but with Intel pulling out, Qualcomm’s obsession with high royalty fees and Huawei offering the same technology (if not better) for much lower cost than Qualcomm and devoid of royalties, means that Huawei can easily start supplying their 5G chips to third parties such as Nokia, Ericsson, Samsung and others. This prospect of a global economy running on Chinese supplied 5G chips is what is scaring Trump. All the ‘national security’ talk is but an excuse to defend these seemingly drastic measures the US is taking against China as they head full-steam towards tech dominance. On the Internet front, the US is also feeling the heat of the decreasing dependency on US internet infrastructure to power the global internet. China has effectively managed to create a separate internet for its citizens whose size cannot be ignored. For example, WeChat has 1.04 Billion active users in China (Compared to WhatsApp’s 1.5 Billion globally), Weibo, China’s version of twitter, has over 462 Million monthly active users (Twitter has 260 Million), E-commerce site Alibaba has been growing at an annual rate of 58%, despite its revenues being far behind Amazon ($178B vs $40B), Alibaba’s net profit is comparable to Amazon. If this growth is sustained (and all signs show it will), Alibaba will surpass Amazon in sales within 5 years. For example: If you compare “Singles’ Day” – a sales event initiated by Alibaba in China – with America’s Black Friday and Cyber Monday, it is evident that the Chinese eCommerce market is bigger and has more potential: On Singles Day, Alibaba generated US$30.8 billion in sales. More than double the US$14.1 billion that merchants across the U.S. achieved on the two western record days on Amazon. China also has all odds stacked in their favour because:

  • China has over 830Million internet users (That’s more than twice the entire US population)
  • China plus its Asian neighbors account for 49% of the global internet users, closely followed by Europe with 16.8% of global internet users.
  • China’s 830Million internet users account for 20% of all users globally, followed by India’s 500Million users.
  • 98% of all Chinese access the web via a mobile device, compared to 73% in the USA.

The above few examples show that China has been successful in creating its version of the web that is somehow independent of western resources.

Russia’s National Internet Plans

With the announcement by Russia that a law is now in place to create what they call a ‘national internet’, Russian aims to be in full control of how Russian internet traffic is routed. Among other measures, it dictates the creation of the infrastructure to ensure the smooth operation of the Russian internet in the case of Russian telecom operators’ failure to connect to foreign root servers.

This seemingly drastic move was necessitated by the aggressive nature of the U.S. National Cybersecurity Strategy adopted in 2018 under Trump. To give a background as to why Putin signed the bill into law, It would be worthy noting that the US currently controls the top level root servers that help all internet users worldwide to convert human friendly domain names (such as http://www.tommakau.com) to computer friendly address names, see the list here. This effectively means if the US decided to block certain countries from accessing the root servers, they will have effectively blocked them from accessing much of the internet and world wide web. The US also has legal right over all dot com, dot org, and dot net domain names (including this blog) and can take down any website it so wishes because they are all legally US websites. “Under these conditions, protective measures are necessary for ensuring the long term and stable functioning of the internet in Russia.” Said Vladimir Putin when signing the bill.

What Next?

These recent events indicate one thing; The world is detaching itself from over-dependence on US technology and infrastructure. This has got the US into panic mode. With the future becoming highly connected, technology will be at the fore front of human advancement and the US fears it might not be the world leader it has been in the past, like oil today; whoever has control of technology in future will control the world. To cloth this fear in ‘national security’ is callous for Trump to say the least, this is not about national security but about commercial dominance. The outcomes of such drastic moves cut both ways and will end up harming the US more than helping it. What I am sure is that China will emerge victorious if today’s statement by the Huawei CEO is anything to go by. In the last 8Hrs, the US has offered a 3-month ‘stay of execution’ for the Huawei ban because of the number of US citizens who own Huawei phones and operators who are heavily dependent on Huawei gear. This is to enable them transition to other phones and network equipment.

Locally, the US-China trade war might have major ramifications especially if the ban extends to other Chinese telecom gear and handset manufacturers. Tecno, infinix and iTel command a 34% market share of all smartphones. All these three brands are made by one company and this extends the risk further based on the market share by this one company should it also face the ban. It is also worth noting that large sections of Kenya’s mobile network runs on Huawei gear (including the base stations serving State house). The short term effect of this ban will be increased operating costs by local mobile operators as they seeks alternatives from European suppliers whose equipment and deployment cost is more expensive. The long term effect is that these Chinese companies will adapt to not depending on US tech and come up with their own technology and processes to manufacture even cheaper telecom equipment; couple this with the ambitious Belt and Road Initiative by Xi Jinping and the US will have forever lost its dominant position on the world stage.

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