Home Technology U.S.-China Relations Keep Getting Worse. It’s All About Technology. – Barron’s

U.S.-China Relations Keep Getting Worse. It’s All About Technology. – Barron’s

U.S.-China Relations Keep Getting Worse. It’s All About Technology. - Barron's

The Huawei logo is seen on the side of the main building at the company’s production campus in Dongguan, near Shenzhen, China.

Photograph by Kevin Frayer/Getty Images

The U.S.-China relationship just took another hit, with the Commerce Department on Friday taking new steps to restrict privately held Chinese company Huawei Technologies—this time curtailing its access to global chip makers that use U.S. technology.

Analysts have been closely watching the battle for dominance in 5G, the next generation of wireless technology expected to power a fourth industrial revolution, concerned it could escalate a brewing technology Cold War that could hurt both countries.

On Friday, the Commerce Department amended an export rule to “strategically target” Huawei and its chip-design unit HiSilicon’s access to semiconductors from foreign companies like
Taiwan Semiconductor
(TSM) that simply use certain U.S. software and technology, requiring foreign companies to get a U.S. license before supplying certain types of chips to Huawei. Taiwan Semi’s largest customer for leading-edge chips used in 5G smartphones and base stations is Huawei.

“It appears to be a novel, complex expansion of U.S. export controls,” said Kevin Wolfe, a partner at Akin Gump and former senior Commerce Department official who focused on export restrictions.

The move had been in discussion for months and among proposals under consideration last fall, many of which were tabled as the U.S. made headway on a trade deal with China. But tensions have ratcheted higher as the U.S. economy is ravaged by Covid-19 and the Trump administration has been fighting with China about accountability for the outbreak—and technology has been the heart of long-simmering tensions between the two countries.

The U.S. last year blacklisted Huawei, the world’s largest telecom equipment maker and a leading supplier of gear for 5G networks, using export restrictions to limit its access to components from U.S. suppliers. But U.S. companies pushed back and were able to get licenses to continue supplying Huawei with some components. That allowed Huawei to stockpile months of needed components, according to analysts, and the company managed to report record revenue growth in 2019.

The measures out of the Commerce Department on Friday also included an extension of some of those licenses for another 90 days though the department indicated that would be the last extension. The takeaway: It sets the U.S. and China up for even more conflict at a time both countries’ economies are already reeling—and technology companies will be caught in the crossfire.

In an email, Eurasia Group’s Paul Triolo called the measures “a major blow to both Huawei and China’s 5G ambitions” and said that “China’s handling of the pandemic has given China hawks in the administration new ammunition to push this through.” Triolo expects a “swift and strong” reaction from China, targeting U.S. technology firms operating there.

“It is a return to 1970s and 1980s Cold War export controls of technology,” says Paul Schulte, a longtime Asia strategist and analyst who now heads up independent Schulte Research. The moves though won’t affect China’s lead in 5G but could slow technology innovation broadly, he said. “The bottom line is that this is highly inefficient and we will need two of everything.”

It also leaves companies scrambling and trying to avoid getting caught in the crossfire as both the U.S. and China look to become more self-sufficient. Taiwan Semi, for example, said Thursday it would spend $12 billion to build a chip factory in Arizona though production doesn’t start until 2024. Analysts played down its significance. In a client note, Susquehanna analyst Mehdi Hosseini noted that the capacity of the proposed plant would be less than 25% of U.S. demand. “This reminds us of the 2017 Foxconn plans to build mega-display plant in Wisconsin. It turned out to be just a headline,” Hosseini said.

TS Lombard analyst Rory Green said in an email that Taiwan Semi’s plant news ahead of the export restriction move was no coincidence and foreign companies may get licenses from the U.S. in return for foreign direct investment or job creation promises.

If the Administration implements it on a case-by-case basis, the news could amount to ”a big bang headline and then a step-forward-step-back approach in reality,” much like the last round of Huawei restrictions, according to Tarun Chaabra, a former White House National Security Council staffer who now focuses on China’s growing global influence as a fellow at the Brookings Institution.

Though Taiwan Semi is in the crossfire of the restrictions—and shares were down 3.3% early Friday to $50.39—Schulte said he thinks the development could ultimately be good for companies like Taiwan Semi since a bifurcated technology ecosystem would mean everyone will need two of everything—as they try to supply the U.S. and China separately.

If there is any “good” news for the chip industry, Wolfe noted that the new export restriction is targeted and doesn’t affect other chips or items made by U.S. or foreign companies outside the U.S. that are now able to be sold to Huawei. That could allow Huawei to tap alternative sources—buying more from China’s
Semiconductor Manufacturing International
Corp. (981.HongKong), even though it may not be able to make as advanced chips as Taiwan Semiconductor, or others like
Samsung Electronics

Samsung and companies like
SK Hynix
(660.Korea) could also see more demand as China accelerates its own memory capabilities, Wedbush technology strategist Brad Gastwirth said in a note. “From an intermediate to longer term perspective, China still needs to build a 5G network, phones will still be built bought, whether they use
(2454.Taiwan), HiSilicon,
(QCOM)—they will get built,” Gastwirth said.

But Korea and Taiwan risk a difficult balancing act, increasingly caught between economic dependence on China and reliance on the U.S. for national security, Green says. “This marks a clear escalation in the ‘tech war,’” he says.

Longer-term, the technology ecosystem could be carved in two—not just chips and 5G but also software. “China’s ambition is comprehensive: to develop and, eventually, export a full ecosystem of digital tools, from software to hardware to fintech to social media to telecom infrastructure,” Chaabra said.

That could set technology investors up for a lot more volatility—and reassessing assumptions about profit margins and business models.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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