The Bigger Picture behind the Trade War and Huawei Isolation

The China economy is becoming more independent than ever before

July 6th 2018, The United States imposed $250 tariffs of Chinese Goods.

May 15th 2019, President Trump banned Huawei with national security.

May 19th 2019, Americans companies are obligated to cut off Huawei updates

This led to tremendous problems for Huawei’s in hardware production, software updates (including Bluetooth service), disconnect with major social applications, etc.

After hitting a 50% growth in phone sale, Huawei Technologies Co., the company who plays as the second biggest role in the smartphone market, has fired up the trade war and resulted in massive destruction within the entire stock market where S&P, Dow decreased over 1.2%.

Before diving deep into the root causes and implied effects of the trade war, let’s take a snapshot of Huawei’s challenges to remain competitive within the global market without the aid of U.S companies as they had before.

Without Qualcomm and Intel as their previous chip suppliers, Huawei has to look for an alternative supplier to replace/substitute the materials required to manufacture their phones and computers. This way they would have to spend a significant amount of time and money to explore and negotiate with non-American companies, ideally Chinese companies.

Fortunately, Huawei has managed stockpiled chips and other vital components to keep its business running for at least three months from the beginning of the trade war (mid-2018). Therefore, Huawei’s production will technically be sustained within the short-term, in a long term it might strength Huawei’s internal management since production is anticipated to pull back and become less sensitive within the relationship between both parties.

2. Software

The past, present Huawei models would stop have software updates on August 19, 2019, and new models such as P30 Pro would lose access to Android, Bluetooth, Microsoft, Majority of Applications. The only way to turn it over would be a successful renegotiation between the Chinese and the Americans which is unlikely to happen. Compare to hardware difficulties, software problems would be the biggest problem that would sustain Huawei’s sales performance.

However, the real challenge for Huawei is not the ability to recode and generate these applications. The real challenge is to regain consumer trust and demonstrate competitiveness in terms of its functionality and trendiness. At the end of the day, Huawei really needs to maintain and recreate sales over, as being positioned as a such a disadvantage. In the short term, Huawei is unable to expand its market, but one thing they can do is to penetrate its existing market and develop better functionality.

Ultimately, it is not about picking a stand within the United States and China, it is more about knowing how does this conflict affect us, society. In my perspective, I have comprised the bigger picture into 4 parts:

1. Who is the real winner of the crisis

I think this topic is super interesting because the two biggest giants (largest GDP) within the world began a head-to-head trade war against each other would definitely harm the total social interest of the entire society by compressing the free trade ecosystem. But there are a few stakeholders other than the US government, China Government and Huawei that are impacted drastically.

Huawei’s loss is Samsung’s gain? What about Apple?

The smartphone hardware market has been reported as saturated over these 2 years and the market players have struggled to vertically integrate smartphone to accessories and increase the quality of the products such as camera and connectivity.

I would say the crisis ‘saved’ Samsung because the rising Chinese smartphone manufacturer has demonstrated superior growth and would be establishing its new foldable phone ‘Huawei Mate X’. The crisis has definitely calmed Samsung from its unpleasant growth danger. As Samsung’s share price has not increased since May 15 because of its earnings press didn’t convince the investors.

Samsung has definitely gained a decent market share at the non-Chinese market because of the disadvantage as Huawei is unable to access to Playstore and Window Services etc. Speaking in terms of Apple’s perspectives, perhaps not as such, The American company has one-fifth sales generated in China and Some of Apple’s components are manufactured in China. The hatred developed within the incident would definitely discourage Chinese consumers to purchase Apple’s products and vice versa. Therefore the loss from Apple might outweigh the benefits they can obtain from the trade war.

The trade war has caused disruption for global businesses and it also brought benefits for some. The additional tariffs major businesses are now required to pay would eventually shift their outsourcing options to better alternatives, for instance, Europe for American and Japan for Chinese. The proximity and similar economic development allow them to trade at a comparative better cost with similar quality. The European and Japanese declared that an additional 70 billion and 20 billion exports would be anticipated as the trade war continues.

Canada is an interesting one to look at. Due to the significant loss of Chinese exports for the Americans, they would want to stimulate imports from other countries. When the trade war began in 2018, The United States was proposing to restructure the NAFTA and extract values from Canada by imposing tariffs on Steels and Aluminum. On May 17th, 2019, The United States decided to eliminate all the tariffs they previously had (25% for steels and 10% on Aluminum), as a result, Canada has benefited significantly through the heat of the trade war.

Picture from City of Shanghai (Source: Unsplash)

2. The Rise Chinese Global Independence

The Huawei Crisis has also signified the economic power China has against the United States. In 2011, The United States did the exact same thing against the Chinese brand HTC, and within half a year the company went bankrupt. In contrast, Huawei appeared to have a larger network, more capital and greater branding, it shadowed the growth of the Chinese Economy where China is no longer recognized as a developing country.

In the past back into the 19th Century, Britain and France took part as the leader of the industrial revolution because of their established military power and agricultural power. After World War II, the Americans took the lead as a world leader because of its geographical strength in North America and advanced technology development. In the 21st century, China has boomed in population, economic strength, innovation development, and political strengths.

The Europeans have suffered a lack of innovation due to the flee of human capital to Northern America, The United States has rooted with significant debt and tensed international relationships. In the meantime, China has outpaced these countries and formed the alliance at the surroundings.

The Chinese adopted a strategy ‘One Belt, One Road’ which is similar to their well-known ‘The Silk Road’ but in an international scale, their goal which is to expand the physical land of China and expand its access to other countries. Here are a few things they have done following to the principle ‘One Belt, One Road’

  • The People Republic of China has created a vast network of railways, energy pipelines, highways across borders including East Coast to West China, India, Pakistan and the rest of Southeast Asia
  • Canceled the ‘One Child policy’ where they started to subsidize families for better fertility rates
  • Invested (lent at 0% interest) $170 billion USD in African’s infrastructure, in order to bridge the ‘One belt, One road’ in the future
  • Along with Huawei, the Chinese owns 3,750-mile cable between Brazil and Cameroon and a 7,500-mile cable connecting Europe, Asia, and Africa and is finishing uplinks across the Gulf of California in Mexico.

Within all these global infrastructure development, China is going to be the leader of telecommunication (5G and Undersea Tunnel), agriculture (as usual), capital investment. China has also led as the top exporting country since 2017. Therefore it is extremely reasonable to declare that China does not rely on other countries in order to survive.

5G network

The telecommunication speed competition has been super fierce for smartphone companies especially they are constantly competing against in advertising and functionality. Huawei is one of the pioneer smartphone manufacturers who initialized the fifth-generation network (5G), this gave Huawei a significant competition over their competitors like Samsung and Apple, in the meantime, this reveals the commitment Huawei as well as China has put into research and development. I think it is a historical moment for China as well as they were able to come up with 5G before Verizon did in America.

The Huawei crisis has also put the American into a disadvantage. Why? Because if Qualcomm and Intel remain as their chip supplier, they would have been able to absorb the 5G technology as well. Personally, I believe this is only the beginning of the disconnection between the Chinese and the Americans and at the end of the day the aggregate market would only lose its competitiveness as both parties refuse to trust each other.

The chain effect to the United States Automotive & Farmers Industry

There’s no doubt that a trade war would decrease our exports as well as slowing down the economy because of the lesson in consumer demand. Indeed, the smartphone crisis has led to a deep slump in the automotive and agriculture industries and here’s why:

Since the advent of NAFTA, The United States, Mexico, and Canada which contribute to most of North America have enjoyed the benefits of free trade, The US government has imposed a tariff of 5% on all Mexico imports and ultimately would increase to 25%.

The automotive industry within North America has more reliance on neighbor countries in terms of manufacturing progress as well as consumer spending. The increase in tariffs has brought logistical slowdowns, staffing concerns and tighter margins which are unlikely to sustain growth within the business. The market has revealed a bear trend where companies’ stocks have decreased over 1.5% (Ford Motors and General Motors).

Mexico contributed as the 2nd largest car manufacturers to the United States where 44% of General Motor components are manufactured in Mexico. As a result, the tariffs would eventually increase car prices by 3.6%, which would decrease the demand of the 16–18 billion automobile industry.

The United States has over 2.2 million farms (covering 922 million acres of land) and historically known as a net exporter of vegetables. However, the country is too big to farm and a lot of fruits are not suitable to plant and the United States where they would have to import them from the Mexicans and the Europeans.

Levying a 5–25% tariff to Mexico’s imports would hike our commodities price up, in another way to explain — we have to pay extra taxes for the cost of the trade war. Prices of fruits have doubled up in the United States and here’s a few examples of Mexico’s exports to the United States:

  • Avocados
  • Berries
  • Asparagus
  • Canary Seed
  • Beef & Pork

Takeaways

The Huawei incident has completely fallen out of the United State’s expectation and the relationship between the United States and China is going to get worse. In my opinion, sustaining trade war would be a huge disadvantage to the United States GDP and its national status, and what really takes to stop the war is a compromise from the United States.

If you have a different perspective towards the bigger picture or if you want to know more about certain topics I have mentioned above? Feel free to contact me (alex.ha4121@gmail.com)! Thanks

just articles about technology strategy