In our previous update on “Heightened U.S. and China Trade Tensions Now at the Tipping Point ,Supply Chain Matters raised the prospect that within the high tech and consumer electronics supply network sector, new U.S. moves to curb Chinese telecom producer Huawei Technologies access to U.S. supply networks is quickly reverberating across the high-tech sector. In a matter of just a week, implications and concerns have indeed risen.

Some have termed the U.S. move as “weaponizing global supply chains.” The Economist opined this week, in part: “Supply chains are highly specialized and globally connected. Cutting them off – weaponizing interdependence”, in the jargon -can cause serious disruption.”

 Others rightfully point out that the consequences of the U.S. action can be far reaching, and indeed, they can be.

 

Background

On May 15, President Donald Trump issued an executive action barring U.S. firms from using telecommunications equipment made by firms that are a risk to national security or supplying components to such firms, while not specifically mentioning a specific technology provider. On that same day, the U.S. Commerce Department, indicated that the agency was adding Huawei Technologies to a list of firms that U.S. companies cannot do business without express government approval.

Consequently, Google’s decision to restrict Huawei’s access to certain proprietary features of the Andriod operating system, was followed in quick succession by announcements from Intel, Infineon, Micron, Qualcomm, other semiconductor, high tech and screen component manufacturers, all curtailing supplies to the Chinese telecom producer. Once more, the Trump Administration is hinting that five additional Chinese providers may be added to the restriction listing.

A similar U.S. action last year targeted ZTE Corp. from doing business with U.S. companies which brought that manufacturer to a near business crisis. That action was reversed three months later, supposedly when Chinese leaders appealed to President Trump, and ZTE having to pay a $1.4 billion penalty.

 

Where This Disruption Headed

Some like Bloomberg, indicate that the U.S. national security action implies not only an escalating trade war, but the possibility of “a permanent technology schism” that could disrupt the industry supply chain permanently. The Washington Post opined last week that the U.S. conflict with China is increasingly becoming a technology war, beyond that of trade.

Bloomberg quotes Alex Capri, a senior fellow at the Business School of National University of Singapore as bluntly indicating: “Long-held relationships between supplier networks and global ecosystems will fall apart. Markets will fragment, and there will be a decoupling of China and the U.S. into two distinct tech supply chains.

Others indicate potential Chinese retaliation on U.S. companies doing business in China, and the listing of speculative names is also concerning including that of Apple, Cisco, Hewlett Packard and others.

We are further reminded that 90 percent of the global production of rare earth materials used in high tech equipment, batteries, missiles and navigation equipment originates from China and can similarly be declared as a national security resource. China also remains the epicenter of high-tech and consumer electronics design and manufacturing which is likely not to be replicated in large-scale across the U.S., contrary to Trump Administration Made in America beliefs.

 

Added Perspectives

While it is natural to want to dismiss this latest salvo as a tough negotiating tactic by the Trump Administration to force China’s hand in coming to a comprehensive trade agreement, many are beginning to believe, including Supply Chain Matters, that the ramifications of this action will linger on beyond any trade agreement among these two influential nations. In short, it is a very risky move with a lot of implications if not managed smartly.

This is indeed shaping out to be an advanced technology conflict being played out by two very influential economies, and existing high-tech supply networks are now in the crosshairs as to the implications.

There are obviously arguments to be made from both sides.

From a U.S. perspective there is the notion that China’s continual abuse of intellectual property protections and China’s threats and ongoing efforts to dominant advanced technology areas is indeed a U.S. national threat. On the other hand, the U.S. cannot take on this fight alone, and needs the cooperation and support of other nations. That is what comprehensive multi-nation trade agreements are all about.

From a Chinese perspective, there is the notion that the reliance on U.S. advanced technology adds to the growth of the U.S. economy and increased research and development. The Huawei crisis can serve as a new rallying cry to re-double efforts in advanced technology replication related to semiconductor and microprocessor technologies. China can further continue to leverage its massive cost advantage as an attraction to other nations, other than the U.S.

As to the threat of cyber back doors and snooping networks, as other editorial writers have observed, global hackers already have the ability to steal information from U.S. businesses, including the U.S. government itself.

From our admittedly prejudiced Supply Chain Matters  lens, all of the arguments overlook the realities of globally reliant and highly linked high tech supply and customer demand networks. Indeed, all could be disrupted with high tech and consumer electronics brand owners scrambling to seek alternative sourcing. Thai is, of course, they had already planned for such a scenario.

 

Bob Ferrari

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