Trump’s counterproductive ban of Huawei

When the Trump Administration decided to ban Huawei, it displayed a shocking level of ignorance about how the global tech industry operates. It is not surprising that the US government sees Huawei as a threat. Huawei is the now the second largest smartphone maker in the world, growing from 5% of smartphone shipments in Q1 2015 to 17% in Q1 2019. Likewise, Huawei has become the largest maker of telecom equipment in the world, growing from 8% of the market in 2013 to 29% in 2018.

The problem is that banning Huawei from using tech from American companies will have widespread consequences in the American tech industry and the economy as a whole. One out of four of Huawei’s 263 suppliers last year were American companies, and I suspect that those companies (Flex, Broadcom, Western Digital, Qualcomm, Micron, Seagate, Intel, etc.) will be lobbying like mad to reverse this decision, because they know that Huawei, unlike ZTE, has the resources to either make their own chips or to use Chinese suppliers, so they will be cut out of Huawei’s supply chain. For example, Huawei’s Kirin processor is already competitive with Qualcomm’s Snapdragon and Huawei will no longer be selling to the American cellular market, so it can stop using Qualcomm’s modems.

Basically, the US is sending a signal to every Chinese company that it is risky to keep using parts and software from American companies, so the next generation of products will be designed without American components. This is an insanely stupid decision on Trump’s part from a business perspective. I’m no fan of so-called “free trade,” but it appears that no one in the Trump administration did a cost-benefit analysis and realized that American tech companies will only end up losing in this trade war. If China responds in kind, cutting Apple out of the Chinese market, it will harm American trade far more than cutting Huawei out of the American market. Apple currently controls roughly 11% of the Chinese smartphone market which is the biggest in the world, whereas Huawei controls virtually none of the American smartphone market. The situation will be even worse if China tells Apple, Microsoft, Google, Dell and HP that they can’t use Chinese parts, since it will make their electronics too expensive to sell on the global market.

In the second quarter of 2017, Chinese brands accounted for 48% of the world’s smartphones and that percentage is probably higher today with the recent growth of Huawei and Xaiomi. Roughly half of the world’s servers, PCs and tablets are also sold by Chinese brands (Lenovo, Inspur, Huawei, etc.) or Taiwanese brands that have the majority of their operations in China (Asus, Acer, MSI, Clevo, etc.). More importantly, roughly 90% of the world’s PCs and 70% of the world’s smartphones are assembled in China. Basically the US government is telling Huawei, B&K (which owns the Oppo, Vivo, OnePlus & Realme brands), Xiaomi, Motorola/Lenovo, Meizu, ZTE, TCL (which owns the Alcatel & Blackberry brands), Asustek, Acer, Foxconn, Quanta, Compal, Wistron, Pegatron, Inventec, EliteGroup, Arima, MSI, Supermicro, Gigabyte, Twinhead, and every other tech company operating in China that it is risky to use American parts and software, because the US government can ban them tomorrow. This message will destroy the demand for American tech in the future.

When Dell and HP ask Quanta, Compal and Winstron for their next laptop design so they can slap their logo on top, it will contain fewer American parts inside. Almost all the Western tech companies rely on Taiwanese and Chinese original design manufacturers (ODMs) operating in the lower Yangtze Valley to both design and assemble their electronics. The only major Western brands that still manufacture the majority of their own devices are Samsung and LG. All the rest of the western brands rely heavily on Taiwanese and Chinese companies. In some cases, these companies are doing simple assembly, but in many cases, these companies also do the design and engineering work. These ODMs that have the majority of their operations in China will look at the potential risks of using American parts, and ask themselves why take those risks in their designs.

TiawaneseOEMsMakeWorldsLaptops

Shipments of notebooks in thousands of units manufactured by Taiwanese companies in Q4 of 2016. Digitimes (2017-02)

Qualcomm’s control over the mobile processor market is already slipping with Mediatek, UNISOC, Huawei, Xiaomi, Samsung and Apple all producing competing SoCs. Motorola’s recent decision to use Samsung’s Exynos instead of Qualcomm’s Snapdragon in two of its mid-range phones is a sign that Qualcomm’s monopoly is cracking. The current lock that the American companies Intel, AMD and nVidia hold over the CPUs and GPUs in PCs may disappear as PCs move to ARM processors. Everyone assumes that Qualcomm with make the ARM processors running tomorrow’s laptops, but they could just as easily be processors designed by Mediatek, Xiaomi or Huawei, and fabbed by TSMC or CSMC in China.

Google also has to be mad as hell about the ban, because it will no longer be able to include its proprietary software in future Huawei phones and tablets and collect data from millions of Huawei users around the world. Even worse, the US government is effectively giving Huawei permission to create its own version of Google Web Services and Google apps, which will break Google’s monopoly outside China. Once Huawei creates the equivalent of Google Maps, Play Store, Youtube, Gmail, etc. for its users outside of China, other tech companies may want to use those services as well, either to avoid Google’s onerous restrictions preventing them from forking Android or to avoid Google’s licensing fees.  Every US software company has to be scared that Chinese companies have been given the green light by the US government to make their own versions of American software.

The Trump administration is corrupt enough that it will probably be swayed by all the lobbying done by American tech companies to end the ban, but the American agroindustry hasn’t managed to stop Trump’s trade war, so American tech companies might not be able to either.

The US is trying to stop other countries from installing Huawei and ZTE telecom equipment, but the number of Cisco jobs that this policy will save is minuscule compared to the number of jobs that could be potentially lost at Apple, Microsoft, Google, Intel, Qualcomm, Broadcom, Micron, etc., if Chinese companies stop using American hardware and software and create their own alternatives that get marketed though out the world.

There seems to be no domestic economic goal in the ban on Huawei and ZTE, since it is basically shifting telecom business to Samsung, Ericsson and Nokia. There is no hope of the US establishing a domestic telecom equipment company to rival Huawei. AT&T and Motorola could have potentially become industry giants, but their telecom equipment divisions never got the necessary investment and the 1996 Telecommunications bill atomized the industry into many competing network standards. In 1996, AT&T spun of its telecom equipment division as Lucent, which nearly went bankrupt when the internet bubble burst in the early 2000s. It was sold off to Alcatel in 2006, and then absorbed into Nokia in 2016. Motorola struggled through years of losses before selling off its telecom equipment division to Nokia Siemens in 2011.

Keeping Huawei and ZTE out of the American smartphone market will mostly affect the bottom of the market where Apple’s iPhone and Google’s Pixel don’t compete. Trump thinks that he can bully Chinese companies, but he doesn’t understands the risk of cutting out American suppliers and how the profits of US tech companies depend on China companies and Taiwanese ODMs operating in China.

Trump claims that he wants to bring manufacturing jobs back to America, but his record shows that he has exported more jobs per year than Obama and his tax breaks and government purchasing policies have incentivized more outsourcing. India and Brazil have shown that there are ways to convince tech companies to do more assembly work inside national borders, but Trump isn’t pursuing these types of policies, which need to be carefully crafted and methodically implemented. If Trump convinces Apple, Dell and HP to stop making their devices in China, the assembly jobs will simply move to countries like Vietnam, not the US, because Trump hasn’t put into place the financial incentives to make it happen.

Despite the fact that Trump is making a fundamentally irrational decision that didn’t calculate the long-term consequences, not all the consequences of the ban are necessarily bad. It won’t be a bad thing if Americans don’t buy Huawei’s locked-down phones. Huawei hasn’t allowed the bootloader to be unlocked in its mobile devices since July 2018, which means that its users can’t root their phones in order to be able to remove its pre-installed apps, update the phone outside Huawei’s purview, and change the configuration. Users of Huawei phones are also prohibited from installing a different operating system that isn’t designed to spy on them, such as LineageOS. The only way to root a recent Huawei device is to pay a $55 fee, so it is now more onerous than jailbreaking an Apple device. Like Apple, Huawei restricts user freedom, but it doesn’t promise to respect user’s privacy like Apple does, so Huawei users live in a walled garden with none of the benefits.

Nonetheless, the ban on Huawei may open up cracks in that walled garden. Because Huawei will be forced to remove all of Google’s proprietary apps in its future devices, there is the possibility that they will be replaced with open source apps and use more open web services, like Open Street Map. There is also the possibility that Huawei may start opening up its own code, in order to assuage the fears of government regulators who want to verify that spying isn’t taking place.

More importantly for users in Western countries, Huawei being forced to stop using Google Web Services and Google’s spyware in future phones, meaning that less of their personal data will be sucked up by Google’s servers, so there is less chance of that data being collected by the NSA and shared with the governments of the UK, Canada, Australia and New Zealand which participate in the Five Eyes alliance.

On the other hand, Huawei might decide to launch its own proprietary web services just like Google which are based on monetizing user data, and it will almost certainly try to capture more user data to better train Xiaoyi, its AI voice assistant, in the same way that Google, Microsoft, Amazon, Apple and Samsung currently collect users’ data to train Google Assistant, Cortana, Alexa, Siri and Bixby.

The US government has presented no hard evidence that Huawei devices are being used by the Chinese government to spy on Americans. Edward Snowden, however, presented unequivocal evidence that the NSA was using the servers of Google, Apple, Facebook, Yahoo! and Dropbox to spy on people around the world. For citizens of Western countries, the possibility that their own governments may access Google’s servers is a far greater threat to their privacy and civil liberties than being spied on by the Chinese government, which has little power over them.

Given that banning Huawei makes little economic sense, a more likely explanation for the counterproductive ban is that it is being pushed by the US intelligence agencies, which aren’t able to tap Huawei’s telecom equipment, like they can with equipment made by Cisco, Samsung, Nokia and Ericsson. For agencies like the NSA, they also may see Huawei and ZTE as threats, because these companies owe allegiance to the Chinese government, so they won’t necessarily take orders. The fact that Google followed the US government’s orders to enforce the ban on Huawei is a good indication why US spy agencies might prefer that the telecom and internet infrastructure is run by controllable Western companies.

From the perspective of Western citizens, however, cracking the duopoly of Google and Apple over mobile operating systems might not be a bad thing for society, since Google’s business model is based on monetizing their users’ data and Apple’s is based on trapping users in an ecosystem that milks them for ever-greater fees. If Huawei makes its own forked version of Android based on the Android Open Source Project (AOSP) and provides its own web services, similar to what Amazon and Alibaba do with Fire OS and Alyiun OS, then it at least provides an alternative. The existence of an alternative will help push Google and Apple to better respect user’s rights, since they know that users can leave their platforms. Nonetheless, Huawei doesn’t exactly have a history of respecting user rights, so the choice may be one between the frying pan and the fire.

At the end of the day, the best hope for maintaining user freedom and privacy in Western countries is more transparency (à la Wikileaks and a vibrant free press), better democratic oversight of both business and government, and new governmental regulation of the tech industry, such as the EU’s General Data Protection Regulation. Another possibility is establishing new tech companies whose business models aren’t based on monetizing users’ data, planned obsolescence to stimulate sales, and walled gardens to lock users into expensive ecosystems. The best hope for promoting both the liberty and privacy of users is helping to support tech companies like Purism, which sell devices running on free/open source software and offer web services that respect users’ rights as a paid service.

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