How Huawei fiasco could knock your global investment returns – expert

China has slowly but surely eroded manufacturing industries, including in South Africa which once had a large clothing sector in Cape Town. Efficient production is not the only way China has managed to achieve global domination; its government has heavily subsidised this commercial activity to ensure that Chinese companies can undercut global competitors. Although trade unions and industry players have complained about this trend, which has wiped out jobs in many countries, political leaders have continued to cosy up to China on the grounds that it is a major force in global trade. Suddenly, there’s a major shift underway as President Donald Trump says “no more” to the world’s second-wealthiest country. South African Chartered Accountant Sinesipho Maninjwa cuts through the political smoke-and-mirrors to set out what’s happening and how companies that could be in your portfolio, like Apple, might be affected by the Huawei fiasco. – Jackie Cameron

By Sinesipho Maninjwa*

Huawei – A victim of the China/USA Trade war

Background

We live in a global village, in large part thanks to the rise of the internet. People have access to goods and services through a global network of companies. As with all good villages, there exists a council of elders to referee and provide guidelines for fair trade. The World Trade Organisation (WTO) is likened to a council of elders; providing global rules for international trade, and acting as referee and mediator to resolve trade quarrels between governments. Of course, there are other trade organisations usually amongst countries in the same region who have their own trade agreements e.g. North American Free Trade Agreement (NAFTA) between Canada, Mexico and the US or the Southern African Development Community Free Trade Agreement (SADC -FTA). Globally, China ranks as the world’s leading exporter and the second biggest importer, which puts them in a powerful position when it comes to trade negotiations. The US too has strong trading muscle as it ranks as the largest importer and second largest exporter.

China – US trade  

In 2018, the US exported $180bn worth of goods and services to China and imported $559bn in return. The United States ran a trade deficit of $379bn against China alone, which accounted for a massive 42.5% of America’s total trade deficit of $891bn last year. China’s increasing trade domination has long been the subject of Donald Trump’s public statements even before he was elected US president in 2016. It was of little surprise that when he got elected, soon afterwards in 2017 the US launched an investigation into Chinese trade policies.

Consequently, the US alleged that some Chinese companies pose a threat to national security. In April 2018, the US executed a trade ban of Chinese telco ZTE which buys parts from US companies. The US alleged ZTE violated sanctions on Iran and North Korea. However, the US Commerce department lifted the ban three months later which resurrected the company from certain death. President Trump later made statements on the deal to lift the ZTE ban as, “also reflective of the larger trade we are negotiating with China and my personal relationship with President Xi.”

In early May, a Chinese delegation visited the US to resume trade negotiations amid threats of tariff increases on Chinese goods by Trump. Unfortunately, no deal was concluded and in disagreement both countries enacted tariffs among goods traded between them.

Why the utilisation of a tariff ?

In theory, tariffs imposed on Chinese goods make US-made products cheaper than imported ones which encourages US consumers to buy American. However, tariffs are seen more as a negotiation tactic in trade talks. Trump’s use of tariffs pre-trade negotiations proved futile and caused some reservations on the financial performance of US stocks impacted by the increase in input costs and loss of revenue. To soften the blow of the trade war on US farmers, a key electoral constituency, Trump signed a bailout package to tide them over.

Huawei trade ban in the US

Huawei Technologies Co. Ltd. is a Chinese telecommunications equipment and consumer electronics manufacturer. The company was founded in 1987 by Ren Zhengfei, a former People’s Liberation Army officer. Initially focused on manufacturing phone switches, Huawei has since expanded its business to include building telecommunications networks and equipment, providing operational and consulting services to enterprises, and manufacturing communications devices for the consumer markets inside and outside of China. It now ranks a close second to the world’s largest smartphone brand Samsung. Huawei’s revenue totalled more than $90bn (€79bn) in 2018 and expected to grow in the double digits in 2019

Why target Huawei?

The main issue is the US accusing Huawei of using their smart devices and telecoms network equipment to spy on the US. That the founder of Huawei is a former army general and as such has close ties to the Chinese government is an aggravating factor in the US’ accusations. Last year the daughter of Huawei’s founder and also its financial director, Meng Wanzhou, was arrested by Canadian authorities after the US government alleged that she was assisting Huawei dodge US sanctions on Iran. This rang similar in reason to what substantiated the ZTE ban in 2018. Congruently, weeks after failed trade talks with China the Commerce Department enacted a trade ban against Huawei. Trump signed an executive order giving the Commerce Department authority to blacklist foreign companies believed to threaten US national security. US companies will have to apply for a license with the Commerce Department to trade with companies on the list. Canada has indicated its relationship with the firm is under review as a key US ally. It is worth noting that this is the first time in modern history that a sovereign country has waged such an intense battle against a particular entity.

The impact of the Huawei trade ban

US companies must halt their business with Huawei. The list of partner entities affected include Qualcomm, Intel and Broadcom who sell Huawei microchips and other specialised parts that go into its smartphones and telecoms equipment. Google too, whose Android software powers Huawei phones. Huawei spent $70bn on components and other supplies last year wherein $11bn went to US companies.

Read also: Battle lines on China tech are hardening

Google has issued a statement that it will not provide its propriety products/services on its Android operating system. Therefore, Huawei will no longer be receiving later versions of Android nor have access to the eco-system. Huawei will be only be able to utilise the open source version of Android however it will maintain current system and security updates on issued phones.  Huawei has been developing its own proprietary operating system over the past few years in anticipation for this latest turn of events. Regarding the chips and specialised parts, the company announced their stockpiling since early this year and thus will have enough supply to fulfil sales orders for the year or alternatively until the trade war ends. There are also alternate suppliers in Europe, South Korea, Japan and among its own group subsidiaries who have the ability, however weaker in comparison to the  US counterparts.

Caught in the Fray

Apple Technologies

Almost all Apple’s components are manufactured in China therefore their exposure is quite significant in these trade tensions. With the implementation of these tariffs, the third largest brand would see its costs increase. The company would then have to decide between absorbing the cost hike fully, partially or passing it onto consumers.

Other Emerging Market counterparts

The US executive order can enlist any foreign company as a national threat. Thus, it would seem all companies from emerging markets are under threat, if President Trump deems them a threat. For example, the US has changed its stance on Turkey, and sought to increase tariffs against India recently. South Africa is already under pressure from a growth perspective, and the imposition of tariffs between either of our biggest trading partners would be quite damaging. The US has pressured its allies to follow suit on their trade position with China and against Huawei. In a Business Insider report, a spokesperson for the DTI allayed any concern the SA government would be taking punitive measures against China or Huawei.

Will South African telcos follow suit?

Of the South African telecommunications entities, Vodacom is most likely to halt business with Huawei as a result of its parental entity in the United Kingdom, Vodafone. Again the US has pressured it allies to follow suit with the ban against Huawei to which Australia has conjoined already. From the UK side it’s unlikely as Huawei was appointed by the UK government for the roll out of its 5G Network, after having sought assurances regarding security risks. Huawei’s competitiveness in supplying 5G Network technology is believed to also have fuelled it being a target by US authorities to protect its US competitors. Federal Communications Commission (FCC) is set to approve the merger of T-Mobile and Sprint, who too promise 5G Network roll out capability. Curiously though, the US Justice department may block their merger over antitrust concerns that this may not be a positive development for consumers.

Conclusion

Right now, there are no winners in this trade war, it’s a matter of who blinks first but with stalled negotiations it seems we’re a long way from anyone seeing eye to eye. For now, Samsung is set to keep their title as leader in the global village of smartphone brands.

  • Sinesipho Maninjwa CA(SA)