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Any US government official looking at Huawei’s recent financial performance must feel vindicated.
Washington’s efforts to destroy the Chinese technology group appear to be working: Huawei’s revenues are in free fall, the premium smartphones it launched in late July do not work for 5G, and it is forced to sell off parts of its business. For the next five years, according to chair Eric Xu, the company’s sole goal is survival.
But policy experts caution that the US is in no position to declare victory in its “technology war” with China. In fact, among hundreds of Chinese technology companies which the US Department of Commerce has targeted with sanctions, Huawei is the only one fighting for its life.
“As it stands today, the restrictions that are in place are rather limited,” said Douglas Fuller, an associate professor at City University Hong Kong who closely follows the Chinese technology industry and Beijing’s and Washington’s policies towards it. “Obviously, they heavily impact Huawei. But all those other companies, not so much.”
That is because Washington has used its most potent weapon — barring access to semiconductors via the US-made machinery and software tools needed to manufacture them — against Huawei only.
Washington faces a dilemma in its attempt to rejig export controls: For American chip equipment makers and producers of the software tools used to design chips, China has become the biggest and fastest-growing market.
John Verwey, a trade and investment analyst with a focus on microelectronics, argues that it is China-powered growth that finances the US industry’s ability to innovate and thus stay ahead in its race with China.
Under the 2018 Export Control Reform Act, the US administration must identify technologies on which additional export controls should apply beyond the existing register of military-use or dual-use technologies.
But work on those lists keeps dragging on as the government seeks to balance national security risks posed by China’s acquisition of key chip technology with the risk for the US of losing a vital market.
Instead, Washington is going after China with a cruder instrument: the so-called Entity List, a register of legal persons seen as engaging in activity running counter to US national security or foreign policy interests. US companies need to apply for an export licence to sell to targeted companies, but they are not under a blanket ban.
“Controls on a specific technology or end use more effectively address a broader national security risk,” Emma Rafaelof, a policy analyst at the US-China Economic and Security Review Commission, a Congress-mandated body, wrote in a recent paper. She added that the long process of identifying which technologies should fall under extra export controls “has allowed for unfettered US exports of these technologies in the meantime”.
Commerce has put more than 250 Chinese companies on the list, most of them over the past two years. But the department continues to issue export licences for selling to some of them and others have found loopholes.
“For many of these Chinese companies there are no consequences at all — you could say that this part of US export controls is toothless,” said an industry insider.
Hikvision, the Chinese surveillance technology company listed in 2019 for enabling repression and surveillance in Xinjiang, reported a 40 per cent jump in operating income for the first six months of this year.
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Semiconductor Manufacturing International Corporation (SMIC), China’s largest chipmaker, saw its revenues increase by 43 per cent in the second quarter. Although the company is barred from obtaining foreign equipment for expanding capacity with newer technology, the performance “shows SMIC has been able to slowly access US equipment, although only for mature nodes”, Jefferies analysts wrote this month.
The possibility that Washington could slap Huawei-style sanctions on more Chinese companies hangs over the industry, as some officials in the Biden administration have discussed broader controls on technology exports to China.
But concerns over doing more harm to the US’s technology leadership in the long term might continue to stand in the way of that. Fuller said: “What we are going to get from the Biden administration will be a case-by-case approach rather than very broad bans.”