Careless or Conscious Decoupling with China?
Late last month, three news items from China caught my eye that reflect how geopolitics are shaping the state of mobile devices today. I also attended an online discussion on deglobalization that provided some context for what’s going on.
1. Xiaomi was taken off of U.S. DoD “CCMC” list
Late in Donald Trump’s presidency, the U.S. Department of Defense placed Xiaomi on a list of companies banned from U.S. investment due to Xiaomi supposedly being a “Communist Chinese Military Company.” Xiaomi makes smartphones and consumer electronics, so unless the Chinese army was secretly using Xiaomi vacuum cleaners as military drones, it seemed that the decision was blatantly political. Xiaomi sued to block it before its access to U.S. technology or its brand outside China was negatively impacted. The Biden administration agreed to remove the designation and Xiaomi has dropped its suit.
With that obstacle removed, Xiaomi is now free to sell into the U.S. market, though it probably won’t any time soon. Xiaomi’s business model uses phones as an anchor point for a wide, wide array of consumer electronics and white goods, and while Xiaomi is growing rapidly in Europe, the U.S. has different cost and structural barriers.
2. Honor spinoff complete; new products teased
When the U.S. placed Huawei on the Commerce Department’s blacklist, Huawei was split roughly evenly between infrastructure and consumer devices. The network equipment side of the house is the main stated cause for concern, but limiting access to U.S. mobile software and silicon immediately made Huawei’s smartphones uncompetitive, especially outside of China where Google’s Android and apps are a market requirement. Huawei stocked up on chipsets ahead of the ban to keep production of its premium phones going for a while, but its budget brand, Honor, was left in limbo.
Honor shared many components and R&D, but in other respects it was independently from Huawei, so to salvage the business, Huawei sold Honor to a local consortium (Shenzhen Zhixin New Information Technology Co., Ltd.) in November, 2020. With the sale now complete, the new Honor is not affected by the U.S. Entity List designation. The next group of phones, Honor’s 50-series, will be back to using Google Android GMS and will run on Qualcomm Snapdragon 7-series SoCs. As such, these phones should be able to compete on an even basis in Europe. Honor could potentially reenter the U.S. as well, though it will need carrier distribution to get the sales volume necessary to make the engineering and certification expense worthwhile.
3. Huawei founder directs company to focus on software ecosystems
Huawei founder and CEO Ren Zhengfei used to operate out of the limelight, but lately he has been publishing books, granting interviews, and providing internal memos to the press. The most recent memo called for a strategic shift towards software platforms development, noting the “US will have very little control over our future development, and we have much autonomy.” This is likely to be a long process – Huawei will also need to hire more software developers. However, in the short term, Huawei is putting more resources into HarmonyOS, which started out as an Android-based OS for IoT, and is now being brought to smartphones, tablets, and televisions as well.
Techsponential will have a separate report on Huawei’s June 2 HarmonyOS 2.0 software and devices launch.
De-Globalization: Second Order Effects
What all these things have in common is that they are reactions to U.S. restrictions on China in the mobile market. However, while the Trump administration certainly accelerated things, its actions are part of a larger trend of de-globalization, where nations are trying to repatriate manufacturing and assert tighter control over material and technology supply chains. I recently attended a lively discussion about deglobalization titled, “Decoupling: A Conversation We Need to Have” specifically focused on how the U.S. and China are moving farther apart, consequences (intended and otherwise), and potential courses of action.
The Decoupling webinar was organized by Huawei and Huawei’s Andrew Williamson, VP of Global Government Affairs and Economic Adviser was one of the panelists. However, Huawei’s perspective was not the only one presented; other panelists came from Western consulting (former Boston Consulting Group), venture capital (DCVC), and industry analysis (Forrester Research) firms. Indeed, at one point, the moderator, Jason Pontin noted that his firm does not invest in Chinese companies due to forced IP transfer concerns.
After a long period of globalization and concentration of manufacturing in a handful of Asian countries, some type of rebalancing – a “conscious decoupling,” to mangle a phrase – was bound to occur. The pandemic made it clear that medical supply chains shouldn’t be spread across oceans. Political tensions and pandemic lockdowns highlight the strategic cost of relying on hyper-efficient electronics supply chains where all slack and geographic redundancy have been removed.
However, under the Trump administration, the U.S. and China appeared headed for a full-on divorce – there were heated, often counterproductive trade fights, accusations of IP infidelity, and military escalation. The U.S. administration has changed, but most of the restrictions and much of the animus remains. The Biden administration focused its initial energies on domestic issues, but, the reversal of actions against Xiaomi aside, it has given no indication that it plans any big changes to China policy.
As we start to emerge from the coronavirus pandemic and silicon needed for product development of all kinds is stuck in a massive supply chain squeeze, it’s worth taking a step back and examining the benefits and consequences of globalization and various decoupling strategies.
This infographic represents a worst-case scenario of “supply chains fully split apart.” This scenario seems unlikely, but the upfront costs of even today’s partial uncoupling are staggering, and are generally ignored by the government agencies setting policy.
This is not a simple issue, involving politics, supply chains, and unintended consequences. One point that came up over and over during the discussion was that, even when necessary, it is expensive and painful to decouple. (The infographic on the right, provided by Huawei, presents the most extreme version, but that doesn’t mean its wrong.) Focusing engineering and manufacturing resources geographically makes economic sense, and spreading that out adds friction to every process. There is opportunity cost and lost business — and some costs may be justified by political or practical considerations — but there is also a cost to innovation if we move to separate standards. One panelist noted that decoupling means not just losing access to manufacturing, but also reduces R&D: in recent years there has been more U.S./China co-authored IP than U.S. plus UK and France combined.
Some categories, like consumer electronics, are already so concentrated that it is not realistic to decouple from China quickly. You can move factories to Vietnam or India for assembly, but the machining, process, and manufacturing expertise are still going to be in mainland China or Taiwan, often clustered together in dense industrial zones. Decoupling semiconductors from Southeast Asia will take years and tens of billions of dollars in investment. There is a marked shortage of fab capacity, so it certainly makes sense for TSMC and Intel to build new ones in Arizona, but this is a years-long process.
Even if there are sound political or trade reasons to restrict Huawei's infrastructure business, bans on access to U.S. technology pose the danger of unintended consequences. Take away GMS (Google's Android software and services layer) from Huawei’s consumer phone business, and Huawei is forced to invest over a billion dollars in creating HMS - its home-grown equivalent. Will Huawei succeed in extending that to creating software-based ecosystems, especially outside of China? Who knows, but it is unclear how that could be a better outcome for the U.S. than letting Google sell services and manage software security on Huawei devices in Europe. When you restrict Chinese access to Qualcomm, Intel, and TSMC, then China predictably invests in building its own silicon infrastructure. In the short term, that’s crippling Huawei’s smartphone business, but in the long term, it could make the entire Chinese tech sector self-sufficient and more competitive.
Some solutions were suggested – zero trust security architecture, embedding more technologists in government to more selectively apply decoupling mandates, strengthening standards bodies – but the truth is that the challenges of decoupling are stronger than the answers for how to manage it.
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