By Stu Woo
The world is paying a high price for the technological Cold War
between its two greatest powers.
The U.S.-China conflict has already upended the tech industry in
both countries, disrupting giant hardware manufacturers,
computer-chip designers and even social-media services. Now the
broader consequences are becoming clear, as the actions of Beijing
and Washington reverberate across rural America, Europe and other
corners of the world.
Bearing the brunt of the costs are the telecommunications and
semiconductor sectors, where the Trump administration has blocked
leading Chinese companies from the U.S. market and restricted
exports by American businesses to China. Companies anticipate
billions of dollars in potential costs overall, from lost business
or from replacing Chinese telecom equipment.
But the effects go far beyond tech companies' bottom lines. U.S.
chip makers worry that the loss of sales to China will mean less
money for research and development, making it hard to continue
producing the cutting-edge chips that have made the U.S. the global
leader in the semiconductor industry.
There is also a risk that the conflict will slow the spread of
high-speed telecom access throughout Europe and rural America,
regions that bought Chinese-made wireless and internet equipment
after Washington effectively banned such hardware from major U.S.
networks back in 2012. That could leave European companies at a
competitive disadvantage internationally in manufacturing, health
care, transportation and many other industries that require 5G. And
hundreds of thousands of homes and businesses in rural America face
a delay of months or even years in getting fast and reliable
Current and former U.S. officials say the costs are worth it in
the long run. They say the aggressive measures against Chinese
telecom-equipment makers protect democracies against potential
Beijing-backed espionage. And they say the U.S. export controls --
which make it extremely difficult for some of China's leading chip
companies to make advanced products -- help create a fairer global
semiconductor market, offsetting unfair support that they say
Beijing gives Chinese chip makers. They say U.S. semiconductor
companies won't have to slash prices to compete with Chinese
rivals, meaning they'll have more money to spend on research and
development in the long run.
Other companies also could benefit from the hostility between
the U.S. and China. Tech providers from outside the U.S. and China
that are seen as neutral players, such as South Korea's Samsung
Electronics Co., Sweden's Ericsson AB and Finland's Nokia Corp.,
could pick up market share. And if China's ByteDance Ltd. ends up
selling a stake in TikTok to Oracle Corp. and Walmart Inc. -- as
envisioned in a preliminary deal prompted by the White House --
ByteDance could get a cash infusion while the U.S. companies gain
shares of the world's hottest social-media platform.
But the damage also could spread, if, for example, China
escalates by raising barriers for the U.S. tech companies, such as
Apple Inc. and Qualcomm Inc., that still count China as an
A closer look at the telecom and semiconductor sectors gives a
sense of the toll the U.S.-China tech Cold War already has taken
and might take in the future.
The biggest casualty so far is China's most successful
international business, Huawei Technologies Co. U.S. export
restrictions have cut off much of its supply chain, and Washington
has lobbied allied countries in Europe and elsewhere -- with
limited success -- to ban Huawei from 5G networks, saying Beijing
could force the company to spy or conduct cyberattacks. Huawei and
China's government say that wouldn't happen.
With $123 billion in sales last year, Huawei is the world's
leading telecom-equipment maker and one of its biggest smartphone
manufacturers. But Deputy Chairman Guo Ping recently said "survival
is the goal" after the U.S. restrictions jeopardized access to the
computer chips, made with U.S. technology, that it needs to make
hardware. A company spokesman says it won't have an estimate of the
financial damage from the U.S. export controls until next year.
Mr. Guo said Huawei's consumer division -- which with $67
billion of sales last year accounted for most of the company's 2019
revenue -- faces the biggest challenge. That division has won
accolades for the cameras on its smartphones, which all require
advanced chips affected by the U.S. export controls.
The telecom-equipment business, which had about $42 billion in
sales last year, is also in danger.
The effect of Huawei's problems, though, extend well beyond the
company. They also will have a big impact on companies in the U.S.,
Europe and Asia that design or make computer chips sold to
Huawei, for instance, says it spends more than $11 billion a
year on U.S. parts. A senior U.S. official says the Commerce
Department is likely to grant licenses to U.S. businesses to export
to China technology that doesn't impact national security -- such
as components for older internet routers or cellphones -- on a
case-by-case basis, but acknowledged that American suppliers would
bear some costs. There are currently no plans, the official says,
for the government to help these companies offset those costs.
On the customer side, the U.S. efforts to have allies follow its
Huawei example have found some success in Europe, where countries
including the U.K. and Poland have essentially agreed to restrict
Chinese telecom-equipment. Other countries, most notably Germany,
are still debating whether to do so, and could follow recent
European Union recommendations that advise members to limit using
equipment from high-risk suppliers, a category that includes
In the U.K., the government said the U.S. actions that disrupted
Huawei's supply chain make it harder for British cybersecurity
officials to ensure that Huawei equipment doesn't pose an espionage
or cybersecurity threat. British officials say they worried that
Huawei could start buying components from new suppliers that posed
a national-security risk.
The U.K. government told British carriers to stop buying Huawei
5G equipment by January and to replace all 5G Huawei equipment by
2027. BT Group PLC, which reported $30 billion of revenue in its
most recent fiscal year, said it would cost about $650 million to
replace Huawei equipment.
Across Europe, in anticipation of action against Huawei based on
the EU recommendations, big telecom carriers are diverting funds
and attention away from expanding coverage and building 5G networks
to focus on replacing Huawei equipment already in use. European
wireless executives have warned for years that the continent was
falling behind the U.S. and Asian countries in rolling out 5G
networks. They say restrictions on using Huawei threaten to
Without 5G, the executives say, European tech and manufacturing
companies would fall behind on developing 5G-dependent technologies
such as driverless cars and robot-run factories.
The British minister in charge of digital issues, Oliver Dowden,
has said the U.K. ban on Huawei could delay the development of 5G
by two to three years and cost up to roughly $2.6 billion to
replace Huawei equipment. British wireless carriers have said the
U.K. economy could lose billions as a result of the delay, because
the U.K. would lose out on increased productivity and new business
In the U.S., Congress has effectively barred major U.S. telecom
carriers from using equipment from Huawei and smaller Chinese rival
ZTE Corp. since 2012. But both Chinese equipment makers continued
to supply many small, rural carriers. In June, the Federal
Communications Commission banned these smaller telecom providers
from using federal funds to purchase or maintain Huawei and ZTE
Because these small carriers rely on federal subsidies, the FCC
decision essentially forces them to replace the Chinese equipment
within a couple of years. The companies say they want to do so as
soon as possible because they don't want to buy spare parts for
equipment they will have to replace anyway.
About 50 rural American telecom providers told the FCC that it
would cost a combined $1.8 billion to replace Huawei and ZTE
equipment. The U.S. House of Representatives has passed a bill to
reimburse these carriers for at least $1 billion of the cost with
public money, but the Senate has yet to act; it could be months
before that money is delivered.
Meanwhile, carriers like Pine Belt Communications are stuck in
limbo. The Alabama company had planned to double its network to
reach 100,000 new customers, including 25,000 currently without
adequate broadband services, says Pine Belt's president, John
Nettles. That includes children who need internet access for remote
schooling because of the pandemic, he says.
Mr. Nettles says it may now take more than a year before he can
expand his coverage area. The U.S. Senate may not finalize the
reimbursements until next year. Then it will take months to solicit
bids from new telecom-equipment providers, and then many more
months to install that new equipment.
In the meantime, he is praying for good weather to protect his
cellular towers. He doesn't know how to reach customer-service
contacts for ZTE, his longtime equipment provider, because many
left the U.S. after Washington's recent actions. "It would just
take a good, direct hit from a lightning bolt" to disable company
towers, he says. "I would have a difficult time finding a
replacement part for them."
The Rural Wireless Association says some rural carriers have
been unable to repair some network equipment made by Huawei or ZTE
because they ran out of spare parts, which in one case has left
parts of Montana without wireless service, including the ability to
make 911 calls. Both the trade group and some Trump administration
officials are urging the Senate to finalize the reimbursement funds
so its members can start the multiyear process of replacing Chinese
U.S. semiconductor companies that want to sell certain products
to China must apply for permission to export from the Commerce
Department, which said it would issue licenses for exports that
don't impact national security. The semiconductor industry is
asking the government to increase the consistency and transparency
of the license-approval process, saying U.S. companies are losing
In 2018, the U.S. semiconductor industry had $226 billion in
revenue and 48% of the global market, according to a Boston
Consulting Group report from March commissioned by the U.S.
Semiconductor Industry Association. Both figures were expected to
decline in coming years because of China's growing competitiveness,
but U.S. export controls could make that decline steeper and
The report estimated those figures would fall to $190 billion in
revenue and 40% market share within three years under existing
conditions. If U.S.-China tensions escalate and Washington
completely bans U.S. chip exports to China -- or if Beijing ousts
U.S. companies from its market -- then those figures would plunge
to $143 billion and 30%, putting China and South Korea in place to
lead the global industry. That would be a 37% decline in revenue
The upshot, say U.S. semiconductor industry leaders, is that
sales that would have gone to American chip makers would go to
foreign ones instead, resulting in less money for research and
development in an industry that American leaders want to be
globally dominant -- because advanced chips are needed to maintain
an edge in military and commercial technology.
Though the Commerce Department has granted some U.S. chip makers
licenses to continue selling to Huawei and other Chinese companies,
many chip executives say the current limits aren't well thought
out. The report commissioned by the SIA says 73% of products from
U.S. chip companies are essentially commodities that Chinese
companies can easily obtain from non-U.S. companies. The group
argues that some of the remaining 27% poses no national-security
risk, like chips for wearable fitness trackers.
"The best way to tackle this issue is for the U.S. to take a
surgical approach to technology restrictions that address clearly
defined national-security concerns and avoid unintended harm to
U.S. semiconductor leadership," says John Neuffer, the SIA's chief
A senior U.S. official says the goal with the export controls
was to figure out what exactly American companies were selling to
China -- which the Commerce Department can do because it's
reviewing many sales. The official says the department might
eventually grant licenses to most American companies that want to
sell to China, after reviewing everything on a case-by-case basis,
but also acknowledges that chip companies are frustrated that
license applications aren't being reviewed at a quicker pace.
"The Commerce Department takes great care to ensure that
regulations do not impose unreasonable restrictions on legitimate
international commercial activity, and strives to avoid actions
that compromise the international competitiveness of U.S. industry
without any appreciable national-security benefits," Commerce
Secretary Wilbur Ross said in a statement.
But the U.S. actions so far may be indirectly driving away some
business. Jake Parker, senior vice president of the U.S.-China
Business Council, which represents American companies doing
business in China, says he has been told of one Japanese company
urging Chinese companies to switch from their U.S. suppliers. The
message, he says, is: "You can't rely on U.S. technology because
you might be cut off from it in the future."
At the same time, the export controls affect some foreign
semiconductor companies, because they use U.S. technology in making
components they sell to Huawei and other companies. Japanese
semiconductor maker Kioxia Holdings Corp. last month called off
what was expected to be one of the year's biggest initial public
offerings after saying U.S. export restrictions on Huawei were
Mr. Woo is a Wall Street Journal reporter based in San
Francisco. He can be reached at email@example.com.
(END) Dow Jones Newswires
October 22, 2020 16:25 ET (20:25 GMT)
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