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COMMENTARY: Tech War Begins to Splinter in Unpredictable Directions

Mark Melnicoe 2019-06-30 00:00 AM

The budding U.S.-China technology war is spinning off in a number of directions, showing the potential for chaos in global markets as companies on both sides of the Pacific either don’t know what to do or try to circumvent President Trump’s decrees.

As the American side launches new actions against Chinese firms, American companies are starting to challenge restrictions the Trump administration has imposed via attempts to sidestep them or, in the case of Federal Express, filing lawsuits.

On the Chinese side, officials are speaking out louder against Trump’s moves while companies are looking inside China’s borders toward indigenous technology. One exception is privately held drone maker DJI Technology. The Shenzhen-based firm, which dominates the global civilian drone market, is rumored to be setting up shop a factory in Southern California in a bid to evade tariffs and also to assure American officials over concerns about its surveillance capabilities.

All in all, it makes for an ever-changing stew of actions and reactions, with corporate lawyers working overtime in an era of great uncertainty.

Pressured, Companies Fight Back

Things started snowballing late last month when Federal Express (NYSE: FDX) filed suit against the U.S. Commerce Department for putting an “impossible burden” on the delivery service firm to help enforce the U.S. export ban on Huawei. “FedEx is a transportation company, not a law enforcement agency,” the company said.

The lawsuit came after FedEx was threatened by Beijing for rejecting a package from Britain containing a Huawei phone. FedEx said an “operational error” caused rejection of the package, which was sent from the U.K. to a reviewer at PC Magazine.

At about the same time, news emerged that Micron Technology (Nasdaq: MU) had found a way around some of the export ban and was resuming some memory chip shipments to Huawei. Micron’s share price jumped 11 percent in one day – an indication of Huawei’s importance to its bottom line. The New York Times reported that chipmaker Intel (Nasdaq: INTC) also was managing its way around part of the ban.

Meanwhile, more than 300 Chinese companies, including Meituan (HKEX: 3690), Mobike (privately held), video streaming site iQiyi (Nasdaq: IQ) and Xiaomi (HKEX: 1810) were reported by the news portal Caixin to be migrating away from Oracle (NYSE: ORCL) and IBM (NYSE: IBM) database services. Caixin said that database management service provider PingCAP (privately held) was the big beneficiary and that the move signaled China’s “resurgent desire to ‘buy China.’”

Caixin noted that Trump’s move to ban the export of American technology to Huawei, the world’s biggest telecom equipment manufacturer, was “sending chills through the country’s largest entities while raising questions about the security of foreign-made products.”

Chinese officials raised the volume on their criticism of the move against Huawei, China’s marquee global tech company, with Vice Commerce Minister Wang Shouwen labeling American actions “inappropriate” and calling for their cancellation.

Foreign Ministry spokesman Lu Kang had earlier blasted the moves as an “abuse of export-control measures” and said the U.S. should “stop the wrong approach.”

Trump seems to have responded somewhat, saying at a news conference in Japan today that he is going to allow American companies to sell "some products" to Huawei in a bid to restart trade talks. But the administration also recently announced the blacklisting of five more Chinese entities – four tech companies and an institute involved in supercomputing. The Commerce Department claimed they pose a risk to U.S. national security or foreign policy interests.

The Huawei Scare

The spread of the trade war into a technology war accelerated in May when Trump announced the blacklisting of Huawei. For months it had claimed the company’s equipment contains back doors to allow spying on American companies and the government, and it has applied a high-pressure campaign to get other countries to take similar action against Huawei.

Huawei is the global leader in 5G and leads the world in patents as it makes big inroads into other areas including artificial intelligence. China is battling the U.S. to take over the world lead in AI, with one advantage being its unabashed collection of data on 1.4 billion citizens. Big Data is a driver of AI because of the importance of crunching and analyzing such vast volumes of information.

There are legitimate concerns about China’s capacity in these two areas because of the instant connectivity of 5G combined with high-level AI capabilities. Together they carry enormous promise across a range of industries as well as the military.

But the Trump claims about Huawei’s spying are unproven and dubious, and the pressure campaign is meeting only limited success. With Huawei enjoying success all over the world, in some 150 countries, it makes no sense for it to be playing games with its technology and spying on behalf of President Xi Jinping’s government.

The U.S. has leveled similar allegations against ZTE, a much smaller but still important player in China’s telecom and smartphone industry.

Threat to U.S. Tech Dominance

The Trump team has never provided a hint of evidence that these companies are spying or have planted spyware in their equipment, and the whole idea defies common sense.

“If it were discovered that China was, in fact, using consumer electronics exports to spy on American citizens and businesses en masse, the consequences would be utterly disastrous for it,” ZDNet wrote in a recent commentary. “Not just in terms of jeopardizing its export business in the U.S. but also in every country it does business with now. It would be catastrophic for the country's image and would throw the global consumer electronics industry into utter chaos.”

Huawei’s executives know this, China’s top government officials know this, and they are not stupid. What’s behind the sanctions on Huawei and other Chinese companies is the realization that China, for the first time, poses a threat to American technological dominance. With its Made in China 2025 program, the country aims to become a global leader in AI, materials technology, biopharmaceuticals, transport technology and a host of other sectors.

Trump, with his nationalistic “America First” policies, can’t accept the notion that the most populous country on the planet – the nation that led the world in tech innovation for centuries until the 1800s – might be starting to catch up. As a result, we will continue to see lots of confusion and crosscurrents in the business world as Trump makes a futile stand against globalism.