COMMENTARY: A Watershed Moment? Huawei Smartphone Has No American Parts

Amid continuing U.S. pressure tactics, Chinese companies are pushing hard to break free in a movement that could shake the world.

Mark Melnicoe
    Dec 07, 2019 5:00 AM  PT
COMMENTARY: A Watershed Moment? Huawei Smartphone Has No American Parts
author: Mark Melnicoe   

The news this week that telecom giant Huawei is now producing its Mate 30 flagship smartphone without any American-made parts could be a seminal moment in a technology war that is seeing U.S. authorities working overtime to isolate China's leading companies.

Whether they are telecom firms like Huawei and ZTE (HKEX: 0763) or makers of advanced surveillance equipment such as Hikvision (SZ: 002415) and iFlyTek (SZ: 002230), the U.S. government is doing everything it can to stop them. It is putting them on blacklists that can preclude their products from coming into the U.S. and blocking the sale of critical American components to them. And especially in the case of Huawei, it is trying to coerce allies into rejecting the firm's technology for their emerging 5G systems.

Though the hard-line Trump administration uses national security and - in some cases - human rights as the reason, in truth it wants to stop China's technological rise.

If in fact these firms can operate on their own - with domestic technology and through trade with other partners - it will mean defeat for the U.S. efforts. While this will take years to play out, the ultimate result will determine whether China succeeds in continuing its economic miracle through a second industrial revolution after its first one in basic manufacturing. The stakes are that high.

The American blacklisting is critical to Chinese companies because it threatens not only their U.S. sales but also their ability to manufacture for the global market. China has set forth a goal to take international leadership in several key technologies, the most important of which is artificial intelligence. Companies in cities like Shanghai, Hangzhou and Shenzhen also are taking leading positions in 5G technology and are rapidly building up their prowess in clean transportation, robotics, pharmaceuticals and other sectors.

The central government in Beijing has launched a campaign to help these companies compete without the need for American microprocessors and other equipment.

"The ‘Made in China 2025' [plan] has designated time periods where China is going to lead globally in certain sectors, and the U.S. really does not have anything that's the equivalent to that," journalist and author Rebecca Fannin recently told a podcast at the Wharton School at the University of Pennsylvania. "Of course, it's a totally different governmental system, but the U.S. needs some muscle behind our technology prowess. The U.S. is still the world's leader, but China is coming up very fast," said Fannin, whose book is "Tech Titans of China: How China's Tech Sector is Challenging the World by Innovating Faster, Working Harder and Going Global."

Measuring China's progress is something of a moving target, and much depends on what products and sectors you're talking about. One crucial area where the Chinese are lagging is in traditional computer chips.

"This is an area that China needs to improve in — the whole chip/semiconductor area," Fannin said. "The U.S. and other markets — Korea, Japan — have the leadership in these areas."

However, tech giants, such as Huawei, Baidu (Nasdaq: BIDU) and Alibaba (NYSE: BABA), are throwing themselves into crash programs to make their own chips. And these are not the chips of yesterday, driven by Moore's Law, which said that microprocessors doubled their capabilities every two years while the price dropped. Instead, new types of chips are designed to exploit AI – running neural networks for such tasks as voice recognition, instant translation and image processing.

"These chips handle data in a fundamentally different way from the silicon logic circuits that have defined the cutting edge of hardware for decades," MIT Technology Review wrote. "It means reinventing microchips for the first time in ages."  

"China won't be playing catch-up with these new chips, as it has done with more conventional chips for decades. Instead, its existing strength in AI and its unparalleled access to the quantities of data required to train AI algorithms could give it an edge in designing chips optimized to run them."

In the case of Huawei, the company's HiSilicon chip division designs the Mate 30's processor and modem. This is similar to the strategy of Samsung, the world's No. 1 smartphone maker, which also makes its own microprocessors and modems. Even Apple Inc. (Nasdaq: AAPL) buys its modems from other companies.

The Wall Street Journal broke the story of Huawei's success after gaining access to an analysis from UBS and Fomalhaut Techno Solutions, which tore apart the phone and found who manufactured each component.

Huawei also makes its own chips for its world-leading telecommunications equipment. These capabilities are crucial for Chinese companies in a tech war that may not let up. Despite the growing independence displayed by China in reaction to American tightening of the screws, the two countries remain intertwined in a number of important technologies and products.

It's a symbiotic process that has worked well since China's rise as a manufacturing superpower in the 1980s and ‘90s. But due to the U.S. pressure, China is preparing to break free from much of its need for American components.

That process won't be easy or pain-free. But in the end, China's technological independence might well cause more pain on this side of the Pacific as the U.S. loses market share and perhaps a lot more in a world that grows ever more dependent on technology.