CNBC Squawk Box. It's Huawei or the Highway.
July 2, 2019
Heads up that I will be on set for CNBC's Exchange 1PM ET next Friday (7/12) to talk with Kelly Evans about the trade war, economy and markets.
Summary: I spoke with anchor Andrew on CNBC's Squawk Box 7AM Tuesday ET (4AM my time!) about the impact of the Trump/Xi G20 meeting on Huawei. You can see a brief video clip of the conversation by clicking here. If you want to know why it's not a good idea to state something as a fact unless you can back it up when Andrew is interviewing you, check out the dialog starting at the 6:24 mark on the tape. Ouch!
Huawei has long been a lightning rod for people who are unhappy about China's growing economic and political presence in the global economy. In February 2008, Huawei and Bain Capital's proposed acquisition of 3Com was nixed by CFIUS, the Treasury-led committee with representatives from 12 government agencies charged with screening proposed foreign investments. At issue were national security concerns over anti-hacking software and the fact that Huawei's founder, Ren Zhengfei, was a former senior Army official.
I met Ren Zhengfei at a 2007 VC conference in Shenzhen and took up his offer to tour their nearby headquarters. The campus reminded me of Apple in its early days. Since then, Huawei has grown to be the largest maker of telecom network equipment in the world, and a major customer of US firms like Qualcomm and Intel, who supply components to Huawei. Huawei is building high-speed networks, known as 5G, in dozens of countries, who often receive financing from China's One Belt One Road initiative.
Huawei has been back in the news recent months, of course, most notably when Huawei CFO Meng Wanzhou (who also happens to be Ren Zhengfei's daughter) was arrested at the request of the US while changing planes in Vancouver on her way from Hong Kong to Mexico. The charges concerned Huawei's violating the US sanctions on Iran and stealing IP. (Most major US and foreign banks have paid fines for violating US sanctions--nobody was arrested.) Huawei has also been accused of inserting blocks of code into its operating systems that might allow people back in China to access information traveling across their networks--to my knowledge, no one has produced any evidence of this--resulting in an executive order last month preventing US companies from doing business with Huawei.
I should insert here that I have no clue whether Huawei has violated anything or everything. I do know that Huawei is a huge and sophisticated technology company headquartered in China. I know that Huawei, along with ZTE, a second telecom equipment company that does a great deal of business in emerging economies, are very important pieces of China's One Belt One Road initiative. And I know that Huawei and ZTE are key pieces of China's long-term strategy to transform the Chinese economy from being a low-tech, low-margin assembler of other people's products (like the iPhone) to being a high-tech, high-margin producer of global, branded products. That makes Huawei a juicy target.
What started as a trade war has now morphed into foreign policy. For those who are alarmed by China's growing economic and political influence in the world, Huawei and other Chinese tech companies represent easy pressure points for slowing down or derailing China's growth strategy. And they are soft targets for politicians in both parties who have figured out that it's easy to get voters to be mad at foreigners and that foreigners don't vote here.
This growing tech war is potentially much more damaging to the economy that the trade war. The direct effects are easy to see--US companies like Qualcomm, Intel, and Google (most Huawei phones use their Android operating system) lose the revenues from selling components to Huawei. There are, however, two much bigger risks.
The first is a potential supply chain collapse, when companies in one place have to shut down because they can't get parts made in the other place. Supply chain collapse is sudden and painful, roughly like poking a baseball bat between the spokes of the front tire of a moving bicycle.
The second risk is triggering a financial crisis. For reasons of network architecture we will discuss in another post, financial networks are more fragile than product networks. That means a collapse of a highly-connected part of a financial network (think Lehman Brothers) is more likely to lead to a cascading network failure that shuts down the entire system (the US and global economies) than the collapse of a big manufacturing company. The signs of financial stress are different today, of course than they were in 2008. US consumers are much less leveraged today than they were then. But there are signs of stress in the leveraged loan market. And Chinese regulators have been having trouble restoring order in the interbank loan market after the collapse of Baoshang Bank in May. The only thing we know for sure about financial crises is that they happen a lot more often than people think they do. That gives the trade and tech wars a whole new dimension of risk.
So, what are we to think about the Trump/Xi handshake at the G20 meeting that will restart trade negotiations and at least partially ease restrictions on doing business with Huawei? It is good news for now and I am hopeful that the negotiations produce results. But don't look for a big announcement that the trade war has ended any time soon. It is simply too delicious a political issue to let go of with the election still 16 months away.
Dr. John