India risks US wrath after Huawei thumbs up

India’s decision to allow Huawei to participate in 5G trials is certainly a win for the vendor, but it does add further strain to an already tenuous relationship with the US.

As a country, India has gone through an incredibly aggressive digital transformation in recent years. Reliance Jio democratised the digital economy, bringing the benefits of mobile internet to hundreds of millions who were priced out of the equation in bygone years. This is incredibly promising for the people of India and the Indian economy, but it also pushes the nation into the spotlight.

Thanks to an increasingly wealthy and digitally competent society, India is looking like a goldmine for other nations. Every country will want to secure a lucrative trade relationship with India, and for the US, it represents another battleground for China in the race for supremacy in the digital economy.

Aside from fighting the ‘red under the bed’, attempting to convince India to ban Huawei is a step towards eroding the Chinese telecom champions dominance on the technology world of today, and China’s influence on the 5G world of tomorrow. The US has already warned of the consequences of India working with China, and in particular Huawei, it has threatened to severely limit visa applications from the country, but India has seemingly ignored these threats.

India is heading towards becoming a tier one digital nation, but with this success comes the challenge of making friends. Countries will push, bicker and threaten to secure more valuable trade relationships, as well as try to get the upper hand over rivals.

India is walking the line of diplomacy, and unfortunately it is a very precarious trail. And such is the animosity between the US and China, it becomes very difficult to be friends with both.

Country Export Import
USA $44.3 billion (15%) $22.8 billion (5.5%)
China $14.8 billion (5.1%) $68.8 billion (16%)

India Exports and Imports value and percentage of total

As you can see there is a delicate balancing act in play. It is not as simple as choosing one superpower over the other, as one trade partner is the most valuable globally in each column.

Looking at the exports, heading towards China are a lot of raw materials. Iron ore accounts for 9.9% of the total exports to China, refined copper 12%, refined petroleum 3.7% and granite 3.6%. While these might not be considered the growth prospects of the economy, these industries are still incredibly valuable and employ significant numbers in the rural regions.

In terms of exporting to the US, diamonds account for 19% of exports, while packaged medicines make 14% of the total. What is worth noting, is that these numbers from the OEC do not include the service industry, the largest contributor to the Indian economy.

If a country was to value its relationship with partners on the value of exports, the US is the financial winner, however the industries which China underpins are likely to be larger employers in the country. The nuances become a bit more complicated, and that is before the import column is considered.

In terms of the goods coming into India from China, 13% of the total ($8.84 billion) are telephones (landlines, smartphones and feature phones). The OEC estimates that machinery (including consumer devices and computers) accounts for $38.9 billion of the Indian imports from China, perhaps due to the affordability of Chinese brands. These imports will be a significant factor to continue the drive towards the digital dream.

These statistics become important when you consider the other countries who are being heavily pressured by the US to ban Huawei.

Take the UK as an example. The UK has a valuable trade relationship with the US (11% export, 7.5% import), but it also does with China (5.6% export, 9.5% import). The US might account for more currently, but this might be down to the longevity of the relationship; China could be a more profitable market for the UK in the future.

Germany is also in a similar position to the UK. US and China account for 8.4% and 7.1% of total exports, and 5.7% and 10% of imports. In Italy, the US exports and imports are 9.3% and 3.8% of the total, while it is 3.4% and 7.2% for China. These are all countries which are resisting President Trump’s demands to ban Huawei.

What is worth noting is that there are countries which do not seem to be walking the fine line of diplomacy in the same manner. Australia, as an example, was one of the first to ban Huawei and to place its relationship with China at risk. According to the OEC statistics, China accounts for 35% of exports while the US only takes 3.5% of the total. In terms of imports, 24% come from China with only 10% heading across the Pacific from the US.

There is no hard and fast rule to explain why some countries have been swift to ban Huawei while others are sitting on the fence. Competition and reliance on the firms 4G equipment will be part of the reasoning, but the overarching implications on the relationship with China should not be ignored.

The conflict between the worlds two superpowers is incredibly complex, and there is certainly credibility to the argument that it is more than one country pushing back in the name of ‘national security’.

Indian companies to be punished for Huawei business

India is the latest country to be dragged into the US/China conflict as the threat of punishment is directed towards any companies who work with Huawei.

According to the Economic Times, any company found to be supplying components or products to Huawei, or any affiliated company on the US Entity List, could face regulatory penalties. Although the White House has focused on crippling Huawei through placing limitations on US companies, it seems the US Government feels it needs to spread its wings further.

“Any Indian company which will act as a supplier of US-origin equipment, software, technology to Huawei and its affiliates in entity list could be subject to penal action/sanction under US regulations,” said Telecoms and IT Minister Ravi Shankar Prasad in Parliament this week.

Although Huawei’s entry onto the Entity List, a list of companies which US firms are banned from working with, has had a notable impact on the Chinese firm’s business, it seems the consequences have not gone far enough. Huawei has suggested smartphone shipments will certainly take a hit, but the company is still functional, seemingly much to the distaste of US officials.

Last year, the US dropped an economic dirty-bomb on ZTE and it almost destroyed the firm. ZTE’s supply chain was unhealthily concentrated in the US leading to the distress, though as Huawei’s supply chain is much more diversified, the same action has not brought the same result.

Perhaps this is another step to add further distress to Huawei. If the US Government places restrictions on the companies who supply Huawei, irrelevant to their nationality, it might have a better chance of hurting the Chinese vendor.

That said, the impact on Huawei might just be a pleasant by-product of a dispute between the US and India. Like China, Mexico and Canada, India has got its own tensions with the US this time concerning data localisation.

Last month, rumours emerged that India would be the latest target of the US. India currently has laws in place which force foreign companies to store data on Indian consumers and businesses within the borders. There are other countries who have similar laws, but the US does seem to have some leverage over India.

H-1B work visas allow an individual to enter the US to temporarily work at an employer in a specialty occupation. Although there are no official quotas, it is believed Indian citizens account for as much as 70% of the H-1B work visas which are handed out each year. If localisation rules are not relaxed, the US has threatened to curb the flow of visas into India.

What will interesting to see is whether this is a strategy which is rolled out globally for the US Government. If it holds all of Huawei’s suppliers who use US components, products or IP in their products to account, there will be a varied list. This might be a strategy to further cause distress to Huawei, though we suspect it could also be used as a bargaining chip in the larger trade discussions.

Huawei R&D faces export ban in Silicon Valley

The US Commerce Department has refused to renew an export licence at a Huawei subsidy in Silicon Valley, meaning China cannot access new developments at the site.

According to the Wall Street Journal, Huawei R&D outfit Futurewei was informed over the summer that the US Department of Commerce would not be renewing the license meaning some of the technologies developed at the site, but not all, could not be exported back to China. It’s a new strategy in the conflict between the US and China, but it could prove to be an effective one.

Silicon Valley is not the hotspot of the technology world because of the favourable climate or the presence of helpful regulations, it has one of the most talented workforces around the world. There are of course challengers to this claim emerging, India or Eastern European for example, but companies flock to Silicon Valley to open up R&D offices to tap into this resource. Such a ban from the US Commerce Department means Huawei is going to miss out on some of these smarts.

The block will prove problematic to overcome as there does not appear to be any logical way to combat the move. The rationale behind the blockage is quite simple; national security. Seeing as Huawei is currently being trialled and punished without the burden of evidence, there seems to be little the vendor can do to combat such passive aggressive moves by the US.

This is of course just another stage is the incrementally escalating conflict between the US and China. The tension between the pair does seem to have escalated over the last few days following a minor hiatus at Christmas. Rumours are circling the Oval Office concerning an all-out ban on Huawei and ZTE technology in the US, while suspicions will only increase following the arrest of a Huawei employee in Poland on the grounds of espionage.

With all the drama before Christmas and the hullaballoo kicking off again now, perhaps we should expect some sort of retaliation from Beijing. The Chinese governments has not been anywhere near as confrontation as the US, though there might be a breaking point somewhere in the future.