US/Huawei saga enters the realm of ‘who knows what going on?’

The US Commerce Department has held a press conference to announce some companies can now trade with Huawei, but no-one knows who, how, what or where.

Speaking at the annual department conference in Washington, Commerce Secretary Wilbur Ross has said US companies can now start trading with Huawei, assuming they have had a license approved by his department, which is unlikely to happen, while little guidance has been offered to the criteria on how decisions will be made.

The only clue which we have so far is a reference to ‘national security’. Huawei and its affiliates remain on the ‘Entity List’, though US firms are allowed to do business if it doesn’t compromise national security. What that actually means is anyone’s guess.

The move from the US Commerce Department follows comments from President Donald Trump at the G20 Summit in Japan. In order to get trade talks back on track, Chinese President Xi Jinping insisted the aggression towards Huawei be ended. This seems to be somewhat of a compromise with a nod to the likely domestic opposition the White House will face.

Immediately after Trump signalled his intentions to let Huawei off the hook, two of the President’s biggest opponents, from opposite sides of the aisle, voiced their disapproval. Republican Senator Marco Rubio, who has Presidential ambitions, and Democrat Senator Chuck Schumer, who consistently undermines the President, both suggested they were going to be hurdles in the pursuit of Huawei relief.

For the moment, the language is still very negative. US suppliers can apply to work with Huawei, but applications will be looked at with refusal at the front of mind. There will have to be proof such business would not compromise security, though it is highly likely the vast majority will be turned down.

“To implement the president’s G20 summit directive two weeks ago, Commerce will issue licenses where there is no threat to US national security,” said Ross during the conference.

“Within those confines, we will try to make sure that we don’t just transfer revenue from the US to foreign firms.”

This seems to be an attempt to keep all parties involved happy. In China, it might look like the White House is trying to relieve pressure on Huawei, while in Congress, Trump seems to be attempting to give the impression he is protecting national security. However, it does paint an incredibly confusing picture.

Ross’ statements seem to ignore the fact that supply chains are now globalised, and it is almost impossible to do business without working beyond domestic shores. Few firms will have any concrete understanding to where they stand either.

For those who have lobbied against the ban, its difficult to see whether this is a win or not. Yes, it is somewhat of a concession, but it might not mean anything ultimately. If the US Commerce Department is going to be stubborn, few suppliers might receive the golden ticket to do business with Huawei. Only time will tell whether this is anything more than ego stroking from Ross.

Trump makes minor Huawei concession following pleading from US tech sector

Following talks with the Chinese leader, US President Trump has announced US companies will be able to flog Huawei some gear if they really must.

It looks like Trump got the memo that the collateral damage from his decision to ban US companies from doing business with Huawei was starting to mount up. As part of trade talks with Xi Jinping Trump announced on Twitter, as it his wont, that US companies can resume selling Huawei stuff, so long as it doesn’t cross some arbitrary, unspecified ‘national security’ line.

Here’s Trump making it official.

It doesn’t look like there was significant progress on the underlying trade war that seems to have at least had an amplifying effect on the Huawei situation, but at least the two leaders are talking and making the right public noises. The mutual decision not to impose further tariffs, as had been threatened in advance, is one positive sign, but it looks like the final resolution for Huawei remains closely tied to the broader talks

That said the Trump administration has been keen to counter any perception that this concession amounts to a more general weakening of the Trump position. Speaking to Fox in the clip below, Director of the US National Economic Council Larry Kudlow didn’t really add much on Huawei, but made it clear that the move is part of a general process of horse-trading in which each party makes small, symbolic concessions to show good faith.

 

Huawei stresses how much it respects intellectual property

Embattled telecoms vendor Huawei feels so passionately about the sanctity of intellectual property that it’s published a great big white paper on the matter.

Titled ‘Respecting and Protecting Intellectual Property: The Foundation of Innovation’, the paper goes on at great length about how important innovation it and how it can only happen if people don’t go around ripping off each other’s inventions. There’s even a whole five-page section stressing how much Huawei respects third party’s IP and would definitely never nick any of it.

The paper was unveiled at a press conference in China by Huawei’s Chief Legal Officer Song Liuping (pictured). “In the past 30 years, no court has ever concluded that Huawei engaged in malicious IP theft, and we have never been required by the court to pay damages for this,” he said.

“Innovation and IP protection is the cornerstone of Huawei’s business success. Last year we generated more than 100 billion dollars in revenue. None of our key products or technologies are linked to any accusations of IP theft. No company can become a global leader by stealing from others.

“We have grown because we invest. Last year alone, we invested 15 billion US dollars in R&D – the fifth largest in the world. We have more than 80,000 R&D engineers that put their hearts and souls into the technology we create. Huawei fully supports the IPR protection system, both globally and in the United States.”

That all seems pretty clear doesn’t it? The primary purpose of the paper, however, was not to protest arguably too much about Huawei’s innocence, but to indirectly berate US President Trump for using intellectual property as a political pawn.

“Over the past 30 years, we have paid more than 6 billion US dollars in royalties to legally implement the IP of other companies,” said Song. “Nearly 80% was paid to American companies…. Disputes over IP are common in international business. Huawei has been on both sides of these disputes. We believe these disputes should not be politicized. Intellectual property is private property, protected by the law, and disputes should be resolved through legal proceedings.”

Song makes several valid points here. As we recently covered, US attempts to co-opt its own companies into its political dispute with China are increasingly causing collateral damage. Furthermore the apparent suspension of the rule of law for Huawei is not only unjust, but undermines the whole foundation on which international trade relies.

Having said that, Huawei’s unprompted protestations of angelic innocence when it comes to intellectual property are likely to raise some eyebrows. For example, a recent investigation into Huawei’s historical activities in this area paints a somewhat more nuanced picture. Huawei is using MWC Shanghai to make a bunch of self-aggrandizing announcements but the real action will take place when Trump meets Chinese President Xi in Japan this weekend.

US tech companies reportedly exploit loopholes to work with Huawei

The US government seems to be losing its battle to suffocate Huawei as its own companies look for ways to keep doing business with it.

This is according to the New York Times, which has spoken to no less than four people who reckon they know what they’re talking about on this matter. They say US companies including Intel and Micron have started selling stuff to Huawei again on the grounds that the products weren’t manufactured in the US.

This is just the latest example of the confusion and contradictions created by trying to ban trade with large multinational companies in the era of globalisation. Yesterday we reported on courier firm FedEx suing the US government for putting undue burden on them to vet every package they handle in case it’s contaminated by and Huaweiness.

The NYT piece sheds light on the Byzantine complexity of the rules being arbitrarily imposed on doing business with Huawei. The ‘entity list’ kept by the Department of Commerce seems to be very badly thought out and implemented and seems to make very little allowing for the difficulties it creates for American companies.

At the core of the problem is the use of trade policy to augment political strategy. The Trump administration essentially seems to be using this entity list to brow-beat China into making concessions on things like trade tariffs, currency manipulation, etc. It might end up being quite effective but US companies are being asked to take on the burden of enforcement, which is both burdensome and costly. Some, it seems, are disinclined to play ball.

FedEx sues US Department of Commerce over entity list

US courier company FedEx is suing its own government over its ‘entity list’, which it claims puts undue burden of enforcement on companies.

The action follows the recent story of FedEx refusing to ship a Huawei smartphone from one private individual to another because it thought it might get into trouble with the government. The reason it thought this is that Huawei is on a list compiled by the US Department of Commerce that identifies certain organisations US companies aren’t allowed to do business with.

It seems there was some confusion at a FedEx sorting office that resulted in the package being sent back even though it should have been allowed, so long as it wasn’t sent by Huawei themselves. While FedEx eventually admitted to making a mistake, that may have been too late for Chinese authorities, who are presumably itching for any opportunity to add US companies to its own ‘unreliable entities’ list.

FedEx quite reasonably feels it has been put in an impossible position when it comes to enforcing the Export Administration Regulations (EAR) that accompany this entities list, since it can’t possibly be 100% sure every one of the millions of packages it handles comply with the regulations and feels the punishments associated with getting it wrong, in either direction, are too severe.

“FedEx believes that the EAR violate common carriers’ rights to due process under the Fifth Amendment of the U.S. Constitution as they unreasonably hold common carriers strictly liable for shipments that may violate the EAR without requiring evidence that the carriers had knowledge of any violations,” said FedEx’s statement on the litigation. “This puts an impossible burden on a common carrier such as FedEx to know the origin and technological make-up of contents of all the shipments it handles and whether they comply with the EAR.

“As a company that is committed to complying with all laws and regulations in the countries we serve, FedEx strongly supports the objectives of U.S. export control laws. We have invested heavily in our internal export control compliance program. However, we believe that the EAR, as currently constructed and implemented, place an unreasonable burden on FedEx to police the millions of shipments that transit our network every day. FedEx is a transportation company, not a law enforcement agency.”

You can read the full lawsuit here if that sort of thing floats your boat. This seems to be an inevitable consequence of the US’s increasing inclination to use trade bans as a political weapon. The burden of enforcing them falls on private companies and there’s almost no limit to how vindictive the US state is prepared to be to anyone who gets them wrong, just ask ZTE. The longer this trade war goes on there more collateral damage there will be – yay.

China set to start adding companies to its own ‘unreliable entities’ list

Fed Ex refused to deliver a Huawei smartphone between the UK and US, now it seems likely to be put on a Chinese list of undesirable companies.

The issue was flagged up by PC magazine in a story headlined Are Huawei Phones Now Banned From the Mail? One of its UK writers attempted to send a Huawei P30 phone to the magazine’s US office via the Parcelforce and Fed Ex courier services, but got sent back as per the tweet below.

The form that accompanied the parcel identified its contents as a Huawei phone and it apparently spent 5 hours being peered at with deep suspicion before being returned to sender. The stated reason for sending it back was Huawei’s presence on the US ‘entity list’ (to which it recently added 5 more companies), which essentially identifies organizations US companies, and any others who was to stay in America’s good books, are not allowed to do business with.

In an update Fed Ex is now claiming the package was returned in error, but that may not be enough to keep it off a reciprocal list of banned companies China is apparently compiling. According to the Global Times, which is known to be supportive of the Chinese state, Fed Ex is now likely to be added to something called the ‘unreliable entities’ list, which is rumoured to have been recently created by the Chinese state to give the US a taste of its own medicine.  

This all feels like an entirely predictable escalation of a trade war that is increasingly taking its toll on both sides of the Pacific. The G20 meeting of global political leaders takes place in Japan later this week and at the top of the agenda will be the US/China trade war. Companies from both countries are being used as proxies in this battle of wills between Presidents Trump and Xi, so everyone will be hoping they make some progress towards mutual compromise.

Apple considering a Chinese exit amid international tensions

It seems Apple does not consider itself immune from collateral damage, as whispers about a China exit are becoming louder and more plentiful.

For China, and those Chinese citizens who are dependent on Apple for their livelihood, the news will come as a shock, but this is a development which some have been expected for a while. According to the Nikkei Asian Review, Apple is considering moving 15-30% of its production capacity out of China.

This is a trend which we are starting to see pretty much everywhere. Supply chain management is a very difficult aspect of an international business, and while it might have looked attractive to take advantage of cheap labour in developing markets during yesteryear, it seems a concentration of operations is getting Apple executives twitchy today.

The quoted sources are suggesting diversification of the supply chain is a sensible way to manage some tensions floating back and forth across the Pacific Ocean.

In terms of the clues this development was on the horizon, it is worth looking back a couple of weeks. Foxconn executives have already said 25% of production is already located outside of China, and there is enough capacity to meet the demands of Apple as a customer should tensions have a negative impact on the Apple business. This appeared to be a largely unprompted statement, but perhaps the conversations were already happening behind closed doors.

What is also worth noting is that Foxconn certainly has some incentive to bend to the will of Apple executives; if it doesn’t have the capacity, a smart idea might be to spend some cash buying a company outside of China sharpish. Although not confirmed, Apple supposedly accounts for roughly half of Foxconn total revenues. If Apple wants to move production capacity out of China, Foxconn should quickly learn the moves to the new dance.

For the Chinese employees in the supply chain, this will be a very worrying time. Five million workers rely on Apple’s presence in the country, with Apple only employing 10,000 directly. Interestingly enough, there are now more named suppliers in China than in the US (41 Chinese firms vs. 37 US suppliers). What is worth noting is that China will remain the centre of Apple’s supply chain for the foreseeable future; shifting such a complex and monstrous operation would take a considerable amount of time, investment and planning.

Other countries would of course want to woo Apple, but China is a very attractive base for the iLeader. Not only does it have the necessary infrastructure, it has the skilled workers in place. 90% of Apple’s products are currently manufactured in China and replicating this successful operation will not easily be done elsewhere.

Although this would be a precautionary move from Apple, the threat is genuine. Huawei and ZTE have already shown there are heavy consequences if supply chains are too concentrated in a single market, and due to the aggressive actions of the White House it would surprise few to see retaliation from the Chinese Government.

On the supply chain side of things, Apple has been making other efforts to shift around operations. The firm has been working to move the production of some premium handsets to India in an effort to avoid the 20% import duties in the country. Apple has continued to struggle in India, partly due to the price conscious nature of consumers. Anything which can be done to reduce the price of handsets will be explored to improve market share.

Whatever your thoughts of President Donald Trump, you cannot argue the Oval Office is having a much more profound impact on the technology industry than previous administrations. Perhaps his actions will lead the Chinese semiconductor market grow, while the manufacturing and assembly operations will be spread into other Asian markets. Another couple of years and the segment could almost look unrecognisable.

Broadcom hit by friendly-fire in US/China trade war

Broadcom has unveiled its financial results for the last three months, though it isn’t the rosy picture some might have hoped for as ‘continued geopolitical uncertainties’ weigh heavy on the spreadsheets.

Although total revenues were up 10% from the same period of 2018 to $5.5 billion, the team has lowered its forecast for the remainder of the financial year. The new forecast for 2019 is now $22.5 billion, $2 billion lighter than the team was initially aiming for.

“We currently see a broad-based slowdown in the demand environment, which we believe is driven by continued geopolitical uncertainties, as well as the effects of export restrictions on one of our largest customers,” said CEO Hock Tan.

“As a result, our customers are actively reducing their inventory levels, and we are taking a conservative stance for the rest of the year.”

Although not mentioned here, guessing who Tan is referring to is not the most taxing of tasks. While Broadcom does not have as much exposure to Huawei as some US firms, it is its biggest customer; the unintended consequences (or at least we hope they were unintended) of President Trump’s Executive Order continue to pile up.

Estimates might vary, though the general consensus is that Huawei, the world’s largest manufacturer of telecoms equipment, purchases around $20 billion of semiconductors each year. Broadcom is being impacted here, though Qualcomm, Intel, Xilinx and several other smaller firms will also be feeling the pinch.

Although the year-on-year stats are still encouraging, investors might be a bit turned off by the sequential 4.7% decrease in revenues. Net income stood at $691 million, though this is not comparable to the year as this was the period Broadcom realised the benefits of changes to tax laws in the US.

The last couple of years have certainly been an interesting saga for Broadcom. Having shifted its HQ to the US in an effort to buy favour with authorities while attempting to acquire Qualcomm, the transaction was eventually blocked by the White House on the grounds of national security. With financials now being hit because of the anti-China mission of the Oval Office, Tan must be wondering why he bothered to cosy up with the US.

Huawei claims its US ban is unconstitutional

Huawei has continued its counter-assault against the US, suggesting the 2019 National Defense Authorization Act (NDAA) contradicted the country’s constitution.

Signed into law in August 2018, the NDAA effectively banned Huawei and ZTE from any meaningful work in the US. The language was suitably nuanced to ensure this wasn’t a total ban, but the conditions made it difficult for Huawei to contribute any components, products or services to government or state-funded projects. Due to the intricacies of network investments, almost all major projects could be deemed state-funded by one means or another.

While Huawei has not taken this action from the US Government sitting quietly, this latest move challenges the legal foundations of the legislation, suggesting such actions from the White House and Congress are unconstitutional.

“As explained in the motion, the Constitution generally limits Congress to enacting laws and requires that application of those laws be left to the Executive and the courts,” said Glen Nager, the lead external counsel for Huawei and Partner at Jones Day.

“Congress may not selectively punish specific persons; Congress may not selectively deprive specific persons of property or liberty; and Congress may not itself exercise executive or judicial powers. But section 889 violates all of these constitutional rules.”

According to the filing, section 889 of the NDAA violates the Bill of Attainder, Due Process, and Vesting Clauses of the US Constitution. Huawei and its lawyers will argue the law should not be allowed to target specific companies and/or persons, while US politicians specifically targeted the firm during the legislative debate process, blatantly proclaiming an objective was to ‘banish’ Huawei from the country.

The Bill of Attainer clause suggests no bill can be passed into law which singles out an individual or group for punishment without a trial. As the US has passed this law without any formal legal proceedings against Huawei, it would appear there is a good case here.

Huawei’s lawyers also claim section 889 violates due process and the separation of powers, in that it is selective legislation targeting Huawei specifically. The filing also argues deprives Huawei of protected property and liberty interests without affording it constitutionally necessary due process. And finally, Congress has assumed the fact-finding and law application functions of the executive and the courts, ignoring the separation of power clause.

Should the courts be in agreement with Huawei’s position, it would appear politicians were in too much of a rush to make a move against China and its telco flagbearer. Another interesting consequence might be the burden of proof.

To date, little, if any, evidence has been offered to back up US propaganda against Huawei, though if the filing proves the NDAA is unconstitutional, the US Government might be forced to table any evidence it has. If the choice is between this law dwindling into non-existence or tabling evidence of collusion, the nuanced conflict between the US and China might be about to become much more substantiated.