The only original feature of this tech war is that people are actually talking about it

News - 10/10/2019

Over the last ten years, intense rivalry has resurfaced in the tech sector. The tech war is not a recent phenomenon. The US and the former USSR were already fierce rivals during the Cold War and there were tensions in the 1980s when Japan began to flex its muscles.

But China’s arrival on the scene has rekindled old complaints and even aggravated them as this is a big country with enormous capacities. Systematically replacing foreign technology with national champions is not new in China; it is official industrial policy. And so is Beijing’s protectionist attitude to US internet giants like Google, Facebook and Amazon in favour of home-grown players like Alibaba, Tencent and Baidu.

Washington’s riposte has increasingly focused on banning exports of certain technologies and imposing customs duties. But rather than persuading Beijing to change strategy, the approach is likely to reinforce China’s doctrine and even accelerate its roll-out. Over the medium term, these tensions will lead to two parallel value chains in the tech sector, one Chinese and the other American. Indirectly, this will mean missing out on scale economies but it will at least foster another form of competition.

 

Final demand is bigger in China so the market there could benefit from an improved scale effect to catch up on production of semiconductor components in Taiwan and South Korea. This has already happened in the OSAT segment1. At the same time, barriers to intellectual property in chip design are going up and the main EDA2 software firms (Synopsys, Cadence, Mentor), which are all American, have stopped cooperating with some Chinese companies.

Source : World Intellectual Property Organization – 2018 report

Beijing’s determination to make China an essential force for innovation can be seen in the increasing clout of Chinese R&D spending in global rankings (Chart N°1) and in the number of patent applications. (Chart N°2). Elsewhere, China’s National Integrated Circuit Industry Investment Fund, which raised RMB 138bn (USD 22bn) in 2014, has now taken in around 4 times more from the private sector, investing 67% in foundries, 17% in chip design, 10% in OSAT and 6% in equipment and materials. The fund has managed to reduce the technological gap between global leaders and Chinese companies like SMIC, YMTC, JCET, Huatian, NAURA and AMEC, etc. And it recently closed its second capital raising for RMB 200bn (USD 29bn). The fund’s second phase will aim at advancing self-sufficiency in the sector by focusing on semiconductor production equipment and materials.

In the US, the Semiconductor Industry Association, which includes Intel, Qualcomm and Nvidia among its members, has asked Washington to invest $1.5-5bn a year to reinforce US semiconductor leadership and to counter Chinese ambitions in the roll-out of 5G, the new technological paradigm.  

5G is not only a fundamental transformation of network speeds and capacity but marks the emergence of a “network of networks” offering new agile mobile connectivity. It will accelerate the transformation of smartphones, laptops, tablets, connected objects and peripheral servers into a “light client” network with virtual applications; operating systems like Windows and Mac Os will in future be cloud-based. This will make access to high definition browsing and real-time sharing of data traffic much easier. 

Source : World Intellectual Property Organization – 2018 report

5G’s technological disruption represents a major challenge and a reason for Donald Trump to repeat his message that “the race to 5G is a race that America must win”.

 

Pure technological competition is no longer just a quest to offer value added products but also a geopolitical issue. Technological choices now go hand-in-hand with political choices. Huawei is an interesting example. Because of the close relations between the company and the Chinese government, mounting trade tensions could hit its 5G ambitions (currently 30% of its revenues- cf. chart N° 4). Infrastructure and telecom networks can be seen as strategic tools and Washington is actively lobbying a number of governments to avoid using Huawei to deploy their 5G networks.

In March, the US warned Berlin that it could reduce intelligence and information sharing if Huawei’s technology was used in Germany’s 5G infrastructure.

Today, 40% of Huawei’s sales are in telecom networks and equipment with only 52% coming from China. The group currently has 50 5G contracts with telecom operators and 150,000 base stations have already been installed throughout the world. Should distrust of Huawei increase, the beneficiaries would clearly be Nokia and Ericsson in Europe and Cisco/Ciena in the US, amid regionalisation of ultra-rapid networks and infrastructure.

From the investment point of view, the big winners will be companies which provide equipment to build production chains and also players with the open backing of both superpowers. In this stand-off, the few European companies in the field stand to gain but only as long as they adopt a genuinely neutral stance.

1 Outsourced Semiconductor Assembly and Test
2 Electronic Design Automation

02/10/2019


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