Special Briefing: Inside the Tech Cold War
WHY YOU SHOULD CARE
Could Google’s move to kick Huawei to the curb be the beginning of a new Iron Curtain rising in tech?
This is an OZY Special Briefing, an extension of the Presidential Daily Brief. The Special Briefing tells you what you need to know about an important issue, individual or story that is making news. Each one serves up an interesting selection of facts, opinions, images and videos in order to catch you up and vault you ahead.
WHAT TO KNOW
What happened? Google has canceled the Android license of Chinese smartphone maker Huawei, the world’s second largest mobile supplier after Samsung. This means Huawei now can only use the open source version of Android’s operating system and may be unable to download further updates of it. This is meant to be a body blow and comes as a direct result of the U.S.-China trade war. In fact, Huawei was recently placed on the Entity List of companies that U.S. firms can’t do business with without special permission.
Why does it matter? This is now a high-tech Cold War. Huawei’s long been thought to be building an in-house operating system, likely in preparation for exactly this situation, and Huawei founder Ren Zhengfei told Chinese state media after the news broke about Google that U.S. politicians were underestimating his company. But Google’s move could set off a new phase, with China (and its allies and trading partners) potentially using one set of networks and technologies, and the U.S. and its allies another.
How to Think About It
Clock is ticking. Existing Huawei handset users — the company sold 200 million smartphones in 2018 — will still be able to use all Google Android apps, not just those on the open source version. The U.S. Commerce Department also issued a temporary three-month license for the company to give existing users any software patches that were already available before May 16. But it’s a different story when it comes to security updates. Until now, Huawei, like other Google partners, had a monthlong notice of any updates prompted by security concerns. But as of today, the Chinese firm will know of these changes only on the day they’re made public for the open source version. So there will be a delay before Huawei can incorporate updates, resulting in extra vulnerability for those using its smartphones. It also means those buying the phones from now on will only be able to access the open source version of Android.
China’s been preparing. Huawei, having clearly read the tea leaves, told CNBC back in March it had developed its own operating system for laptops and smartphones in case the U.S. forced Google to cut ties. Within China, Google is already banned, and it’s the messaging app WeChat that effectively serves as an operating system that allows users to interact with the outside world, including through e-commerce. But China’s preparations aren’t limited to how it’ll serve its domestic market, or to the telecom sector either. Under President Xi Jinping’s Made in China policy, Beijing has invested more than the U.S. in artificial intelligence and robotics over the past five years. Now, its plans to build cutting-edge tech completely independent of American platforms will likely be given fresh impetus.
Time to pick sides. Over the past two decades, the U.S. and China have competed in the same markets for supremacy. For consumers and other countries, that meant more choice. Companies could build products using components designed in different nations. That might end if the divorce between Google and Huawei spreads to other companies and industries. Cutting-edge Chinese home-built products will likely be cheaper than their American counterparts because of cheaper labor and weaker regulations. China’s also the largest trade and investment partner for multiple African, Latin American and Asian countries — many of which might pick Chinese technology if a firewall emerges between markets exclusively available to Washington or Beijing.
Not the first time. This isn’t the only diplomatic war with tech at its center in the world. But other tussles either involve overt economic sanctions (companies that buy weapons from Russia today risk a ban on trade with America, for instance) or are restricted to specific technology (Australia is pushing back against Huawei over security concerns). If the Google-Huawei separation extends across industries, the U.S. and China would be mimicking the Cold War in which countries had to choose between the U.S-led West and the Soviet-led communist bloc to source everything from satellites and nuclear technology to cars and washing machines.
Collateral damage. It’s not just Huawei’s supply chain that has been disrupted. The Chinese company has reportedly been stockpiling enough components to continue manufacturing for at least three months, but carriers in Europe, Canada and Latin America may soon feel a squeeze. What’s more, industry insiders say such companies would likely need about two years to switch from Huawei components to those of another manufacturer — two years they don’t have. Meanwhile, some of Huawei’s competitors use Chinese-made components, meaning that if China retaliates, their supply chains could be disrupted too. And if two competing world tech systems do spring up, that will curtail consumer choice and could hurt consumers who depend on a competitive market to drive low prices and tech innovation.
What to Read
The Tech Cold War Has Begun, by Tim Culpan in Bloomberg
“The winner won’t be the side with the best fighters, but the one with the greater ability to endure the pain of prolonged losses.”
Forced Tech Transfers Are on the Rise in China, European Firms Say, by Julie Wernau in The Wall Street Journal
“U.S. executives regularly complain that they are pressured to share or give away crucial technology in exchange for access to China’s market, and claim it undermines the competitiveness of foreign firms.”
What to Watch
Why Trump’s Move Against Huawei Has Scared US Businesses
“The way in which the executive order was drafted is so broad that it gives commerce secretary Wilbur Ross the power not just to ban 5G products from Huawei, but any technology sold by any company that even so much as has a contract in China.”
Watch on the Financial Times on YouTube:
We Went Inside The Chinese Telecom Giant That Trump Just Banned
“So what do you do when America says you’re evil? If you’re Huawei, you take out a full-page ad in The Wall Street Journal inviting reporters over for a weeklong junket to prove just how cool and normal you are.”
Watch on Vice News on YouTube:
What to Say at the Watercooler
Greener pastures. Despite the controversy, Huawei’s planned involvement in European 5G networks looks set to go ahead. If Huawei and its house-made chips become standard as Europe and Asia make the leap to 5G, it could disadvantage the U.S. chip-making market, which the Trump administration banned from exporting to Chinese firm ZTE last year.