April 26, 2018 / 5:03 AM / in a month

Breakingviews - U.S. squeeze could rally China tech behind Beijing

By Robyn Mak

People walk past a sign board of Huawei at CES (Consumer Electronics Show) Asia 2016 in Shanghai, China May 12, 2016. REUTERS/Aly Song

HONG KONG (Reuters Breakingviews) - A U.S. squeeze could rally China’s tech sector behind Beijing. Like rival ZTE, Chinese telecommunications equipment giant Huawei could be in trouble over sanctions violations. Beijing, which has long dreamt of self-sufficiency in technology, could enlist help from the likes of Alibaba.

Prosecutors from the U.S. Department of Justice have been investigating Huawei for violating curbs on supplying Iran and other countries, the Wall Street Journal and Reuters reported on Wednesday. This comes just days after another arm of the government banned American suppliers from selling to ZTE, for breaking the terms of a settlement following its own sanctions violations. ZTE is seeking a resolution and says its survival is under threat.

The consequences for the larger Huawei could also be devastating. The privately held group is the world’s top supplier of telecoms equipment and the third-largest handset maker. Like ZTE, it probably relies on U.S companies like Qualcomm for mobile chipsets and optical communications technology.

For China, this underscores the urgency of developing its own semiconductor industry as tensions with Washington escalate. U.S. parts are uncomfortably central to global supply chains: UBS analysts reckon American kit goes into up to 90 percent of ZTE products, for example. The Chinese government has ploughed billions of dollars in investments and subsidies into local outfits like the state-backed Tsinghua Unigroup, but with mixed results so far.

So, Unigroup and peers will step up efforts to lure foreign talent, build new plants, and accelerate research and development. The state could lend a hand with cheap lending and other incentives. Buying up foreign companies will be much harder, given the increased scrutiny and distrust of Chinese buyers in the United States and elsewhere.

Beijing has another lever to pull: rallying private tech giants behind its cause. Alibaba, the $436 billion e-commerce behemoth, is one likely candidate: founder Jack Ma said on Wednesday that China needs to control “core technology” to avoid over-relying on U.S. imports. And just last week, his company bought a Chinese chipmaker. The prospects of gaining political favour and cashing in on a booming local industry may be enough for others to follow.    

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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