China has retaliated over Washington’s ongoing campaign against Huawei, with an instruction for public organisations and state offices to rip and replace all non-Chinese computer equipment within three years. There is a benign view that this is a necessary defence on the part of Beijing to protect against further extensions to U.S. sanctions that would remove U.S. technologies from sale. But, in truth, this is much more a case of tit for tat. The U.S. has banned public sector procurements of Huawei and its Chinese stablemates, and now China has done the same.
First reported in the Financial Times on December 9, the move is likely to hit Microsoft, Dell and HP hardest of all, with some estimates suggesting as many as 30 million separate items of computer equipment might need to be replaced. The order was reportedly given earlier this year, with the mandate that 30% of impacted items need to be replaced in 2020, a further 50% in 2021, and the remaining 20% in 2020, earning the rip and replace initiative the nickname “3-5-2.”
Shortly after the U.S. blacklisted Huawei in May, China hinted at retributive legislation with a like-for-like entity list of its own, suppliers refusing to break U.S. sanctions and maintain their contractual obligations to Huawei would be hit. This is a variant of that proposal, and mimics U.S. procurement legislation. In addition to being a manufacturing hub for U.S. hardware, China is also a vast market in of itself. The complex tie-ups between the public and private sectors in China may also expand this restriction once its in place. The U.S. has flirted with restrictions on private sector purchases of sanctioned Chinese equipment, but opted instead to cut its supply chain.
According to the FT, “The directive is the first publicly known instruction with specific targets given to Chinese buyers to switch to domestic technology vendors, and echoes efforts by the Trump administration to curb the use of Chinese technology in the US and its allies.”
The supply chain compromise that has been instigated by the U.S. blacklisting of Huawei and others has highlighted the globally integrated nature of today’s technology landscape. U.S. chips inside Chinese hardware, U.S. software powering Chinese devices, Chinese components, manufacture and assembly driving U.S. household names. With the U.S. blacklist, Huawei and others have been forced to replace every widget and app with non-U.S. variants. It is unclear whether this Chinese restriction will go any further than removing flagship U.S. branded hardware.
Analysts will watch with interest now to see whether China actually seeks alternatives to Microsoft Windows and the Intel chips driving its domestic platforms, or simply kicks out the Dell, HP and Microsoft hardware boxes themselves. And, again, once that’s done, will there be pressure on private enterprises in strategic industries with heavy government ties to do the same? The Chinese market is worth as much as $150 billion to U.S. tech, but most of that is in the non-government space.
On the assumption that China executes this order as planned, it will represent the most direct and significant backlash against U.S. firms since the latest technology war got underway. There is clearly an economic implication for the firms involved, but there is also the risk of global resonance. As China weans itself from U.S. tech, others will likely follow suit. And as that happens, the U.S. loses some of its global influence on platforms and standards. Whether this spills over into the manufacturing arrangements that U.S. technology firms have with Chinese plants remains to be seen. But if we were to find ourselves there, the impact would be difficult to overstate.
[“source=forbes”]
