Compass Money: October 2019
Articles written by Shaily Acharya and Robert Fanciullo.
HUAWEI IN RUSSIA
Chinese President Xi Jinping and Russian President Vladimir Putin signed an agreement at the 2019 St. Petersburg International Economic Forum (SPIEF) authorizing the launch of a 5G pilot program in Moscow through the Chinese multinational technology company Huawei. Huawei’s first 5G launch in Moscow was done in partnership with Mobile TeleSystems (MTS), a Russian mobile network operator with a presence throughout eastern Europe. MTS is planning to extend the service to the rest of Moscow in short order and to cover all major Russian cities with 5G by 2024.
According to Zhao Lei, the CEO of Huawei’s Russian subsidiary, "We have been working in Russia for 22 years. Thanks to our partners, we live well here.” His claims are supported by the fact that “Huawei currently employs 400 people in Moscow and 150 in Saint Petersburg in mobile research and development.” Huawei plans to grow its Russian workforce by hiring 500 more people by the end of 2019 and 1,000 more by 2024. Huawei’s influence extends beyond just Russia, however: it is now the second-largest smartphone company in the world, behind only Samsung.
Analysts claim that the agreement between Putin and Xi could be seen as an act of solidarity in the face of threats coming from the United States. That the agreement was signed in the middle of China’s conflict with the Trump administration and as Trump encourages western European governments like the U.K. to distance themselves from Huawei due to the perceived risk of security breaches substantiates this notion.
Despite Huawei’s ever-increasing global influence, the corporation faces severe roadblocks in the United States. Earlier in 2019, the Trump administration banned technology companies in the United States from selling equipment to Huawei because of concerns about the connection between Huawei and the Chinese government. Huawei’s CFO, Meng Wanzhou, the daughter of its founder, is currently facing the prospect of extradition to the U.S. from Canada on charges that she defrauded a bank into breaching American sanctions on Iran. This action could have severe repercussions for Huawei: the Chinese corporation heavily depends on phone chips and other equipment from the United States. Without these resources, experts believe that Huawei must reevaluate their larger business strategy in order to ensure the company’s survival.
Due to tensions between Huawei and the U.S. government, Russia has also explored the possibility of transitioning Huawei smartphones to Russian operating system (OS) Aurora instead of using Google’s Android OS. According to Reuters, Huawei is planning to install Aurora “on 360,000 of its tablets to conduct Russia’s population census next year." It has been described as "the first stage of launching the Russian OS on Huawei devices." The use of Aurora was also decided upon at the SPIEF.
U.S.-CHINA SUPPLY CHAIN LOGISTICS
President Donald Trump demanded on August 23 that U.S. firms move production out of China. A week later, he doubled down with an attack on General Motors’ continued presence in China. While the announcement shocked some on Wall Street, U.S. firms are not surprised.
Amid the intensifying U.S.-China trade war, American firms have dramatically transformed their supply chain logistics away from China. While companies must continue to source materials from China, many now assemble their products in Southeast Asian countries like Vietnam. Technology firms, including Google, have moved smartphone production to Vietnam to avoid a new 15-percent tariff that will hit the technology sector during the holiday season.
For firms yet to move their product assemblies away from China, plans are well underway to reorganize their supply chain. For example, a recent survey conducted by the American Chamber of Commerce in China found that 40 percent of respondents were considering moving their supply chain out of the country, with 25 percent expressing interest in moving to Southeast Asia. Hewlett-Packard and Dell, for example, both plan to move up to 30 percent of notebook production out of China, according to CNBC.
However, moving supply chains away from China does not come without issue for U.S. firms. Many manufacturers rely on resources and parts from China that are hard to produce elsewhere. For instance, Apple relies solely on screws made in China for its high-end computers since such screws cannot be made by American suppliers. Shifting production away from China would mean significantly increasing the cost of and time to produce the devices.
While most U.S. firms are prepared for the tariff increases that will affect many consumer goods, especially technology and related products, the high cost of establishing alternative supply chains remains cause for concern.