This is not investment advice. The author has no position in any of the stocks mentioned. Wccftech.com has a disclosure and ethics policy.
While the US races to secure rare earths supplies from across the globe in the face of possible Chinese export controls of the crucial materials, we begin to see that it does indeed look like China is gearing up for the long haul in its trade war/technology cold war with the US. China is pushing itself as much as it can to get 5G rolled out across the country with licences given to several of its large, state-owned telecoms operators.
This is no doubt in an effort to ensure that what business Huawei loses from the West it at least in part substituted with home-grown demand for products and services. Executive sources at the telcos are pointing to expanding their 5G pilot schemes across the country with an expectation that almost 800,000 5G base stations should be in place by the end of this year across China, with 3 million base stations in the country within the next 3 years. To give that some context, that would comprise about 50% of the total global numbers of 5G stations.
In the meantime, US concerns over Huawei have met with somewhat muted responses from across the western world. The UK, keen to ensure it can sign trade deals with as many large economies as possible in the face of Brexit (currently scheduled for October) has been reticent to ban Huawei from helping build out its 5G infrastructure, while still allowing Chinese state-owned nuclear power companies to own and cover large portions of new nuclear power facilities being built in the UK. Much of Europe has taken a similar approach with Huawei being eyed slightly suspiciously, but not being sanctioned or banned.
Huawei Revenue Damage – Can it Make up the Difference?
Among the numerous uncertainties facing Huawei is the stark revenue question. Even if Huawei can continue to operate technically without input from major western technology companies like ARM, Qualcomm (NASDAQ:QCOM) and others, even if it has liberated enough intellectual property from its joint venture partners to be able to design and make its own chips, design its own software, secure its own supply lines etc, will it still be able to continue operations with such a revenue shortfall as it will surely face in light of the fact that the world’s largest economy is now effectively blocked from dealing with it?
Effectively it is going to be looking to government subsidies in the form of massive business from Chinese state owned enterprises (SOEs) like the boost it just received. This may help it weather the storm in the short to medium term however it will need something other than this to maintain its revenue, employee and R&D base over the longer term. This is where potential new partners come in to play with an announcement this week that Russia’s MTS telco (MCX:MTSS) will jointly develop 5G networks in Russia with pilot 5G networks launching in 2019 and 2020.
MTS is the largest telco in Russia with 31% market share and serves over 100 million subscribers across Russia, Ukraine, Armenia and Belarus. The announcement of the deal came while Chinese President Xi was in Russia meeting with his counterpart, President Putin and the two countries are seen as starting to work together towards more geopolitical strategic goals as well as trade on which they already have a strong relationship. This visit saw agreements aimed at increasing cooperation in energy and technology businesses between the two countries as $20 billion worth of deals got signed, including the MTS deal.
Meanwhile, other additional tech flash points in the trade war ramped up this week in the shape of the US trying to woo global rare earths suppliers, particularly in Africa to increase production and processing given the US currently relies on China as the dominant rare earth producer in the world. As we’ve mentioned in the past (here and here), although it is true that rare earths are relatively abundant as a resource, extracting and processing them is a dirty business, one which will take time to build up globally in the face of China wishing to exert some form of export controls on them when it currently produces about 80% of global supply. Building up new facilities will take time (both in the US and internationally) and likely also push costs up somewhat, particularly given that the Pentagon is now aiming to encourage military contractors to purchase supplies which have been produced domestically.
Foxconn (TPE:2354) is also seriously behind schedule and targets on building out its ridiculously heavily subsidised Wisconsin facility and one begins to wonder now whether the heavily touted deal will ever reach fruition, particularly given the Taiwanese company’s exposure to both China and the US for its business.
It certainly seems in the short term at least that China is going to do everything it can to keep fighting the trade war and keep its crown jewel tech company (Huawei) alive in the face of US blacklisting. International concern at China forging ahead to secure its own (independent) technological future is likely to mean that countries will feel the pull of a sphere of influence that either aligns with Western ideals or Eastern ones. Although this may make for significant technological innovation in the coming decades (anyone remember the space race between the US and Soviet Union?), it may become uncomfortable economically for a lot of companies caught in the crossfire which had been banking on continued global cooperation to drive economic growth.