Germany in the Economic War (II)

US-Boycott

The Trump administration is stringently implementing its boycott against the Chinese Huawei telecommunication group, which it had announced last Wednesday, practically without warning. Yesterday, major US computer chip producers, such as Intel and Qualcomm, announced they would comply with the boycott - the same applies to Google, which announced that it would immediately cease to issue new Android operating system licenses. This is a particularly heavy blow for the Chinese company: It still has a large stock of semiconductors and other indispensable US components allowing it to continue several months, perhaps even another year of production in spite of the boycott, still it can no longer equip its new smartphones with the popular Google apps. Even those smartphones that had already been sold can only be updated to a limited extent. As a result, Huawei-smartphones, which have recently received excellent ratings in test results, are suddenly massively declining in their appeal to a large segment of its customers outside China. Huawei must expect heavy losses, because recently, nearly half of its smartphones were sold outside the People's Republic.

Va Banque

The boycott's consequences are unpredictable. The Trump administration is openly seeking to put the most popular – and for China's technological development possibly the most important company – out of business. Numerous experts are speaking of a "nuclear strike."[1] Obviously, Huawei must at least expect heavy losses. However, anticipating the US aggression, the company has, for years, been making extensive preparations for replacing components and software imported from the USA with new in-house production. If the company succeeds, the boycott could backfire, numerous US experts agree, who are worried about this prospect. It can safely be assumed that not only Huawei, but also other Chinese companies will double their efforts to become fully independent of US chips. The US semiconductor giant Qualcomm recently generated two thirds of its sales in China. On a medium and long term, it must fear dramatic slumps, if the Chinese company succeeds in producing equivalent chips. On the other hand, Google with its Android has quasi a monopoly in smartphone operating systems, if Apples iPhones are exempted. However, nearly half of all Android smartphone products are of Chinese production (Huawei, Xiaomi, vivo, OPPO).[2] If they succeed in establishing an alternative operating system, Google will lose nearly half of its market shares.

Business Focus China

The Trump administration's all-or-nothing gamble in the economic war on China is dangerous for German industry also in other respects. This can be seen with the example of the Dax enterprise Infineon, headquartered in Neubiberg in the vicinity of Munich. Yesterday, the chip producer partially joined the boycott. All Infineon-produced components from its US-based plants will no longer be supplied to Huawei.[3] However, the group attaches greatest importance to its stipulation that this boycott, that it must observe in the United States, does not pertain to its plants outside the USA. Not only has the People's Republic of China long since risen to the company's most important market, accounting for 25 percent of Infineon's sales, more than in any other country, including Germany (with 15 percent). The share of Infineon's intake on the US market is only 9 percent.[4] But, Infineon has launched key future-oriented projects in China, as well. The company has entered a joint venture with SAIC, China's largest car manufacturer, for the production of power modules for electric cars.[5] Otherwise, it is also cooperating with the giant online company, Alibaba, making internet applications for the "Internet of Things" (IoT).[6]

Business Focus USA

Unlike Infineon, which has its business focus in China, the Deutsche Telekom's business focus is in the USA, where through its subsidiary T-Mobile USA, it takes in 48 percent of its returns, significantly more than in Germany, (29 percent).[7] In addition, T-Mobile USA is in the process of merging with its rival Sprint. Yesterday, the Federal Communications Commission (FCC) approved permission for the merger. Rumors have it that to obtain that authorization, Deutsche Telekom had to agree that it would forego use of Huawei products in setting up Germany's 5G network.[8] If this is true, the Deutsche Telekom, which has already spent nearly €2 billion during the current bidding for Germany's 5G licenses will have suffered major losses. Experts unanimously consider Huawei to deliver the best quality at better prices than any of its rivals. Without the participation of Huawei the installation of Germany's 5G network would be delayed at least two years. In any case, the Trump administration's Huawei boycott is aimed at minimizing the resulting damages. Should the Chinese company suffer serious losses or even be put out of business, then the rival countries would also be seriously delayed in their 5G network installations, European countries and also particularly the USA, would be able to catch up.

Before the Decision?

Commentators are warning that Germany's entire economy may arrive at a situation, where they - like Infineon and Deutsche Telekom - must choose between the USA and China. The Trump administration's policy is reminiscent of the "approach taken against Iran:" "The US president used economic sanctions to make trade with that country nearly impossible," recalls the Frankfurter Allgemeine Zeitung.[9] However, the German economy's choice between Iran and the USA had been relatively "easy to make." On the other hand, China has become just as "indispensable" as the USA. In fact, though 22 percent of the Dax companies' returns are generated in the United States, the People's Republic of China has now reached an impressive 16 percent (Germany, 21 percent), whereas their sales in China are growing much more strongly than those in the USA.[10] Possibly, Washington may be doing just that, forcing the German economy to decide, noted one commentator. It would be "foolish not to recognize the danger of an American 'either-or' policy." Regardless, one thing is clear, "no one knows yet, how far Trump is prepared to go to retard China's further emergence."

[1] Trump's Huawei Attack Is a Serious Mistake. By Editorial Board. bloomberg.com 20.05.2019.

[2] Tim Culpan: The Tech Cold War Has Begun. bloomberg.com 20.05.2019.

[3] Martin Holland: Auch Infineon und andere kappen teilweise Geschäftsbeziehungen zu Huawei. heise.de 20.05.2019.

[4] Joachim Hofer: Investoren fürchten um das China-Geschäft von Infineon. handelsblatt.com 20.05.2019.

[5] SAIC, Infineon form JV to make electric car power modules in China. reuters.com 02.03.2018.

[6] Malek Murison: Infineon and Alibaba Cloud team up on IoT. internetofbusiness.com 03.08.2018.

[7] Ulf Sommer: Deutschlands US-Offensive: Dax-Konzerne fahren Investitionen in Nordamerika hoch. handelsblatt.com 14.05.2019.

[8] Arvid Kaiser: Wie Amerikas Huawei-Bann die deutsche Wirtschaft trifft. manager-magazin.de 20.05.2019.

[9] Johannes Pennekamp: Amerika oder China. Frankfurter Allgemeine Zeitung 21.05.2019.

[10] Ulf Sommer: Deutschlands US-Offensive: Dax-Konzerne fahren Investitionen in Nordamerika hoch. handelsblatt.com 14.05.2019.