The new cold war with China
Yesterday, the US Department of Justice indicted the world’s largest 5G telecom infrastructure maker Huawei with 20 counts of sanction violations and intellectual property theft. The news media is generally interpreting this move as a blow to the next round of US-China trade talks starting today, but in my view, it is yet another sign of what I call “the coming cold war with China”.
On 6 February 2019, we will publish an in-depth analysis of the current Chinese growth slowdown and its relation to the long-term outlook and prospects for Chinese and global economic growth. But given the latest developments I have decided to give a little sneak preview of some of its contents.
The old fogeys amongst us will remember the cold war between the two geopolitical superpowers, the US and the Soviet Union. It was a struggle for global influence that was fought over political ideology first and economic models second. I think the 21st century could see the emergence of a new cold war, this time between the two economic superpowers, the US and China. Unlike the previous cold war this one will be fought over economic models first and political ideology second.
But it does not mean that this cold war with China will be less intense than the previous one and it certainly does not mean that the potential to escalate into a hot war of military confrontation is lower. However, since the goals of this cold war with China are different, the means with which it is conducted are different as well. Methods like IP theft and cybercrime are likely to be the weapons of choice for Chinese enterprises that enjoy the support of the Chinese government. At the same time, many Chinese IT companies already enjoy the benefit of a dominating market share in their home market, where US competitors, such as Google or Facebook cannot, or would not operate. This provides Chinese companies with a protected home market that provides ample free cash flows. As growth in China slows, it is only a matter of time before companies like Alibaba or Tencent challenge their American rivals on their home turf or in Europe.
And this challenge might increasingly mean that consumers and businesses will have to decide between one platform or the other. One might say that for software companies like Alibaba it does not matter which smart phone or internet infrastructure one uses, but this is where the case of Huawei becomes important. Huawei is the world’s largest manufacturer of 5G mobile telecom infrastructure. As Western companies increasingly ban Huawei and other Chinese hardware manufacturers from their countries due to fears of IP theft and data security, they must turn to Western providers to build their 5G infrastructure. This has two consequences. First, it provides China with a first mover advantage because it can install 5G before the US or any country in Western Europe can. Second, it means that the 5G technology installed in the West will likely not be fully compatible with the 5G technology in China. This in turn means that users might have to choose whether they want to adopt the Chinese or the Western technology standard and with it the software that runs best on it.
The battle with Huawei and implicitly the battle for 5G technology standards may be a bifurcation that is the opening salvo in a much larger fight for economic influence between the US and China.
If you want to know why we think such a cold war between China is becoming increasingly likely, watch out for our next “The Long View” report on 6 February.
Mobile infrastructure market share
Source: IHS Markit