December 12, 2012

Let the Trade Wars Begin (Again)

Reuters today reported on an internal European Union Report purportedly recommending action against Chinese telecom equipment venders based on a combination of threats both to EU "security" and the commercial viability of EU telecom gear producers.

While U.S. authorities have taken great pains to develop convoluted and often contradictory and illogical conspiracy theories to justify their Cold War mentality-inspired market distortion, it would seem from the brief detail provided by Reuters that the EU's "security" veil is paper thin.  Call it what it is: Good old fashioned protectionism.

Let the trade wars begin (again).

In the (perceived) wasteland of North American telecom gear-makers, the landscape appears bleak: Nortel is gone.  Motorola is toast.  Yes, Cisco remains, indeed, aspires to extend it's business into mainstream telecom, but, it would seem, it hopes to do so on the back of anti-competitive U.S. Government protectionism.

And now, in Europe, the protectionist sirens sing.  Alcatel-Lucent, the French-based vender that swallowed the remains of America's Bell Labs, is challenged to maintain its outlandish margins in the face of commercially-rational competition from China-based companies.  Nokia-Siemens, the ever-struggling joint venture combining the flailing infrastructure assets of Germany's Siemens and Finland's Nokia, is faring yet worse.  Ericsson, long-bolstered by Sweden's government-commissioned export agency EKN, is better off, but feeling the pinch, and likely as not, eager to suckle a protectionist teat.


According to the Reuters' story, the EU Report found that "prices of equipment from Huawei and ZTE were on average 18 percent below those of EU producers."  The suggested assumption is that  the China-based multinationals are government-subsidized or otherwise "cheating."   Perhaps it would be worthwhile to consider some of the commercial realities:

Alcatel-Lucent, Ericsson, Nokia-Siemens and Cisco have all off-shored the lion's share of their coding and production and a healthy dose of their R&D, much of it to China where they can tap vast and markedly less-costly yet high-quality labor pools.   Even so, they maintain significant and bloated overhead in their legacy headquarters' markets, often precluded by regulation or law or social pressure from trimming (slashing?) where necessary to remain commercially competitive.

And the fact that the younger, slimmer, more dynamic China-based venders can deliver competitive product at lower cost comes as a surprise?

No, it is what it is. Protectionism.  And remarkably misguided, indeed, reckless.

Retaliation is a given.  Copy-catting in other markets, equally likely.  But the impact goes deeper.  For instance, Huawei did $32 billion in business last year.  Roughly one-third of the components in Huawei infrastructure solutions come from American suppliers.  That amounted to about $6.6 billion in procurements from U.S.-based high-tech companies last year alone.  That's a few tens of thousands of American jobs (this is where the earlier referenced to "perceived" wasteland of North American telecom gear-makers comes in: In fact, the North American, and particularly U.S. telecom industry is alive and well,just in a different form than before).  Europe accounts for just shy of another third of Huawei components, with similar economic benefits.

Sure, maybe all of these suppliers can shift their shipments to the favored "Western" venders if the U.S. and EU succeed in walling off free trade and competition.  Or maybe not.  Remember, all of the "Westerners" are in fact as "Chinese" as Huawei in terms of R&D, coding and production.  If the U.S. and EU succeed in undoing sixty-plus years of free trade, competition and innovation, it will almost certainly disrupt the global supply chains that power the ecosystems behind not just the likes of Huawei, but pretty much all of the venders.  

Yes, in five, perhaps ten years, new ecosystems should develop inside the newly-proscribed "blocs," but what commercial, macro-economic and innovative damage will have been wrought in the interim?  And for what purpose?  This is not about "national security."  It never has been.   This is just bad policy.  And it's very likely gonna hurt.  Everyone.

Æbbe the Younger and Chinese Outward Investment

Globalization is real and capital flows that once ran largely one-way - West to East - are increasingly travelling a two lane highway.  The emergence of China as a global economic powerhouse and the five-year long lingering malaise in Western economies are significant factors behind this capital flow evolution.  As China continues to flex its new-found economic and commercial muscle, other markets are racing (or not) to roll out the welcome mat.

Chinese outward investment has been on a relatively rapid rise since the mid-2000's.  According to China's Ministry of Commerce, outward investment in 2005 totaled  a mere $12.3 billion.  By 2008, that number had climbed to $55.9 billion for the year.  2011 saw the level of outward Chinese investment top $70 billion, and that pace is being matched in 2012.  It is interesting to consider where those funds are flowing.  And why.

According to Heritage Foundation data, roughly 8% of that investment - $42 billion - found its way to the U.S. (putting the US just slightly below Latin America as an investment destination), but as much as 12% was devoted to Europe, with the UK receiving roughly one-fifth of Chinese foreign investment bound for the EU (about $12 billion, or 2% of total Chinese outward investment).    

While there are any number of comparative indicators to consider, let's look at the size of the economies as a belweather for the scope of the potential investment opportunity:  

The delta between the 2011 $17.5 trillion aggregate GDP of the European Union and the U.S. 2011 GDP of just over $15 trillion would seem to jibe with the delta in Chinese investment into Europe versus the U.S.  But, U.S. GDP eclipses the UK's (just shy of $2.5 trillion in 2011) by a factor of five, which, when factored against the Chinese capital inflow, would seem to indicate that the UK benefits from a disproportionate level of Chinese investment vis a vis the U.S.  

Again, while there are any number of potential factors to consider, for the sake of brevity (and my agenda), let's consider one rather telling illustrative comparative experience (regular readers: here we go...):

In 2005, Huawei Technologies struck a landmark telecommunications infrastructure deal with British Telecom.  Over the last 7 years Huawei has grown that relationship, and deployed network equipment with a range of other UK operators, from Everything Everywhere to Orange to Virgin Media.    In September, 2012, Huawei announced it would increase its investment in the UK by more than $2 billion over the next five years.

In 2010, the U.S. Government intervened in the multi-billion dollar Sprint-Nextel telecommunications network upgrade to prevent Sprint from selecting Huawei as a vender, on supposed national security grounds.   Pulled off the table were potential billions in capital and operating expense savings for Sprint, as well as world-leading technology that uniquely met Sprint's complicated network needs.  Japan's Softbank recently announced its purchase of the beleaguered company.

Did the British sacrifice their national security by allowing Huawei to compete and invest?  Of course not.  Did they share concerns similar to those expressed in the U.S.?  Yes, indeed.  

The delta between the way the U.S. and the UK addressed Huawei epitomizes the delta between their approaches to attracting (or discouraging) ever-growing Chinese outbound investment capital, which in turn explains the seeming disproportionality mentioned above.  

The UK took a coordinated and comprehensive commercially pragmatic approach to a perceived security concern by employing appropriate technological tools and related disciplines to safeguard the integrity of UK telecom networks while simultaneously adhering to its commitment to free and fair trade and competition and ensuring that UK operators could avail themselves of world-class rationally-priced technology.  Huawei and other China-based investment are warmly welcomed.  The economy benefits.  The nation is secure.

The U.S., which unlike the UK harbors plans - contingency or otherwise - to one day go toe-to-toe with the Chinese (whether virtually or kinetically), has taken a chaotic, uncoordinated, commerce-be-damned, Cold War-inspired protectionist approach, stringing together odd, underhanded, market-distorting and anticompetitive attempts to somehow blackball Huawei from doing business in the U.S. 

 Is the nation any more secure?  Nope.  All of the competitor gear is at least in part sourced from China as well and, well, duh, is subject to the same potential global supply chain and other vulnerabilities as Huawei's.  Does the economy benefit?  Nope.  Less competition, higher prices, less innovation, fewer jobs, protectionist retaliation...and, of course, less foreign investment.

And this ain't just about Huawei.  Sure, torpedoing the Sprint deal effectively tanked the possibility that Huawei might have invested the billions in the U.S. that it has subsequently invested in the UK.  And sure, the treatment Huawei has received in the U.S. could easily have contributed (albeit in some vague, indirect way) to the December 2012 decision to invest almost $100 million in smartphone R&D in Finland instead of Texas, New Jersey or California, any one of which has a wealth of displaced telecom gadget expertise to rival Nokia's home market.

But its bigger than Huawei.  The signal to Chinese companies looking to invest in the U.S. is clear.  There are no rules.  The environment is at best capricious.  So they think twice, or just go elsewhere altogether...  We are myopically engineering lost opportunities, at the expense of American workers, families and innovators, and all in the name of so-called national security policies that are easily demonstrated to be utterly ineffective.

Or look at it this way:

As legend has it, in 867 AD, Viking pirates from Zealand and Uppsala landed in Scotland. When news of the raid reached Æbbe the Younger, the Mother Superior of a monastery of Coldingham, Scotland, she gathered her nuns together and urged them to disfigure themselves, so that they might be unappealing to the Vikings. She demonstrated this by cutting off her nose and upper lip, and the nuns proceeded to do the same. The Viking raiders were so disgusted that they burned the entire building to the ground.  This legend is thought to be the origin of the phrase 'cutting off the nose to spite the face'.  

Get it?