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Crosses several threads / topics.

Looks like the UK is joining Aus on the Chinese naughty step.

They are now, officialling threatening the UK.

https://mobile.twitter.com/adrianzenz/status/1269668251832909825

China’s UK ambassador Liu Xiaoming says abandoning Huawei could mean that Chinese companies may no longer be able to build Britain's nuclear power plants and high-speed rail network.

 

 

 

 

Another winner from Caniron n Gidiot.

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Who in their right mind would trust the Chinese to build nuclear power stations in the UK?  Clown world. 

If we are forced to pick a side between China and the US,  we will always side with the US. The Chinese have designs on becoming the worlds next leading superpower..  while they remain an undemoc

Why would Chinese Gov (ccp) be so aggrieved by the UK rejecting a private company that 'is nothing to do with Chinese army or state'?

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35 minutes ago, Long time lurking said:

Yep it`s full on toys out of the pram when it comes to huawei ,they have threatened Germany with classing their cars unsafe if they cancel there 5g plans 

One could easily get the impression they had an ulterior motive regarding huawei and it`s 5g 

They should get closer to N Korea. They're getting closer to becoming another pariah state with every statement they make.

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58 minutes ago, One percent said:

Who in their right mind would trust the Chinese to build nuclear power stations in the UK?  Clown world. 

Its worse than that its fusion cuisine, a mix of French design and Chinese construction, it will be three times over budget, 10 years late and will fall to bits due to shoddy construction.

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If persons had decimated a town of ours with the estimated excess mortality were at the moment...we would be at war.

Dont get me wrong, they may have been helped by fuckwitts of our own government accidentally.

Still.

Gloves off here. Fuckem. Hits a plenty to take in getting us out of the supply chain crap. Its a job we have to do.

Long term national security interests. Never again.

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Sorry for a long post but no way of linking, as it was a pdf I was sent:

 

Huawei: Fog of war?
TECH BLAST #10 May 26th, 2020
 Pierre Ferragu
Rolf Bulk
Antoine Chkaiban Benjamin Harwood Derek Mogull
Nina Achache
+1 646 681 4616 +44 20 7375 9118 +44 20 7375 9126 +44 20 7375 9160 +1 646 681 4638 + 44 20 7375 9148
pierre@newstreetresearch.com rolf@newstreetresearch.com antoine@newstreetresearch.com ben@newstreetresearch.com derek@newstreetresearch.com nina.achache@newstreetresearch.com
 As things stand, Huawei has 12 months left to live. Just over a week ago, the U.S. Department of Commerce extended restrictions on exports to Huawei, in essence barring the company from
buying any chip from TSMC or any other foundry, as they all extensively use leading-edge U.S. manufacturing tools. Without leading-edge chips, Huawei cannot sell competitive networking equipment, and there is no alternative to fabs powered by U.S. technology to manufacture such chips. We assume that, with existing inventories and a 120-day grace period, the company can survive a maximum of 12 months.
Although the move had been discussed for months in Washington circles, it came as a surprise to us. It made us realize two things. First, the U.S. administration wants to hurt Huawei much more than we had initially thought. And second, what we considered so far gesticulations of lawmakers and government officials trying to get media attention and build leverage in trade negotiations, was actually opinions shaping in the administration.
In other words, this is now real. Huawei is in deep trouble. We don’t know what Washington really wants, or how Beijing will react, but it all looks like the beginning of a
new Cold War. The picture remains very foggy. But isn’t fog exactly what a war needs to get started?
In today’s note, we reset our perspective on the matter. We first review what Washington could want out of today’s situation. (There is no single answer). From there, we analyze how things could play out. We see, in particular, as in any war, domestic policy agendas in the U.S. and in China as the main influences structuring the course of
events in the near term. We have come to the conclusion a new cold war is on indeed, and it will last. It will structure the evolution of the technology value chain in the next decade, and much more. Lastly, we draw a first sketch of what implications would be for investors. On that last front, though, there is still a lot of work to do. We will have a busy summer.
  Key Takeaways
    U.S. sanctions put the future of Huawei in jeopardy
The broader context, is favorable to an escalation
We expect a Cold war to emerge:
• The U.S. contains China
• China strives to develop its own supply chain
We expect the U.S. to have the upper hand in the first 5 to 10 years but maintain a more open-ended view beyond.
Implications for investors are complex:
• We are not worried about exposure to Huawei, but more about exposure to the Chinese domestic market.
• We remain bullish on U.S. technology and become more constructive on Telecom Equipment.
 1

I - What does Washington want out of this?
The fog of war is thick; at this stage, it seems more like smog. Thick and toxic. (Exhibit 1). It is difficult to know what Washington wants, for a pretty ontological reason: We suspect they itself don’t really know what they want out there! When we talk to lawyers, lawmakers, and administration officials, their answers seem to fall into three categories, which we review here briefly.
Strike a trade deal
The dispute about Huawei will be settled as part of a broader trade agreement. This was our initial assumption, a year ago, and this is still something you might hear in Washington, but not much anymore. Given how the last year played out and today’s circumstances, we suspect this doesn’t weigh much anymore in Washington’s preferences.
The export ban targeting Huawei might have been seen a year ago as a way to expedite a good trade deal, but, as the company successfully resisted the ban, and as U.S. tech companies lobbied efficiently to warn about the potential impact of the ban on their businesses, it became inefficient, as resolution didn’t feel urgent on the Chinese side.
1 We are vastly unconvinced by claims that Huawei is spying on the U.S. and its allies and is by itself is a national security threat. We have had dozens of opportunities in the last decade to be told convincing evidence of this and no one ever could. The worst case of Huawei spying of which we are aware are ludicrous: stealing some code to telecom equipment manufacturers 15 years ago, and the specs of the mechanical tests an operator was doing on
With extended restrictions, one may argue urgency will be back on the table, and we agree with that, but at the same time, we argue the environment today is very unfavorable to a deal. As we will detail later, the combination of a recession and an upcoming election makes such a deal, of which Huawei would be a part, unlikely. This is visible in Washington. Commentators have moved away from this analysis, and we couldn’t find a public statement by any stakeholder suggesting such a deal as a possibility for nearly a year.
The U.S. president is for the least unpredictable and impossible to read. He might see value in a deal, make a 180° turn in his rhetoric, and strike one in which Huawei is included. In our view, this is unlikely.
Change Huawei’s (or China’s) behavior
This is what most Washington folks will tell you today: The U.S. government wants to force Huawei, and China in general, to change behavior. In Washington’s perspective (which is definitely not ours, but that is another story1), the ban is legitimate because Huawei misbehaves against the U.S. It is therefore fair and logical that if Huawei wants the ban to be lifted, it has to change attitude. This may sound very sensible, but is, in reality, totally empty. We have never heard anyone explaining to us what Huawei could tangibly do to “change behavior”. This leads us to think this rationale is somewhat artificial. Washington has a desire to legitimize the ban with that statement but doesn’t seem to have any tangible expectations about what Huawei should do to comply.
Two years ago, there was a similar situation with ZTE: After being fined for doing business with Iran, the company went under a ban in April 2018, as it failed to reprimand incriminated employees. The ban was lifted in July 2018 after ZTE renewed its top management, renewed its board of directors, and accepted to set up a compliance function in its organization. All that was very tangible and specific. To our knowledge, Huawei has not been fined on anything and is not being reproached for anything specific. In these circumstances how could they change behavior in order to get to a deal with the U.S. government?
handsets before referencing them... not good stuff, obviously, but nothing threatening national security! The Only Threat the U.S. should worry about is China challenging their technological, economical and eventually military global leadership. Don’t read us wrong. This is a real threat, and we understand Washington’s willingness to address it, but what has Huawei to do with this?
 Exhibit 1 – Smog of War
       Source: NSR analysis.
   2

             Exhibit 3 – China’s economic and geopolitical momentum is catching up with the U.S.
    Metric Population
GDP
Military budget
USA
328m in 2019
0.5% growth p.a.
$24tn in 2019
2% growth p.a.
$700bn in 2019
declined since 2010 peak
China
1.43bn in 2019
0.6% growth p.a.
$14tn in 2019
6-7% growth p.a.
$180bn in 2019
7% growth p.a.
            Years until China takes over
   Already done
  10
  10-20
    Source: OECD, CSIS, Washington Post and NSR estimates and analysis.
  There might obviously be a lot of things we don’t see. Secret talks between Huawei and the U.S. government about specific wrongdoings and specific requests for change from Washington. That nevertheless remains a remote possibility. How could that be kept secret so well, for so long? It would have made much more sense for the U.S. government to disclose some of such information to strengthen their case. Not much was secret in the fight with ZTE and what the U.S. government was asking at the time.
Break China’s economic and geopolitical momentum
No one in Washington will state this clearly when talking about the Huawei situation, but this is what one would read between the lines in most conversations, and a theme more present in broader conversations and public statements about China. (See exhibit 2 for some examples).
From a technological standpoint, in the last 30 years, Huawei went from reselling U.S. and European PBX to be first taping out 7nm chips for smartphones, servers and networking equipment. (exhibit 4) It is legitimate for the U.S. government to be worried that at this pace, Huawei will give China full technological independence and the ability to challenge U.S. leadership within a decade. It is also legitimate for the U.S. government to observe that access to U.S. technology enabled Huawei’s rapid progress. We don’t imply here that they stole U.S. technology, but Huawei systematically sourced technology in the U.S. or in Europe first, then played a “backward vertical integration” (i.e. manufacturing themselves instead of buying) as soon as they could. Reverse engineering played an obvious and documented role in this, of course.
From an economic standpoint, the Chinese GDP is today 65% of the U.S. and growing 5pts faster. At that pace China will overtake the U.S. in less than 10 years.
From a military perspective, Chinese budget was $180bn in 2019, vs. almost $700bn for the U.S. The gap is material but could be filled in 10 to 20 years.
Last but not least, people. There isn’t true wealth but in people2 – let’s not forget the Chinese population is 1.4bn, vs. 330m for the U.S.
 Exhibit 2 – Washington wants to break Chinese Momentum
   “In recent decades, China has grown its economy rapidly by combining low-cost Chinese labor with Western capital and technology. But China’s leaders know they can’t rely on that model forever – to surpass America, they need to make leaps in cutting-edge technologies.”
-Christopher Wray, FBI Director, Feb 6 2020
“China is a very serious threat to the United States - geopolitically, economically, militarily, and a threat to the integrity of our institutions, given their ability to influence things.”
-Bill Bar, U.S. Attorney General, April 8, 2020
   Source: Press.
  The concern is material, and objectively justified (exhibit 3).
 2 Translated from Jean Bodin, a 16th century French philosopher and man of great common sense.
3

 Exhibit 4 – Huawei’s rise to technological power
    1987
Founded by Ren Zhengfei, former telecom researcher of the People Liberation Army. Reselling imported PBXs
1990 600 R&D staff. Commercializes its first reverse engineered PBX.
1991 Nortel outsources their PBX to Huawei
1997
Contract with Hutchinson Whampoa Launched its first GSM equipment
2004 Founded HiSilicon, ASIC design subsidiary
2005 Global framework agreement with Vodafone
2018
Kirin 980 – The first 7nm chip for smartphones is produced for Huawei by TSMC
   Source: NSR analysis.
  and would become a weak point easy to attack for the other camp: It could easily be perceived (and pitched by Democrats) as a capitulation to China, to global trade and an aggravating factor for the U.S. economy. Last but not least, with the Coronavirus outbreak, the public opinion has clearly turned against China (exhibit 5). In these circumstances, striking a deal into the election, in which the Huawei situation is resolved, would be suicidal.
  Exhibit 5 – U.S. views of China increasingly negative Amid Coronavirus outbreak
   % who say they have an unfavorable opinion of China
70% 60% 50% 40% 30% 20% 10%
0%
 2005 2010
2015 2020
   Note: Survey of U.S. adults conducted March 3 - 29, 2020 Source: Pew research and NSR analysis.
   In summary, all our three hypotheses about what Washington really wants are legitimate and could be considered. Reality in Washington is that there is probably no single doctrine, but that all three are running concurrently. Our perspective is that Washington wants a tiny bit of the first, a bit of the second and a lot of the last one. Question is: Which one wins in coming months?
II - How does the situation evolve from here?
Now that we have a good sense for what Washington may want, we need to understand what influences will play in the coming months, and how the situation may evolve as a result. Obviously, the presidential election in the U.S. and the recession profiling globally on the back of the Covid-19 pandemic will matter a lot. Our objective here is not to make a call on how the macro economy will play out. We are therefore making the simple assumption that between now and the end of the year, unemployment will be high, the global economy will contract materially year-over- year, and consumer confidence will be low. In such an environment we see the following happening.
No Trade Deal
We see little value in a trade deal for the U.S. president. We suspect the original plan was to strike one before the November election. In the context of a roaring economy, it would have cemented the president’s narrative about his positive impact on the U.S. economy, employment, and the strength of the U.S. on the international scene. In a recession, a deal would possibly look the exact opposite
In China, the situation isn’t much different. The government and the party know that their grip on power is easier to maintain with economic growth (isn’t the legitimacy of the Chinese political system about foregoing personal freedom for economic prosperity?) In a recessionary environment, the government is therefore likely to feel challenged, and in that context, striking a deal with the U.S. may sound less compelling than taking on the fight. Recent developments in Hong Kong seem to support that view: From a domestic policy perspective, isn’t cracking down on Hong Kong and increasing belligerent rhetoric against the U.S. a better option than coming across as bowing to foreign threats? Bowing to Western powers is not something the Chinese government is likely to risk. In China, today’s political system was built on the fight against Western influences, and the public opinion remembers it.
China won’t retaliate much on the economic front...
4

A concern for investors is whether China retaliates, cutting-off supply to Apple or others. We see small odds of this happening. On one hand, China could significantly hurt the U.S. economy (and public opinion: Will the U.S. voter accept not getting a new iPhone? ) by doing so: We know today there is no easy or immediate plan B to replace the manufacturing contribution of China to the U.S. technology and consumer electronics supply chain. We have learnt the hard way that pulling together an iPhone is all but trivial! On the other hand, such a move, on a large scale, would probably be too painful for China themselves. It would accelerate the crisis, whereas China will probably want to buy as much time, retaining manufacturing activity as long as possible, to ease a transition towards a more self-centered economy.
There will be some possible retaliation: cutting supply from U.S. companies wherever possible (references made in the press about Boeing, Cisco, Qualcomm on that front), maybe creating an entity list similar to the U.S. one. We wouldn’t expect any of this to create major near-term disruption.
But will on the geopolitical front...
At the same time, China cannot afford to do nothing in the near term. Here again under the pressure of domestic policy, the government will have to show its muscle. This is our interpretation of recent developments in Hong Kong. Cracking down on the peninsula isn’t at all a direct blow to the U.S., but it will likely be very positive from a domestic policy point of view. Our understanding of the Chinese public opinion is that it looks negatively at the particular rights of the Hong Kong population and recent riots, which are found unjustified and excessive.
Hong Kong could also be China’s Crimea. A good place to
3 put a stick in the ground, the way Russia did in 2014 .
Beyond Hong Kong, Taiwan, Japan, and South Korea come to mind as the next areas where tensions could escalate, but we don’t see these as credible options. There isn’t much China can do against any of these without using military force and risking uncontrolled escalation and a conflict against the U.S. and its $700bn military budget. We might see rising tensions on secondary theaters, like Vietnam, where we note China created an incident in April, sinking a fishing boat nearby the Paracel Islands.
3 For what it is worth, that makes us bearish about the prospects of Hong Kong as a good place to live...
We are in the fog of war, but directionally, we feel pretty convinced about how things will evolve in the next few months: No trade deal, escalating tensions and belligerent rhetoric, no major economic retaliation from China, but increased geopolitical aggressions in Hong Kong and on secondary theaters. We don’t need to be McNamara to understand what happens next...
III - The new cold war
Before we get started on that topic, we need to make a clarification. The new cold war we describe below is one we see happening on the battle ground we know well and research daily: Technology Infrastructure. Our analysis builds on a broader perspective, that we have described in the first two parts above, but it is limited to the scope of technology in what is left of this work. How broader relations between China and the U.S. evolve, and how they shape tomorrow’s world are much more complex questions, that we don’t feel qualified to address today.
Appeasement after the U.S. election? Wishful thinking!
This is not going to happen. Once near-term constraints (the U.S. election, and hopefully the trough of the recession) are behind us, only strategic considerations will prevail, and from that point of view, it appears evident that China’s next move will be to accelerate its journey towards technological and economic independence, while the U.S. will do the same on the manufacturing front. In addition, each player will try and slow the progress of the other.
What to expect in coming years?
The U.S. will firstly increase the scope of the ban on their technology beyond Huawei, to all of China, in order to slow down their progression as much as possible. Reverse engineering and backward vertical integration have been the main drivers of Chinese technological progress in that last three decades. The U.S. will see limiting these two as a priority going forward. Secondly, the U.S. will ramp up “onshoring”, i.e. bring back manufacturing on U.S. soil. This is how we interpret the recent announcement of TSMC and we expect more on that front in coming months. Thirdly, the U.S. will diversify its global supply
 5

chain, reducing to nearly nothing the contribution of China over the years.
Lastly, the U.S. will need to ensure its technology supply chain innovates at the fastest possible pace, in order to mitigate the risk of China catching up. We will expect monster government incentives in that direction, such as military and infrastructure contracts.
China will maximize short-term benefits from its export manufacturing and grow domestic demand as fast as possible, with aggressive investment plans and policies favoring consumer demand. We are not macro economists but understand this is doable. It will present the double benefit of driving economic prosperity on the domestic market and accelerating the path towards economic independence. On the technological front, China will have to enter a long march, catching up with major missing parts in its domestic value chain. We see two major areas of technology infrastructure in which China will invest massively: ecosystems and leading-edge manufacturing.
On the ecosystem front, China will build on Hi-Silicon’s technology to develop alternatives to X-86 and ARM. This is something we would deem impossible in a normal competitive environment, but that the U.S. ban will make possible. This is the major counter effect of today’s U.S. policy. By cutting off China from their ecosystems, the U.S. government will favor the emergence of alternative ones.
On the manufacturing front: China has a lagging foundry – SMIC, and a couple of memory manufacturing operations. All are vastly lagging behind global leaders Intel, TSMC, and Samsung, and are still using American manufacturing tools. They are nevertheless assets on which China can count to start building independence. On one hand, these assets are operational today and will scale out production. This is our interpretation of the recent $3bn capital raise SMIC executed. The foundry is moving into their N+1 node, pitched as partially competitive against TSMC’s 7nm and Intel’s 10nm. This roughly positions the Chinese mainland foundry 3-5 years behind TSMC. In order to keep going and narrow the gap, China will have to develop its own semiconductor manufacturing tools. The country has inland tools from all U.S., European and Japanese players and will just need time to reverse-engineer them. At first sight, this will take 5-10 years for most tools, and probably more for EUV scanners.
Here again, competing with TSMC, Samsung, and their suppliers is something impossible in a normal competitive environment, but the U.S. ban will make it possible. It only
means China will have to live with uncompetitive chips for years, if not decades to come. Here again, the U.S. ban makes a catch-up possible for China.
Before moving to how the rest of the world reacts to this, we would like to elaborate on this last observation. We (hopefully rightfully) claim the U.S. ban actually enables a catch up on manufacturing and the development of competing ecosystems for China. Does that mean the U.S. government is making a mistake? Not at all. Not doing anything would have not prevented the Chinese government to subsidize this catch up and the creation of these ecosystems, that free market dynamics were not making possible. We will discuss below how, by imposing a ban, the U.S. government provides seeds for an iron wall that will eventually protect U.S. technology from Chinese competition!
What about the rest of the world?
Europe will have to choose its camp... and it will be the U.S. At a broader level, Europe will probably have some room for maneuver to maintain some sort of neutral ground between the U.S. and China, but from a technological standpoint, there is no room for neutrality. Europe won’t run x-86 and a Chinese alternative, and Europe won’t run cellular networks based on Chinese technology.
Things are evolving fast: Over the weekend, multiple reports indicated the U.K. prime minister will take Huawei out of the nation’s 5G infrastructure.
This doesn’t rule out building some independence, and this is actually a call for action we make towards the continent. It is time for Europe to embrace U.S. technology dominance but negotiate at the same time elements of independence, which can be built around key assets: ARM, ASML, Infineon and ST Micro. These four companies can create a backbone for a European technology infrastructure cluster that creates soft dependency links with the U.S. and get Europe closer to independence. Ericsson and Nokia could also play a role. They don’t supply core technology, but rather integrate it into equipment, but benefit from a privileged position in existing infrastructures, including in the U.S. This in itself is a very important topic on which we will do more research over the summer.
Similarly, we expect most of South America, Middle East, and India will pick the U.S. camp, for straight forward
6

economic, practical, and geopolitical reasons. We imagine a lot of observers, well aware of China’s strong influence in many of these regions, may disagree, but our argument rests on our own expertise: Technology: China will run well behind the U.S. for at least the next decade in terms of performance. In addition, it will probably be nearly impossible to dual source, between China and the U.S., for the latter will do everything possible to prevent it, and for the iron law of ecosystems will make it extremely costly and inefficient.
The delicate question of Taiwan.
We are at loss trying to predict what Taiwan will become in this new world. Part of us think about the island as a Switzerland of technology, maintaining good neutrality between the two camps, but this seem impossible in the near term.
Recent developments suggest the U.S., leveraging the dependency of TSMC on their technology are forcing Taiwan into their camp, and TSMC is bowing to that, as the foundry announced the building of a leading edge fab in the U.S. and reportedly stopped taking orders from Huawei.
In the long run, though, TSMC could participate in the Chinese efforts to build their own supply chain, investing further in the fabs they already have in mainland China, eventually running Chinese equipment. That is a long view and may never materialize, as by then, SMIC might be better positioned to do so. That would be a negative for TSMC.
Containment wars? In which theaters?
This is a difficult question. Will there be containment wars? (reminder – we are talking infrastructure technology here, not warfare). The concept was fundamental in the actual cold war but may not apply well in a technology cold war. What would a containment war look like? China offering to swap out a telecom or cloud infrastructure in a neighboring country? This sounds unlikely in the near term but could happen over time. Most likely theaters would be South-East Asia and Africa.
4 As mentioned above in note 2. Not a new idea. Jean Bodin coined it in the 16th century: Il n’est de richesses que d’hommes: There isn’t true wealth but in people
Maybe containment is not a concept that will apply in this new cold war. Maybe it will be replaced by extensive cyber war, in which China and the U.S. will confront through their respective technology infrastructures with viruses and other cyberweapons aimed at spying, stealing, or destroying digital assets of the other camp, as much as disrupting real-world operations, from industrial production to elections. This goes well beyond the scope of today’s research.
Iron Wall?
Yes. As described above, we expect most countries to have to pick a side, which will result in a world splitting in two, with on each side economic and competitive dynamics we know for technology: importance of ecosystems, driving market concentration, reinforced by scale and experience. We struggle to imagine many markets where U.S. tech and Chinese tech will compete.
Who wins?
Here is legitimate ground for competitive analysis, our core competency! Looking at the situation and limiting it to the near term – say at least the next 5 years, if not 10, the U.S. is the obvious winner. As explained above, China won’t be able to have competitive chips on that kind of timeframe, and will have nascent ecosystems, totally subscale compared to those in place in the U.S. With an experience and a scale disadvantage, China cannot win!
This analysis is nevertheless limited to a 5-10-year horizon. On a longer one, scale and experience can become irrelevant. (If you are unconvinced, think about the fall of the Roman Empire!) In the long run, we believe the only
4
thing that really matters is human capital ... and on that
front, China is almost 5x the U.S. with 1.4bn inhabitants.
Moreover, we believe human capital is at its best with education, of course, but also prosperity growth. Look at your teams. Do they do better when their comp goes up or down? In the long run, China may therefore run, with more people, getting richer at a faster pace than American citizen. For that, China will need economic and education growth. The fight in the next 5-10 years will be mostly on technology, and the U.S. will win it. The next fight will be
 7

on education and economic growth. Can the U.S. win that one?
IV - Implications for investors?
This is where we feel silly. The complexity of the situation we describe in this work makes it difficult to draw immediate and simple conclusions for investors. We will therefore have to drop back 5 yards and punt5 on this one. We give here some initial thoughts to get the ball rolling now and will come back in subsequent research, with more specific recommendations. From broader to more specific, here are our high-level thoughts:
Bearish global economy? Not specifically for this reason.
In normal circumstances, this technology cold war would have been a macro deflagration, but in today’s environment, we won’t play the Cassandra on that front. Our view is that cold war or not, we are entering global contraction never seen in the history of humanity, with second quarter U.S. GDP expected down as much as 40% year-over year! In that context, time will tell how the world economy recovers in upcoming quarters, but the reset will be so strong that we can’t help but see a technology infrastructure cold war ramping as a secondary moving part. On the contrary, the context is favorable for each camp to actually orient stimulus packages and exit strategies towards a new world in which the technology value chain is not global anymore. For instance: subsidized onshoring for the U.S. and government subsidies compensating sub-par 5G technology for China.
Global trade will take a hit, for sure, and protectionist measures after the great depression are unanimously considered a terrible aggravating factor. But wouldn’t have global trade taken a hit after the Covid-19 crisis anyway?
Bullish U.S. manufacturing and onshoring? Yes.
This is definitely a conviction of ours, although totally unresearched. Bringing manufacturing back to U.S. soil will become a necessity and will require monster innovation to make up for local labor costs and catch up on the know- how developed in China in the last couple of decades. Elon
5You will note the cultural adaptation of the main author, who, until recently, would have written about kicking the ball into touch...
Musk showed with Tesla this was possible and a pretty damn good source of value creation.
This exceeds the scope of our coverage, though. We will need to do more work (or stand ready to hear your tips) to understand how investors can benefit.
Bearish exposure to Huawei? Not really.
We don’t see that as a major concern in today’s environment. For sure, multiple U.S. companies have exposure to Huawei (exhibit 6), but it rarely exceeds 10% of total revenues. In addition, losing Huawei business will for many be temporary, as Huawei will in turn lose share, and typically semiconductor suppliers are more concentrated than equipment or device manufacturers.
Exposure to Huawei could create some waves in the near term, as the company has built and might still be building lots of inventories in all categories to deal with the current situation. We have not made a detailed analysis of where things stand, company by company, as we think the odds of this becoming a major driver for any of the stocks we cover are low.
Bearish exposure to Chinese domestic market? Yes.
That is a much more material concern. Tech companies in the U.S. (and in Europe) for which China is a material end-
  Exhibit 6 – Huawei accounts for less than 10% of revenues for most U.S. suppliers
   Annualised revenue exposure to Huawei (US$bn)
      Source: Reuters and NSR estimates and analysis.
   8

market will suffer a lot in coming years, as the country accelerates efforts to develop a domestic supply chain.
China is usually described as consuming nearly 60% of global semiconductors and producing less than a third of that. This is a distorted view, though, as a large majority of semiconductors entering China leaves China with exports. Of consumer electronics and other technology hardware.
At the time we finalize this piece, we still haven’t properly figured out how much stays in the Chinese domestic market, but a rough estimate could hover around 20% of global production, i.e. 40 of the nearly 60% of global semiconductors that enter China exit China in finished good. That part of the business is safe for U.S. players.
A key area of focus for us in coming weeks will be to better understand the exposure of individual companies we cover to this elusive Chinese domestic semiconductor market.
Bullish Telecom Equipment? Yes, especially Nokia.
In light of last week’s developments, we evolve our perspective on the telecom equipment front. Until recently, we defended the idea that Huawei would not lose significant ground in Europe and in the rest of the world, and that any benefits to competitors Ericsson and Nokia would be balanced by lost business in China.
The situation is now different, with Chinese business for both companies reduced to very little (7% and 8% of 2019 revenues for Ericsson and Nokia, respectively), and coming down, especially for Nokia, not being part of the recent allocations of Chinese 5G contracts, while European operators will have to count on the two players to deliver 5G. This benefit will be balanced by the emergence of Open RAN and associated new entrants (link), but still, the outlook is getting better for both players.
One caveat: the near term. As operators need to engage with governments and redefine their plans, all this may well slow investments in the near term. Investors might find it wise to wait before gaining exposure to that opportunity.
Bearish U.S. Technology? On the contrary!
Let us end with a nicely counter-intuitive thought. It might sound logical to be concerned about the formidable competition that will emerge in China from this situation
and challenge U.S. technology leadership. We have a very different take.
Our view is that China, in what we would qualify a fair global competitive environment could, over the years, become a threat to U.S. companies, take global market share and put pressure on margins. But this is not what we are heading into.
In the way we see this cold war playing out, we expect U.S. tech companies obviously to lose their exposure to the Chinese domestic market, but also to strengthen their position in the rest of the world. Moreover, as technology becomes the most important strategic priority of the U.S. government, we expect core players to benefit, with increased government programs and opportunities. Washington knows Technology leadership will come at the cost of subsidizing vivid competition amongst powerful and healthy tech companies. This is good for shareholders.
Conclusion
The broader economic context, with the Covid-19 crisis and upcoming U.S. elections, is favorable to an escalation of tensions between China and the U.S. on the technology front. As a result, we expect a cold war to emerge, in which the U.S. contains China, and China strives to develop its own technology supply chain and catch up. We expect the U.S. to have the upper hand in the first 5 to 10 years of this fight, but we maintain a more open-ended view beyond.
Implications for investors are complex and made even more complex by the current environment. In our first assessment:
▪ We are not excessively worried about direct exposure to Huawei, but more about broader exposure to the Chinese domestic semiconductor market.
▪ We remain bullish on U.S. technology and suspect onshoring will represent opportunities.
▪ With Huawei’s woes now likely to create more tailwinds than headwinds, we are more constructive on Telecom Equipment.
Pierre & the team.
9

Relevant Research
▪ Huawei ban: insights into the U.S. government’s approach with Wiley Law partners (Replay) – (16 May 2020) – Link
▪ TSMC building a U.S. fab enables increased U.S. pressure on Huawei – (15 May 2020) – Link
▪ So you think Ericsson and Nokia will benefit from Huawei’s woes? – (20 June 2019) – Link
▪ Telecom Equipment: What if the ban on Huawei lasts? – (12 June 2019) – Link
▪ Huawei: Going to war? Uncommon (but hopefully useful) thoughts about the current situation – (24 May 2019) – Link
10

Disclosures
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11
   

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29 minutes ago, unregistered_guest said:

In short, we're fucked. 

There's a new cold war coming, so if you want to prosper, think about what did well in the last one...

Is that an accurate precis? 

Fucked? That's not my reading. More a grand decoupling of China from US and European supply chains, good news.

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6 minutes ago, Panther said:

Fucked? That's not my reading. More a grand decoupling of China from US and European supply chains, good news.

Indeed.

If there was not the coming cold war conflict, we would be fucked, because China would take over the world and then, at a time they choose, crush all non-Chinese.  

This way there are going to be struggles, but as we have seen already the racist nature of Chinese thinking means they will piss off people after people by threats and bad dealings, and no one country can win against the whole world.

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Just now, spygirl said:

"For nearly 20 years, we've supplied the UK's mobile and broadband companies with 3G and 4G. But some now question our role in helping Britain lead the way in 5G," the open letter says.

https://www.theregister.com/2020/06/08/huawei_uk_charm_offensive/

Yeah right.

It's accurate but it's only because Orange and T-mobile went for the cheapest option...

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"We have been in the UK for 20 years and have worked with customers like BT and Vodafone to deploy broadband from the earliest stage – 2G, 3G, 4G, and copper and fibre broadband – and now we are entering into the new stage with 5G and full-fibre broadband. This is critical for the UK to enable your economic recovery and lead the industrial revolution."

Balls on 2g.

3g was all copied.

4g bit hmm - half copied, half fuckedfup.

 

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