China buys China—is the war over?

China owns considerable market share in world markets and these days, the country is capturing even more mind share, but what is China's ultimate goal? It's possible China wants most of all to own its own market.

Jon Peddie

China doesn’t need the rest of the world as a customer for its finished goods, its home market (1.4 billion) is bigger than the US (328 million), Japan (127 million), and Europe (742 million) combined. What it does need the world for is as a market for its sub-assemblies and components and OEM/ODM finished goods (goods that get branded but not built by leading suppliers like Dell, HP, Maytag, and others).

China once wanted the US, Europe, and Japan to sell its technology to but it does have some IP hurdles to overcome or lawsuits it might rather avoid. 

The arrest and incarceration of Huawei’s CFO Meng Wanzhou in Canada, Trump’s trade war and ban of Huawei, and the US-led prohibition against companies selling to Huawei, which has been followed to varying degrees by companies in Europe and Japan, have changed how Huawei does business but that doesn’t mean companies and governments trust the company. 

US Federal prosecutors have opened more inquiries into alleged instances of intellectual property theft by Huawei Technologies Co. from multiple sources over several years, and are also examining the Chinese company's process for recruiting employees from competitors, according to people familiar with the matter. It is unclear if the additional inquiries, including a subpoena filed by the Eastern District of New York in Brooklyn for documents from Huawei, will result in new charges against the company according to The Wall Street Journal.

ARM, which supplies IP for processors to Huawei for its smartphones, has stopped licensing to Huawei. That won’t stop Huawei from building those SoC chips at its semiconductor company HiSilicon, but the move will potentially stop new ARM designs from getting incorporated into Huawei products. ARM puts out a new design about every other year, so Huawei has some time. And, a new open consortium called RISC-V may be an alternative for China to dis-ARM itself. 

Google said it will stop licensing Android to Huawei as a result of the US administration’s edict. However, Huawei was already at work on its own OS as a defensive move to get rid of the licensing fees from Google. Huawei officially unveiled its new operating system, HarmonyOS earlier this month. The new operating system will replace the Android operating systems in Huawei devices. HarmonyOS, like Android, and Apple’s iOS are based on Linux kernels and so porting Android-based apps to HarmonyOS won’t be too difficult and could/should all be done within a year.

Google confirmed the US trade ban will prevent it from licensing its apps and services to Huawei for use on the Chinese vendor’s forthcoming Mate 30 flagship smartphone, and in an article in The Financial Times, Google warns that Huawei’s competing version of Android is likely to be more vulnerable to attack because it has not had the same level of vetting and testing by multiple companies, at least so far.

Almost everything else, screens, batteries, 4G modems, accelerometers, cameras, and other sensors, can be found in China, or in places like Taiwan and South Korea that are trade-friendly for Huawei at least for now.

Development of 5G technologies and products has become a key direction for Huawei's operation with its orders for 5G-related chips to upstream suppliers expected to rise dramatically over the next two years. Huawei's chipmaking subsidiary HiSilicon is set to become one of TSMC’s largest clients in 2020 due to 5G demand. 

So, it’s basically business as usual for the smartphone division of Huawei, the server-side is another story for another time.

That just leaves customers. And guess what? Huawei’s sales are up. The world's second-largest handset producer reported unit sales of little more than 58 million last quarter to retailers and distributors, up 16.3% year-on-year. Most of that came from its home market.

China, in total, bought more than 101 million smartphones in the quarter, compared to 100.5 million a year earlier—the US bought about 32.6 million—a decline. 

All of which brings us back to my original point that China does not need the world, China has China. Chinese customers are buying more smartphones from their country’s providers and the US is buying fewer smartphones in general.

We don’t make smartphones in the US. We don’t make TVs, and we don’t make a lot of other stuff, because companies and investors in the US created wealth by hollowing out US industry and technology, and shipping and selling it to Japan, Korea, and most of all China where goods could be made cheaper. Those sharpshooting financial wizards have also managed to wipe out the middle class in the process, leaving us with a disproportionate ultra-rich, and working ultra-poor class. Can’t blame that on China.

But in China, by 2022, thanks to a growing number of higher-paying high-tech and service industry jobs, 54% will be classified as upper-middle-class—meaning they earn between US$16,000 and US$34,000 a year. In 2001, China’s middle-class was only 2%. But the country has had a high GNP, hitting 14% in 2007. Since then it has come down to 6.6%, while the US’s 5%. (5% is still damn impressive considering the overall economic size of the US).

So, China doesn’t need us or the rest of the world anymore. They could seal their borders and do just fine. If they needed any extra rice or cabbage, they could call on their best buddies in North Korea. If they needed any extra steel, oil, coal, or tech for their military, they can call on their other best buddy to the north, Russia. 

And as for consumer products, China has products to sell to the Chinese, as well as their best buddies.

The war’s not over, we know that by reading the news and seeing the discomfort on both sides but as China becomes more self-sufficient, they have a lot less reason to fight.