The Cold War in Tech Is Real and Investors Can’t Ignore It
By Reshma Kapadia
Updated Feb. 22, 2019 11:59 p.m. ET
barrons.com
longish excerpt:
Cisco Systems, an early Silicon Valley success story, has become one of the nation’s top tech exporters. Today, roughly half of the networking giant’s sales come from outside the U.S. As foreign countries sought to catch up with U.S. connectivity, Cisco helped plug them in.
But a wave of nationalist thinking has put Cisco (ticker: CSCO)—and most of its peers—in an uncomfortable position. Earlier this month, Cisco CEO Chuck Robbins described the current climate as “one of the more complex macro, geopolitical environments that I think we’ve seen in quite a while with all the different moving parts.”
It’s likely to get worse.
While investors are cheering indications of progress being made toward a resolution of trade issues between China and the U.S., the battle for tech supremacy between the two global superpowers shows few signs of abating. Even as the White House was negotiating on trade with Beijing, it was also contemplating a U.S. ban of telecommunications equipment from Chinese companies like Huawei Technologies, essentially China’s version of Cisco. As President Donald Trump was tweeting about the importance of 5G on Thursday, Secretary of State Mike Pompeo was pushing U.S. allies to ditch Huawei.
This is a fight that is not going to end anytime soon. For years, U.S. officials have worried about Chinese equipment being used to infiltrate U.S. networks and businesses for possible espionage and theft of intellectual property. Even a resolution of the trade war won’t quell those fears.
“The perception is that too much of the information- and communication-technology supply chain is centered on China,” says Paul Triolo, who focuses on global technology policy issues for risk consulting firm Eurasia Group. “If we are in a conflict and using infrastructure built by China, they could theoretically hit a button and shut off everything.”
“After 30 years of saying companies should optimize supply chains and move some abroad, now we are saying it’s a security concern,” he says. “Adjusting to that is jarring.”
WELCOME TO THE NEW COLD WAR IN TECH.
For a short period last year, the Trump administration banned U.S. exports to Chinese telecom equipment maker ZTE (763.Hong Kong). Unable to get crucial components from U.S. suppliers, ZTE’s production was crippled, and its stock fell 40%.
The move had collateral damage, including U.S. optical networking company Acacia Communications (ACIA), whose own stock fell 35% in the days after the ban. Ultimately, President Trump reversed the ban and fined ZTE $1 billion instead.
Last August, Australia banned Huawei gear from its 5G networks. In January, the Australian wireless and internet company TPG Telecom (TPM.Australia) scrapped its plan to build a new mobile network, citing the ban. TPG shares are down 29% since late August.
For investors, these are early previews of the dangers to tech companies as their parent nations are pulled between the U.S. and China. Consider that Flex (FLEX), Broadcom (AVGO), Qualcomm (QCOM), Micron Technology (MU), Intel (INTC), and Qorvo (QRVO) each sold Huawei more than $90 million of equipment in 2017, the last full year of data, according to Gavekal Research analyst Dan Wang. All of those sales could be imperiled by a Huawei export ban that has been discussed by the Trump administration. For investors, a ban is a greater risk than the cyclical slowdown already weighing on the chip industry.
At the same time, China is no longer content to be the world’s factory for low-cost goods, pushing its own homegrown companies to challenge the global positions of established tech leaders. For China, technology is central to its ambitions to be a global power, a topic that goes well beyond trade agreements.
Western Europe is already caught in the middle. Ostensible U.S. allies are being pressured by the Trump administration to take a tough line with privately held Huawei. European telecom operators, however, have spent years buying Huawei gear. Vodafone, a top United Kingdom telecom provider, has temporarily banned Huawei from the most critical parts of its network. But both Germany and the U.K. are leaning against an outright ban, The Wall Street Journal has reported.
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