[Analytics] Huawei appeals to Japan as the US miscalculates

In November, Chairman Liang Hua of Huawei Technologies told a group of corporate executives and academics in Tokyo that his company plans to spend close to US$10 billion on procurement in Japan this year – more than double the amount it spent two years ago – and even more in 2020. Scott Foster specially for the Asia Times.

This should make Japan Huawei’s largest national supplier now that United States suppliers of electronic components and software have been forced to cut off one of their best customers. American companies sold about $11 billion worth of products to Huawei in 2018.

Liang also told his audience – which included representatives of Fujifilm, Furukawa Electric, Mitsubishi Electric and Tohoku University (known for its Department of Electronic Engineering) – that Huawei can continue to operate without US suppliers, that Japan plays an important role in its supply chain and that Japan is an important market for Huawei.

Other leading Japanese companies that supply Huawei include Sony, Panasonic, Murata Manufacturing, Kioxia (Toshiba Memory), Japan Display and Nidec.

Why did Huawei think it necessary to hold a public meeting to discuss things that might attract the attention of American diplomats and put the Japanese on the spot?

Having been excluded from Japanese telecom carriers’ 5G networks, it apparently wanted to emphasize the contribution it is making to the Japanese economy. Earlier in the year, it released reports detailing its contributions to the European Union and the United Kingdom.

To put this in a larger context, note that Japan-China trade is not radically out of balance and is much greater than Japan-US trade (42% greater in 2018). And unlike the US, Japan has its own 5G telecom equipment makers (NEC and Fujitsu) to protect – a point the Chinese seem to understand.

As Huawei increases its procurement from Japan, Taiwan and Europe, the news media are providing a running commentary on how quickly it is freeing itself from dependence on American suppliers.

According to a teardown analysis by Fomalhaut Techno Solution of Japan, two recently released Huawei cellphone models, the Y9 Prime ’19 and the Mate 30, contain no American parts at all.

Huawei has indicated that it would prefer to continue buying from American suppliers. The Trump administration plans to issue licenses making this possible on a case-by-case basis, but this process is arbitrary, subject to revision depending on the state of US-China relations and therefore unreliable. Several American companies stand to lose a significant amount of business, perhaps permanently.

According to the US Federal Register, “The Entity List (Supplement No. 4 to part 744 of the Export Administration Regulations (EAR)) identifies entities for which there is reasonable cause to believe, based on specific and articulable facts, that [they] have been involved, are involved, or pose a significant risk of being or becoming involved in activities contrary to the national security or foreign policy interests of the United States.”

What aspects of international trade, we might ask, are not covered by the phrase “foreign policy interests of the United States”?

It is ironic that MediaTek and other Taiwanese companies should benefit from American efforts to contain China, but that’s the kind of thing that can happen when one party is playing power checkers with a hammer in one hand while the others are playing Go or 3D chess.

There are, of course, American products that Huawei and other Chinese companies will find difficult to replace. Field-programmable gate arrays, IC inspection tools, electronic design automation software and some cell phone applications come to mind. But America does not have a monopoly on these products or technologies.

As Taiwanese-American technology investment strategist Weiyee In puts it: “We have driven China to … focus on operating systems and semiconductors that have stayed in the periphery because of the ease and convenience of American solutions over the past two decades. Despite the near-term pain that the Chinese companies might feel from tariffs and blacklists, we have become the catalyst for China coming out with alternative solutions to American innovation.” (LinkedIn, June 17, 2019)

The restrictions China put on Google, Facebook and other American internet companies facilitated the growth of Baidu, Tencent and other Chinese internet companies into world-class competitors. The Americans have complained for years about being excluded from the Chinese market, but now they are excluding themselves.

As a result, Chinese start-ups that might never get off the ground in markets dominated by well-established American rivals now have a chance to win orders, build economies of scale and gain operating experience. They are unlikely to waste this opportunity.

The Japanese and Europeans should also benefit from the advance of Chinese industry by exploiting markets in which US companies do not have a significant presence. These include industrial robots, image sensors, capacitors, and certain industrial chemicals.

The optics for Huawei’s most advanced smartphone, the P30 Pro, were developed through its partnership with Leica, which was initiated in 2014. The P30 Pro has four cameras: a 40-megapixel main camera and specialized cameras for wide-angle, time-of-flight depth sensing, and 10X periscope zoom. All of them use Sony image sensors.

Huawei is the second smartphone maker to use Sony’s Time-of-Flight sensors (Oppo, also Chinese, was the first) and the first to use it for both augmented reality and auto focus. Sony also supplies Apple and dominates the worldwide market for image sensors.

Murata Manufacturing is the leading producer of multi-layer ceramic capacitors, followed by two other Japanese companies, Taiyo Yuden and TDK, and Samsung. Japanese companies Furuya Metal and Tokuyama have about 90% and 75% of the markets for iridium compounds used in displays and high-purity aluminum nitride used to dissipate heat, respectively.

When it comes to product assembly, the Chinese depend on factory automation equipment from Japan and Europe. ABB is building a new industrial robot factory near Shanghai that it believes will be “the most advanced, automated and flexible factory in the robotics industry worldwide.” (ABB press release, September 12, 2019)

Japanese industrial robot makers Fanuc, Yaskawa Electric and Kawasaki Heavy Industries are also expanding in China, while component makers such as Harmonic Drive Systems supply Chinese robot makers. China has become the world’s largest market for industrial robots, accounting for about a third of global unit sales according to data from the International Federation of Robotics. It is also the fastest growing market.

Three conclusions can be drawn here: (1) American sanctions are already strengthening Chinese industry; (2) Europe, Japan and even Taiwan are key enablers of China’s industrial advance; and (3) if you’re not designed in, you will probably be designed out – and America is designing itself out of China.

Scott Foster is a partner and analyst with JA Research, Tokyo.