Huawei Trade War Is About AI at the Edge Not Mobile Phones

Along with my colleague Hailing Yu I’ve spent the past two years advising on Chinese technology M&A deals, and I’ve had a ringside seat for the unfolding trade war, and the Chinese strategies for dealing with it. While the current spat over Huawei grabs the headlines, the future of mobile technologies is producing many more opportunities for Chinese companies to became global players.

Deal Scrutiny Spreads to Europe

Up until two years ago acquiring businesses on behalf of a Chinese client was a simple matter of corporate finance. Money and shares changed hands, and in the successful deals the knowledge and expertise that made the company an acquisition target were preserved.

The warning signs were there when the $728 million takeover of Germany’s Aixtron by Fujian Grand Chip Investment Fund was blocked on security concerns over its US arm. This already lead to a hardened stance in Germany worried about asset stripping of German businesses following the sale of robotics company Kuka and the subsequent downsizing of the German operations.

It was also clear at the time that the US was taking an increasingly hardened stance on Chinese acquisitions, and that blocking the sale of companies with sensitive defense related applications was only the tip of the iceberg. Any technology acquisitions involving the US are non starters, and there is increasing scrutiny in Europe, and unease that even European companies could be blocked from doing business if they make use of any US technologies.

The Long March and Long View

The Chinese government, taking a long term and pragmatic view, had already spotted the danger with the launch of the Made in China 2025 strategy by Chinese Premier Li Keqiang and his cabinet in May 2015. China has the ability to scale quickly especially when using the unique combination of foreign technology, domestic capabilities, market demand and government money, one of the things that make it a very attractive place to do business.

As the trade war with the US developed, Made In China 2025 which had the potential to further inflame the US was quietly dropped from official documents. But it also drew attention to the extent to which Chinese companies are heavily dependent on foreign and especially US technologies.

For one semiconductor application we advised, it transpired that almost all the sophisticated devices were imported and that Chinese domestic companies were at least five to ten years behind.

Playing catch up, especially in semiconductors is very hard to do.

Huawei is reported to be losing ARM designed chips, Google software and Qualcomm modems, while surveillance camera manufacturer Hikvision is also vulnerable, importing almost all its image sensor chips and GPU’s. The devices created and manufactured by Intel and AMD are among the most complex ever created by humanity. Whether it is the decades long expertise in design, or the vast experience of building production facilities with high enough yields to allow reasonable margins, it is a Herculean task to try to compete.

The same applies to operating systems. The duopoly of Microsoft and Apple has held sway on PCs for almost 30 years, while Apple and Android have dominated the decade old smartphone market. Something that not even Microsoft could manage to break into.

Although China has responded by giving tax breaks to semiconductor manufacturers and chip designers, and the domestic market doesn’t use Google apps anyway, it may be a very long march for Chinese technology companies before they approach parity with the US.

Time To Play Leapfrog

There is, however, an alternative to catch up. The growth and convergence of AI, communications, and materials technologies, the fourth industrial revolution is changing the playing field. AI at the edge, where small smart devices at the edge of the cloud, i.e. scattered around the world rather than clustering together in vast data centres, is providing opportunities to leapfrog the current server based architectures.

Chinese companies have not been slow to spot this opportunity, and neither has the government. The advantage that China has in AI at the Edge (or the Internet of Things) is the ability to rapidly scale in the domestic market. There’s nowhere else in the word where you can go from zero to a hundred million devices so quickly, and that allows companies to iteratively develop and innovate while setting de facto global standards.

While the current battle may be focused on phones and chips, the real prizes are still lurking in the internet of things.

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