As China Takes Aim, Silicon Valley Braces for Pain
SAN
FRANCISCO — When Silicon Valley looks west to China, it sees many
things. More than a billion hungry consumers. A cheap source of labor. A
competitor, partner, supplier and security risk.
Now add this: A foe bent on retaliation.
The Chinese government said Friday that it was putting together an “unreliable entities list,”
a counterattack against the United States for denying important
technology to Chinese companies. No companies were named or details
given, but tech firms seemed all but assured of being a prime target.
As the economic relationship between the two countries frays at warp speed, the much-anticipated tech cold war is escalating.
“If
China continues to push back, and we continue to push back, there will
soon be dual technology standards,” said Rebecca Fannin, author of the
coming book “Tech Titans of China.” “Prices will probably rise for
components, which companies will pass along to consumers. But both sides
will strengthen their innovation edge, and that helps the global
economy.”
Some
Silicon Valley companies are more vulnerable than others. Because
Facebook and Google are blocked by the Chinese government, social media
and search might be kept out of the conflict. Apple, on the other hand,
is heavily invested in China, which is both a major manufacturer of the iPhone and a major market for it.
Tesla
is building a plant in Shanghai that will produce 250,000 cars a year.
Venture capitalists have poured in funding. Microsoft’s research lab in
Beijing is its largest outside the United States, while many of the
products in the Amazon shopping mall are made in the country. Amazon
also just opened an A.I. lab in China.
Qorvo,
a semiconductor company in North Carolina, also said last week that it
depended on Huawei for about 15 percent of its sales and projected that
its revenue in the current quarter would drop by about $50 million to a
maximum of $750 million.
China is a
big and fast-growing consumer of computer chips, used in an array of
products that include smartphones, personal computers, communications
equipment and server systems. Customers in the country accounted for
about 34 percent of global sales in 2018, which totaled $468.8 billion,
according to the Semiconductor Industry Association.
Chip
makers hope that the latest barbs between China and the United States
are mainly aimed at gaining leverage in trade talks, not permanent
changes in how the countries will have to do business.
“Each
volley in the U.S.-China trade dispute causes semiconductor companies
to wince and financial markets to wobble, while pushing us farther from a
deal that would benefit both economies, the two largest in the world,”
John Neuffer, the Semiconductor Industry Association’s president and
chief executive, said Friday after news of China’s unreliable entities
list.
“We urge both sides to avoid
further escalations, get back to the negotiating table and reach a
high-standard, enforceable and sustainable agreement,” Mr. Neuffer
added.
Apple’s
exposure to China is broad. The company assembles most of its products
there, and the region is its No. 3 market, after the United States and
Europe. In its latest quarter, Apple earned $10.2 billion in China,
Taiwan and Hong Kong, or about 18 percent of its total revenue. Apple
did not respond to requests for comment on Friday.
The iPhone maker’s dependence on China was vividly demonstrated late last year when Chinese consumers began balking at buying
the latest model of the smartphone. Total revenue for the region that
includes China dropped 25 percent in the fourth quarter to $13.17
billion. One of Apple’s responses was to cut Chinese prices of its
cheapest phone. The situation seems to have stabilized recently.
Other
tech behemoths have found little traction in China. Microsoft has
generally tried to play along in China, censoring sensitive topics the
government bans on its Bing search engine and teaming up with a
state-run firm to produce a government-approved version of its Windows
10 software.
Yet in January, government censors appeared to briefly block Bing, which, though little used, provides a rare portal in China to the
global internet. And widespread problems with bootleg copies of
Microsoft’s software have prevented China from becoming a major market
for the company.
“Piracy
has been an epidemic for Microsoft in China,” said Dan Ives, a managing
director at Wedbush Securities. Investors had hoped that trade
negotiations with China could resolve these longstanding intellectual
property issues.
“You are talking
about a company that tried to penetrate China from every angle, both
from a demand and R & D perspective,” Mr. Ives said. “Now, with all
the trouble they have had there, it actually becomes a benefit to
Microsoft versus other tech players.”
Facebook,
which needs all the friends and arguments it can get as it battles
widespread calls for its breakup, has already seized on the China
threat. It maintains it needs to be big to compete with the big Chinese
companies.
“People are concerned with the size and power of tech companies,” Sheryl Sandberg, Facebook’s chief operating officer, recently said in a CNBC interview.
“There’s also a concern in the United States about the size and power
of Chinese tech companies and the realization that those companies are
not going to be broken up.”
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