As China Takes Aim, Silicon Valley Braces for Pain



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Microsoft’s research lab in Beijing is its largest outside the United States.CreditCreditThomas Peter/Reuters

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 eco

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.

The consequences of the deteriorating relationship are already playing out with smaller tech companies.

Two weeks ago, the Trump administration put Huawei, the giant Chinese maker of telecommunications gear, on an “entity list” that would force it to get permission to buy technology from American companies. Huawei relies on American-made parts for everything from its smartphones to its networking equipment. Although it received a 90-day waiver to allow time for negotiations, many companies based in the United States have already severed ties.

That has had a knock-on effect. Lumentum, a Silicon Valley company that makes optical networking gear, said Huawei was generating about 15 percent of its revenue. Last week, it reduced its expectations for the current quarter by about $35 million to a maximum of $390 million.

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.


China appeared to block Microsoft’s Bing search engine briefly in January.CreditFred Dufour/Agence France-Presse — Getty Images

China’s importance to American chip makers is magnified by the fact that many chips are sent to China to be assembled to make gadgets for customers elsewhere, such as the iPhones that Taiwan-based Foxconn makes for Apple in China. Roughly 60 percent of semiconductors sold are connected to the Chinese-based supply chain, the consulting firm KPMG said.

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. Microsoft declined to comment.

“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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