The Trade War Is Exposing What Little U.S. Tech China Still Needs

A trade war between the world’s two largest economies erupted this year, and technology is at the center of the skirmish. President Donald Trump blocked networking giant Huawei Technologies Co. from buying U.S. components, and put tariffs on many Chinese products. China responded by threatening to blacklist U.S. companies. The rising tension is testing a complex relationship, especially in tech where the U.S. and China are tightly intertwined through global supply chains and software that can zip across borders with the tap of a computer key. So which country has the most to lose? Who needs the other nation more?

CRUCIAL NEEDS

Computer Chips

China’s greatest reliance on the U.S. is arguably in semiconductors.

China’s semiconductor imports surge

U.S. companies Intel Corp. and Nvidia Corp. dominate the market for processors, the key component of all laptops, desktop and server computers. The only viable alternative is another American firm: Advanced Micro Devices Inc.

Global computer chips market share, 2017

The three companies are based a short walk from each other in Silicon Valley, where they design their products.

The processors are manufactured mostly in Taiwan. Intel has one plant in China, but it makes memory chips—a commodity component. Huawei unveiled its first home-grown server chip this year, based on designs from ARM Holdings Inc., which is headquartered in the U.K. ARM has operations in the U.S., too, and the company recently said its products fall under the U.S. export controls. Without the latest ARM designs, Huawei may struggle to make its own chips.

CRUCIAL NEEDS

Mobile Chips

In smartphones, Huawei is more independent, supplying at least two-thirds of its own processors and modems, according to analysts’ estimates.

Percentage of Huawei’s phones

using its own chips, 2018

But other Chinese smartphone makers, such as Xiaomi, Vivo, Oppo and Lenovo, rely much more on San Diego, California-based Qualcomm Inc., the world’s largest mobile chip maker.

Switch Chips

Switch chips run machines that direct the flow of information across computer networks including the internet. This is another area of technology where China relies on the U.S. Broadcom Inc., headquartered in San Jose, California, is the largest maker of switch chips.

Huawei, a top networking gear provider, has been a huge buyer of these components. If the Chinese company wanted to develop its own switch chips, it would still need other U.S. technology. Synopsys Inc. and Cadence Design Systems Inc. are the main suppliers of software that’s used to design chips—and they both cut Huawei off recently.

Microsoft

Microsoft’s Windows operating system still runs most personal computers, including almost all the PCs China buys. Windows is still used by the Chinese government and government-owned entities. Microsoft’s Office productivity software is also popular in the country.

Microsoft hasn’t said whether it can keep supplying Windows and Office to Huawei and other Chinese technology companies.

A prolonged ban on the supply of Windows and Office to Chinese computer makers would force them to build alternatives that don’t exist yet. Lenovo, the world’s biggest PC manufacturer, is Microsoft’s biggest customer, according to Bloomberg supply-chain analysis.

Apple

Chinese consumers are increasingly embracing alternatives to the iPhone as Apple’s devices have become more expensive and local smartphones have improved.

Huawei has gone from a small smartphone player to overtaking Apple, mainly on the strength of demand in China—a surge also felt by other local phone makers Xiaomi, Oppo and Vivo.

In China, Apple offers some services like Apple Music, but newer products—the forthcoming Apple credit card, Apple News+, and Apple TV+—either won’t launch in China or won’t be immediately available there. Chinese consumers have already embraced local alternatives. Tencent Music’s monthly user count easily exceeds the total population of the U.S.

The main reason China needs Apple is jobs. The U.S. tech giant has most of its devices made in China, supporting about 3 million workers there.

Mobile Software

Google’s Android smartphone operating system is ubiquitous in the country, running on phones from Huawei, Oppo, Vivo and Lenovo. But for Chinese consumers, these manufacturers use a skeletal version of the software that has no Google services.

Outside China, they still need Google’s support, though. When the U.S. internet giant recently said it would cut off Huawei’s access to the full Android software, that was a major setback.

Artificial Intelligence

China is betting heavily on AI. Money is pouring in from China’s investors, big internet companies and its government, driven by a belief that the technology can remake entire sectors of the economy, as well as national security. A similar effort is underway in the U.S., but in this new global arms race, China has three advantages: A vast pool of engineers to write the software, a massive base of 751 million internet users to test it on, and most importantly staunch government support that includes handing over gobs of citizens’ data—something that makes Western officials squirm.

Cloud Services

Amazon.com Inc., Microsoft Corp. and Google are the biggest U.S. providers of computing power and services over the internet.

But in China, the companies don’t even make the top six. Alibaba Group Holding Ltd., Tencent Holdings Ltd. and their compatriots dominate the domestic market, and they’re on the rise in other parts of the Asia Pacific region, according to Synergy Research Group.

Online Search

Baidu runs the largest search engine in China. Google pulled out of the country in 2010 and recent efforts to return have failed so far.

Online Shopping

Chinese consumers don’t need U.S. companies for their online shopping needs. Amazon plans to shut down its Chinese marketplace business in July, and will only sell goods to mainland customers seeking products from other countries.

Alibaba and JD.com dominate the market, and Amazon never reached more than 1% market share, according to iResearch.

Social Networks

American social networks also aren’t a part of daily life in China. Facebook Inc. and Twitter Inc. don’t operate there—and that’s not likely to change any time soon.

WeChat, the messaging service owned by Tencent, is China’s leading hub for communication and other everyday tasks, like making mobile payments.

Weibo, a Chinese social network similar to Twitter, has more than 203 million daily active users—almost 70 million more than Twitter has.

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