US sanctions on China’s Huawei spell trouble for Shenzhen economy
When Ren Zhengfei, a former officer in the People’s Liberation Army, established Huawei in the Shenzhen special economic zone in 1987, the boomtown was still struggling to gain a meaningful spot in China’s economic landscape. It was dwarfed not only by neighbouring Hong Kong, but by other mainland Chinese cities.
Few could have imagined then that four decades later the
one-time fishing village would emerge as the poster child for Chinese economic
development. Fewer still would have predicted that Huawei, now a key part of
the city’s economy, would become a global telecommunications equipment giant
that Washington sees as a security threat and potential challenger to the
US-led world order.
However, as Shenzhen celebrates its 40th anniversary as one
of China’s four special economic zones, it is unclear whether the city of 13
million can keep shining as the country heads into a turbulent new era.
As the United States adopts a more confrontational approach
against China, the city’s easy access to foreign capital, technology and
markets – which was so important to its rise – is crumbling.
For Huawei, its luck is running out as Washington has
relentlessly tried to prevent its involvement in next generation 5G
communications networks around the globe while restricting the company’s access
to vital American tech components.
A new US government order will effectively ban Huawei and
its affiliates from buying semiconductors made with US equipment or software
from September, a rule that is seen by some analysts as a death sentence for
the company.
A downturn in Huawei’s business, or its complete demise,
would not only deal a blow to Shenzhen’s economy, but undermine broad
confidence in China’s technological and economic strength, which Beijing is
trying to promote through a high-profile celebration of the city’s 40th
anniversary.
Liu Kaiming, director of the Institute of Contemporary
Observation in Shenzhen, which tracks the condition of Chinese manufacturers,
said sanctions that weakened Huawei would send a chilling effect through
China’s entire electronic supply chain.
“There is no other company in China that can replace Huawei
to lead the country’s tech and globalisation,” Liu said. “If Huawei can’t
withstand US sanctions, who can?”
For Shenzhen’s economy, which last year surpassed Hong
Kong’s in size, the loss of Huawei would be devastating, as the company is one
of the brightest jewels in the tech hub’s crown.
Huawei was the single largest corporate contributor to
Shenzhen’s gross domestic product in 2016, contributing about 7 per cent of
economic output, the latest data from Shenzhen’s statistics bureau shows. That
year it was the only company that contributed more than 100 billion yuan
(US$14.4 billion) to the local economy.
Even then, the figure only accounts for the company’s direct
impact on the city’s economy, with suppliers and service sector firms that work
with it – from restaurants to health care – expanding its footprint many times
over.
Huawei invested more on research and development in the city
from 2014-16 than any other Shenzhen firm, dwarfing gaming and
telecommunications giant Tencent Technologies, drone manufacturer DJI, and
electric vehicle maker BYD, according to a research paper published by the
Science, Technology and Innovation Commission of Shenzhen, a government agency
that promotes technology development in the city.
The firm’s importance to the city was also highlighted in
2018, when it decided to build a new operations base in the neighbouring city
of Dongguan. It triggered much soul-searching in Shenzhen about how the city
had become inhospitable for its best firm. Articles like “please don’t let
Huawei go” went viral on social media.
Huawei has helped Shenzhen become the top destination for
China’s programming and engineering talent. It has built a reputation for being
generous to the brightest minds and the hardest workers.
Zhang Ji, a 27-year-old doctoral graduate in artificial
intelligence from Huazhong University of Science and Technology, was hired by
Huawei on a starting salary of 2.01 million yuan (US$291,000) per year, far
above the average 200,000 yuan annual package for other fresh doctoral
graduates.
Huawei was also the largest corporate recruiter of new
graduates from China’s top universities in 2019, including Tsinghua University,
Peking University, Zhejiang University and Fudan University – equivalent to a
single US company being the largest recruiter of graduates among Ivy League
schools.
Among the company’s 194,000 employees across the globe, over
half are engaged in research and development.
Peng Peng, a vice-president of Guangdong System Reform
Research Society, a think tank affiliated with the Guangdong provincial
government, said US sanctions on Huawei would be felt across the country and
signal that globally Chinese enterprises are no longer as welcome as before.
“It is still difficult to predict the magnitude of the
impact. [But] the global market has different attitudes from before towards
Chinese manufacturing and the rise of China,” he said.
Liu, the Shenzhen-based researcher, agreed that Huawei’s
troubles will have a broad impact on the national economy, signifying the end
of the era when Chinese companies were accepted as key elements in global tech
supply chains.
The logic of such cooperation has been interrupted and
decoupling has begun, Liu said. He predicted some Chinese companies with
foreign investment, including many located in Shenzhen, would now pack up and
leave.
“These foreign-funded electronics companies are actually the
high-end sector of China’s current export-oriented electronics manufacturing
industry,” Liu said. “Their relocation will be of no benefit to China’s
technological innovation.”
Earlier this month, Taiwanese-funded Catcher Technology, a
supplier to Apple, announced it would sell its entire stake in two Chinese
units to Hunan-based Lens Technology for US$1.43 billion in cash.
In July, another Taiwan-based Apple supplier, Wistron, said
it would sell two of the firm’s wholly owned subsidiaries in east China to
mainland company Luxshare Group.
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