Protectionism in IT: The Monsters are back

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Protectionism in IT: The Monsters are back

Since mid-2019, IT has been facing one of the greatest challenges of its history. Perceived threats from rogue states taint the products from their companies. The result is the return of protectionism in IT, which could mean a long delay in delivering 5G networks – and major problems for IoT.

by Bernd Schoene

Information technology has had a remarkable run over the past 40 years. No other transformation has changed our blue – planet so radically; none has created such wealth in terms of stock market valuation. On the other hand, no sector is more reliant on globalization, where IT suppliers are linked together through an intricate network of dependencies. Giant corporations exchange knowledge and patents across the globe, all governed – at least until now – by the laws of the market and of supply and demand.

Foreign adversaries are exploiting vulnerabilities in information and communications technology.

U.S. GovernmentExecutive order, May 2019

Just how sensitive this system has been is demonstrated time and again. The Kobe earthquake of 1995 led to a worldwide shortage of cast resin, a crucial element in semiconductor manufacturing, because the world market leader’s factory was destroyed. When Iceland’s Eyjafallajökull volcano erupted in 2010, thousands of flights were canceled, among them shipments of computer chips to automakers in Europe who were forced to shut down car and truck production for days on end. In 2011, flooding in Thailand cut computer manufacturers off from their biggest supplier of hard disk drives.
Flood levels tend to fall after a couple of days and volcanoes don’t spew smoke and ash forever. The effects of political decision-making, however, can be much longer lasting. The monsters of protectionism in IT, which many thought banished for good, are back and IT is feeling the tension.
In May 2019, the US administration declared a national emergency in order to subject the Chinese telecommunications company Huawei to strict export controls. The official explanation is that hardware made in China puts the US at risk of espionage. The executive order states that “foreign adversaries are increasingly creating and exploiting vulnerabilities in information and communications technology and services,” and the “unrestricted acquisition or use” of hardware made by foreign adversaries makes those vulnerabilities worse.
Any US company that continues to do business with the Chinese now faces stinging fines and their top executives could, at least theoretically, go to jail. Google was one of the first companies to comply, canceling billions of dollars’ worth of contracts with Huawei and, in the process, demonstrating just how globally interdependent the tech industry has become.
Huawei is one of only a handful of suppliers for 5G technology in the world but, not only that, the company is also a leading manufacturer of smartphones using Google’s Android operating system. Due to the ban, the Chinese will not be able to supply their customers around the world with updated software versions and new-model phones will no longer be equipped with Google apps such as Maps or Gmail. Access to the Google Play Store will also be denied.

Only One of Nine

Software is only part of the problem. Huawei’s 5G network hardware is crucially dependent on US technology from companies such as Qualcomm, Xilinx, Intel, and Broadcomm – all of which have confirmed they will no longer deal with Huawei. The problem is that Huawei is one of only nine companies globally that sell 5G radio hardware and 5G systems for carriers. The others are Altiostar, Cisco Systems, Datang Telecom, Ericsson, Nokia, Qualcomm, Samsung, and ZTE. Datang and ZTE are also Chinese companies but have not been banned under the software controls.
Operators like Deutsche Telekom, Vodafone, and Telefónica rely heavily on Huawei systems for their new 5G networks, some of which are already running or are planned to go online over the next year or two. The decision by US policy makers could throw a monkey wrench into the worldwide launch of 5G services to millions of customers in scores of countries. The US is also applying pressure on its allies to cancel all orders with Huawei. Australia and New Zealand have already announced their compliance but, so far, Great Britain and Germany have refused.
In Germany, Deutsche Telekom has continued to roll out systems using microcontrollers and circuitry based on Huawei technology, as has Infineon (formerly Siemens), arguing that these components are not manufactured in the United States and do not fall under US jurisdiction. Infineon is especially proud of its Trusted Platform Module (TPM) products, which it sells in large numbers to Huawei as well as to US players like VeriSign.
Huawei also has an ongoing partnership with ARM, a British semiconductor maker, which operates factories in the US. That means it will be unable to sell technology developed by its subsidiaries to Huawei. Already, US banks have started circulating lists of companies and individuals who are forbidden to trade with the Chinese. As a result, bank accounts have been frozen and executives face arrest if they enter the United States.

Protectionism in IT - Infobox
The monsters of protectionism in IT are rearing their ugly heads once more. Nothing new there: 300 years ago, European rulers struggled to achieve dominance over their neighbors by introducing and enforcing strict tariffs and closing their borders. Under the term “mercantilism”, a popular economic philosophy in the 17th and 18th centuries, governments sought to ensure that exports exceeded imports and to accumulate wealth in the form of bullion, mostly gold and silver. In the 20th century, communist regimes in the Soviet Union and the Eastern Bloc opted for central control of the economy through its politburo. Investment, production, and the allocation of capital goods took place according to economy-wide production plans. In the end, kings, queens, and communists were all thwarted. The People’s Republic of China only managed a turnaround by introducing so-called special economic zones (SEZs) with free-market oriented economic policies and flexible governmental measures, creating an economic management system that is more attractive for foreign and domestic firms to do business. As a result, China went from third-world country to one that ranks as the second largest in the world, by nominal GDP and the largest in the world by purchasing power parity, in less than 30 years. Markets, not Mao, were the key to China’s success.

Huawei has said it will defend itself through a variety of measures. The company has already announced its HarmonyOS smartphone platform will replace Android in domestic and foreign markets. The company’s billionaire founder Ren Zhengfei has also set out a three to five-year plan to build an “invincible iron army” that will protect it from ongoing US sanctions while defending its lead in next-generation wireless. The consumer business, Ren wrote in a blog post, faces a “painful long march” – a reference to the Communist Party’s historic cross-country trek during the civil war.
Huawei hasn’t been clear about how US administration curbs would impact its 190,000 employees worldwide, but the company has begun to lay off US-based staff, the Wall Street Journal reported.
So far, China seems unwilling to back down. The hawkish new commerce minister Zhong Shan told the South China Morning Post that China must uphold “the spirit of struggle” in defending national interests. For the global IT industry, this martial chestbeating signals troubled times ahead. Companies and managers will need to devise a new set of rules governing the world IT markets and their decisions about where and how to do business. Suppliers and programmers will need to consider who to accept as customers – and who not to. If China masters the obstacles put in its way by the US sanctions, the nation could emerge as a new IT superpower. In the meantime, 5G operators will need to find solutions fast or face potentially debilitating losses as deadlines for the introduction of 5G are missed. Whatever happens: the global IT markets will never be the same again.

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