How US Sanctions on Huawei Impact Consumers Report

Statement of Aims & Objectives

The successful economic growth of China leads to the transformation of the global economic space, where the leading positions are still occupied by the Western countries. The new US administration, fearing economic competition, has announced a policy of containing China. At the same time, Washington is violating existing rules of international trade. Tensions in economic relations between the United States and China are growing, representing a real trade war. The novelty of the situation is that for the first time in the history of US-Chinese relations, economic contradictions between the parties resulted in such large-scale actions (Meltzer and Shenai, 2019). Identification of their consequences is beyond the scope of standard methods for evaluating trade policy measures.

According to the IMF’s fair conclusion about the trade standoff between the US and China, the main losers in the trade war are producers and consumers (Steinbock, 2018). First of all, the tariff war had an impact on consumers in the United States and China ‑ they definitely lost out on trade tensions. However, the trade war has a much more devastating effect on producers, placing them in extremely difficult conditions.

This conflict is likely to be quite protracted and may lead to increased efforts by China to promote alternative economic strategies. Naturally, the subsequent aggravation of the trade war can have a significant impact on the global economy as a whole and on certain markets, in particular, such a dynamic, turbulent, and fast-growing market as the smartphone market. Without a doubt, given the popularity and (at the moment) the indispensability of the Android operating system, one can assume the emergence of serious problems in Chinese smartphone manufacturers. According to media reports, the trade war has already cost tech companies $10 billion (Felbermayr and Steininger, 2019). It seems interesting to consider the impact of US trade sanctions on Chinese smartphone manufacturers, using the example of Huawei.

The aim of the study is to build a multi-factor model of the impact of US trade policy and sanctions on financial performance, world market share, stability, competitiveness, and prospects of Huawei. In frames of the goal, the following tasks were formulated:

• To trace briefly the evolution and causes of the US-China trade war
• To analyse the US restrictive trade policy, the content of the sanctions, their current application and prospects
• To analyse the dynamics of operational and financial indicators of Huawei since the beginning of the application of sanctions
• To systematise Huawei’s competitive advantages and their potential sustainability
• Using the method of open interviews, to conduct an empirical study of the views of Chinese and American experts regarding the current situation, its true causes, consequences and prospects.
• By comparing the opinions of experts, processed with the help of grounded theory, with the data of a secondary study, to assess the impact of US sanctions on customer loyalty of Huawei products, goodwill, investment attractiveness and prospects of Huawei
• To develop a factorial template model of the influence of geopolitical and geoeconomic factors on the players of the global telecommunications market.

Project Background

In the summer of 2018, the United States unleashed a trade war against China. Prior to this, it seemed to many that the parties would find a compromise. Hopes for this appeared after the May consultations of the parties. However, in July and August, the United States introduced additional tariffs on imports of Chinese goods for the amount of 50 billion US dollars. Beijing responded with a similar increase in US import duties. In September, new tariffs for another $200 billion came into effect (Tankersley and Bradsher, 2018). The Trump administration openly embarked on the economic containment of Chinese expansion, not particularly reckoning with the rules of multilateral international trade. As a result, the trade conflict is acquiring signs of a large-scale and prolonged economic war with difficult to predict consequences.

Washington emphasized that the sanctions were applied within the framework of the current US Law on Countering America’s Adversaries through Sanctions (CAATSA). The reason for the introduction of restrictions was the purchase by Beijing of 10 Russian Su-35 fighter jets, as well as equipment for ground-to-air missiles used in S-400 missile systems. The restrictions Washington imposes against Beijing include a prohibition on the Chinese Ministry of Defence from issuing export licenses, foreign exchange transactions under U.S. jurisdiction, and property seizure and freezing accounts in the U.S. (Meltzer and Shenai, 2019). Already in the fall of 2018, it became known that due to the trade war between the U.S. and China, as well as mutual sanctions and restrictions, about 70% of U.S. companies decided to transfer production from China to other countries (Meltzer and Shenai, 2019).

In January 2019, U.S. congressmen and senators introduced bills aimed at prohibiting the export of products from those Chinese telecommunications companies that violated U.S. sanctions and export laws. Washington also brought 10 charges against Chinese company Huawei, which concern the violation of trade secrets, as well as 13 charges of violation of sanctions (Hanbury, 2019). Chinese telecommunications corporation Huawei can no longer use Google applications due to US sanctions. Google decided to suspend business with Huawei, in which the Chinese company provided software or hardware development. This is due to the adding of Huawei into the “black list” of companies by the US Department of Commerce. Among the restrictions that Google imposes on Huawei, the following should be noted (Hanbury, 2019):

• Huawei will lose access to the Android operating system with GMS services – they include the Google application, Chrome browser, Play Market, YouTube, maps, and other company applications and APIs.
• The company will lose technical support and compatibility with Android and Google services.
• Huawei Android smartphones will stop receiving operating system updates from Google.

The company has found a replacement for most of the equipment previously purchased in the United States, but has so far failed to find an alternative to Google services. So far, customers of the company with old Huawei mobile phones have access to Google Play, Google Maps and some other Google services. But for all new models of the company, all this will no longer be available. Access problems can lead to the company losing a significant share of non-Chinese customers. Following the imposition of sanctions due the U.S.-China trade war, Huawei began to develop its own operating system, known as Harmony. But now it is “far from ready,” and it will take years to develop it.

Beijing is convinced that the actions of the United States undermine the legitimacy of the status and procedures of the WTO, destroying international “production chains” and eliminating the prospects for global economic growth (Zhang, 2018). At the same time, in the end, namely isolation policy can help China become a completely self-sufficient state, and Chinese technology companies will have the potential to create truly unique competitive advantages. In 2017, in analytical reviews of the smartphone market, it was noted that Huawei should soon move Apple from second place in the list of the largest smartphone manufacturers, while the Chinese giant is practically absent in the US market. In November 2018, the new ‘flagship’ Mate 20 Pro turned out to be the most popular smartphone in the company’s history at the pre-order stage in Europe (Deloitte, 2019). These data clearly indicate the excellent prospects of Huawei in European markets.

Thus, the impact of U.S. sanctions on Huawei and its consumers’ behaviour appears to be mixed. In this regard, by following the evolution and causes of the US-China trade war, the content of the sanctions, the nature of Huawei’s competitive advantages and their potential sustainability, as well as the company’s performance indicators, one can not only assess the current and potential impact of US sanctions on Huawei, but also develop a generalized multifactor model of the influence of geopolitical and geoeconomic factors on the players in the global telecommunications market.

Literature Review

The use of sanctions as a tool for implementing policy is rooted deep in the history of international relations. Researchers rightly point out that the goal of sanctions has always been single – to influence the target country without the use of integrated military operations, weakening it and pushing it to political surrender (Munoz, 2017). One of the most effective forms of sanction pressure is currently considered economic one. This is due to the fact that in the conditions of creating a single global market, economic ties began to play an important role ‑ respectively, their break leads to significant costs (Yefremov, 2018). In fact, sanctions tools are used as measures of unfair competition in geoeconomics.

The very concept of geoeconomics was introduced into world science a quarter century ago by Edward Luttwak, who opposed it to geopolitics, which, in contrast to the economic mechanisms of geoeconomics, emphasized the achievement of global goals through direct military or diplomatic action (Luttwak, 1990). At the same time, researchers note that at the turn of the 20th and 21st centuries, armed conflicts practically did not produce the expected effect, while methods of economic pressure led to more tangible results (Wigell, Scholvin and Aaltola, 2018). On the contrary, the expected geopolitical effect was often achieved in a purely geoeconomic way, which, in turn, led to the emergence of the concept of geostrategy. The United States now applies such a geostrategy to China, having “declared” a trade war on it.

Of course, having a negative impact at the macroeconomic level, sanctions all the more pose a threat to individual companies in the target country, creating a crisis situation and the need for urgent anti-crisis measures. The crisis may not only be associated with the loss of competitive advantage, but also become a catalyst for the creation of new, truly unique advantages. During a crisis, it is especially necessary to maintain the company’s competitive advantages at all stages of the life cycle. Under the current conditions of a competitive market, it is important for a company to assess the possibility of radical strategic changes in a short time (Yefremov, 2018). In a situation where the company does not have time to meet the changing market factors, growth may slow down. At this stage, it is necessary to update technologies, increase investment in innovative projects.

Not much is known about Huawei’s own operating system – HongMeng. At the same time, it has been under development for seven years – since 2012 (Li, 2019). As representatives of Huawei rightly point out, developing an operating system is not a big deal. It is much more difficult to create an ecosystem with application support (Li, 2019). Many Western experts believe that HongMeng will fail, as operating systems without applications have no chance in clashing with the Android-iOS duopoly (Keane, 2019). However, it can be assumed that such conclusions can, in fact, be very hasty.

It is obvious that the company may completely lose the smartphone market in Western Europe if it loses access to Google services. Currently, indeed, Huawei’s sales have declined markedly after the introduction of U.S. sanctions (Deloitte, 2019). However, many smartphone manufacturing companies have experienced a significant drop in sales, nevertheless, “with honour” coming out of crisis situations through innovation.

If earlier, before the imposition of sanctions, Huawei adhered to a low-cost strategy, then in this situation, we can assume that it will have to resort to a combined strategy, including differentiation. Buyers should receive significant motivation in order to prefer the new operating system to the well-known and understandable Android and iOS. However, the example of Apple with its slogan “Think different!” and the company’s experience in “patent wars” with Samsung, suggests that there is a real possibility of creating a unique OS. Unique services are also important in creating new competitive advantages. So, the company launched its AppStore application store in the European market and plans to launch the Huawei Video Service, which will focus on younger mobile users.

It should be noted that if certain theoretical studies were conducted at the macro level concerning the impact of sanctions and trade wars on world and regional markets, as well as the economies of individual countries, there are no such studies at the micro level. In this regard, it seems necessary to expand the range of research in this area with the inclusion of the level of individual markets and companies in considering the impact of sanctions on customer behaviour and company prospects.

Methodology

The study will include the collection of secondary and primary (empirical) data. The study will use systemic, institutional, and comparative methods. Secondary data for analysis will be obtained from industry and specialized periodicals, as well as Huawei corporate reporting and industry/segment reports of consulting companies. An empirical study, within the framework of the scientific philosophy of interpretivism, will include conducting open interviews with Chinese and American experts.

Qualitative methods are absolutely necessary where it is required to formulate a new hypothesis or to comprehend the problem. Precisely for a deeper understanding of the problem, the open interview method was chosen, which allows one to get well-thought-out answers from experts. The results of the interview will then be processed using a grounded theory method, as the only completely universal type of qualitative research, that best fit the goals of theoretical validation (Clarke and Charmaz, 2013; Flick, 2018). As part of our study, 35 interviews will be conducted.

At the final stage of the study, the data of the secondary and primary research will be compiled and compared, on the basis of which, using the example of Huawei, a template model of the influence of geopolitical and geoeconomic factors on players in the global telecommunications market will be built. Gantt chart of the implementation stages for proposed research project is presented below.

• Stage 1 justification of study; looking for sources, conducting literature review; formulation of objectives and tasks.
• Stage 2 analysis of the content of sanctions, policies, and the impact
• Stage 3 collecting and processing empirical data
• Stage 4 analysis of Huawei potential competitive capabilities in the conditions of sanctions
• Stage 5 building template model
• Stage 6 overall conclusions and recommendations.

Reference List

Deloitte (2019)The state of the smartphone market: Higher prices, lower sales, growing base. Deloitte. Web.

Felbermayr, G. and Steininger, M. (2019) Trump’s trade attack on China − who will have the last laugh? CESifo Forum, 1(20), pp. 27-32.

Flick, U. (2018) Doing grounded theory (qualitative research kit). Thousand Oaks, Ca: SAGE Publications.

Hanbury, M. (2019) ‘Huawei reportedly knew it was over-reliant on Google’s Android before the US-China trade war and considered alternatives like Sailfish,’Business Insider, Web.

Keane, S. (2019). ‘Huawei ban: full timeline as Trump’s tech chief slams countries working with Chinese company,’CNet, Web.

Li, D. (2019). HarmonyOS/Hongmeng OS: here’s everything you need to know about this new Operating System.HC, Web.

Meltzer, J. P. and Shenai, N. (2019) The US-China economic relationship: a comprehensive approach. Brookings, Web.

Munoz, J. M. (2017). Advances in geoeconomics. Abingdon-on-Thames, Routledge.

Steinbock, D. (2018) U.S.-China trade war and its global impacts.China Quarterly of International Strategic Studies, 4(4), pp. 515-542.

Tankersley, J. and Bradsher, K. (2018) ‘Trump hits china with tariffs on $200 billion in goods, escalating trade war,’The New York Times, Web.

Wigell, M., Scholvin, S., and Aaltola, M. (2018) Geo-economics and power politics in the 21st Century: the revival of economic statecraft. Abingdon-on-Thames, Routledge.

Yefremov, D. (2018) ‘China in trade war against the US: tactical capabilities and prospects,’ Kitaêznavčì doslìdžennâ, 1, pp. 133-141.

Zhang, Y. (2018). ‘The US–China trade war: A political and economic analysis,’ Indian Journal of Asian Affairs, 31(1/20), pp. 53-74.