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US sanctions on China’s Huawei spell trouble for Shenzhen economy

Written by South China Morning Post Published on 

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Huawei’s success has been a major factor in Shenzhen’s transformation from a fishing village to an international tech hub.

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 US 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.

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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 globalization,” 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% 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 (USD 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.

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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.

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 RMB 2.01 million (USD 291,000) per year, far above the average RMB 200,000 (USD 29,220) 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.

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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 USD 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.

“Just like the early 2000s, when American buyers asked their Taiwanese and Korean suppliers to move from Taiwan and South Korea to China, now the same American buyers are asking them to relocate from China to Vietnam, India, and Taiwan,” Liu said.

The future of Shenzhen and Huawei is not completely bleak, given that China’s huge domestic market remains a source of growth.

Li Daokui, a professor at Tsinghua University, said in a television interview last month that China’s domestic market of 1.4 billion consumers, along with markets in belt and road countries, would be sufficient to support Chinese companies like Huawei.

“Just let the European and American markets go. It’s difficult to reconcile [relying on them] in the future if they don’t trust us,” Li said. “This will be the new era of the globalization.”

This article was originally published by the South China Morning Post.

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