Pacific Money

Collapse of Huawei-AT&T Deal a Double Blow to China

The deal’s collapse is a bad sign not only for Huawei, but China’s global technology ambitions.

Collapse of Huawei-AT&T Deal a Double Blow to China
Credit: Flickr/ Kārlis Dambrāns

Following on the heels of the collapse of Ant Financial’s acquisition of MoneyGram, the telecom company Huawei announced on January 9 that plans to sell its smartphones with AT&T in the United States have collapsed. Huawei, the world’s third largest smartphone brand behind Samsung and Apple and China’s market leader, had hoped to expand into the U.S. market by partnering with carrier AT&T. Carriers dominate the American smartphone market, being able to provide special subsidies and packages to customers. Without the deal, Huawei will need to continue selling its phones through open channels, such as Amazon, which only account for about 10 percent of the U.S. market.

While AT&T and Huawei have so far declined to comment on the exact reasons for the deal’s collapse, there have been reports that AT&T was under political pressure to end the agreement. Huawei has been a subject of intense political scrutiny for years: in 2012, a U.S. Congressional panel stated that Huawei should be banned from any mergers with or acquisitions of American businesses because it posed a “security threat.” On December 20, 2017, members of the Senate and House intelligence committees informed the Federal Communications Commission that they again believed Huawei posed a security risk, specifically an espionage risk; this report is likely what caused the AT&T to pull out of the agreement.

The collapse of this deal is a double hit to China. First, it is a blow to Huawei, one of China’s leading “national champion” companies, with one of Huawei’s top executives saying “we have been harmed again.” Even though it is the third-largest seller of mobile phones, most of its customer base is in China or other developing countries. Huawei needs to increase its share of the American market if it hopes to overtake Apple and Samsung. The American market is “the largest goldmine” for smartphone companies, as customers there are willing to pay a high price for performance and success in the U.S. market helps bolster global brands. To compete with Samsung and Apple globally, and with Apple in its home market, Huawei had shifted its strategy to produce more high-end, high-cost phones. Yet, with AT&T now backing out of the deal, Huawei will be forced to continue relying on online sales, which have not produced anywhere near the volume needed to compete in the U.S. market. Thus the deal’s end represents a significant blow to Huawei’s global expansion.

Second, the U.S. government’s role in the deal’s collapse is another example of America pushing back against the Made in China 2025 plan, the Chinese government’s industrial plan to turn the Chinese economy into a high-tech hub. The plan relies heavily on forced technology transfers from foreign companies for access to the Chinese market, a central plank of Chinese development for decades. In addition to forced transfers, American companies worry that intellectual property theft is also a key pillar of China’s planned technological transformation. Huawei has often been the target of American investigations regarding forced transfers and IP theft. By essentially denying the company access to the American market, Congress made it clear that it is tired of Chinese mercantilist practices toward American technology. This, of course, comes right after the U.S. government denied Ant Financial’s attempt to buy MoneyGram and as the Trump administration has launched investigations into Chinese IP theft and dumping practices. By working to deny Chinese companies access to American technology and consumers, the U.S. government is also working to decrease Chinese companies’ innovation and collaboration with American businesses.

A double blow like this is sure to anger Chinese officials. Indeed, they have signaled that China is willing to retaliate if the United States continues to impose “unilateral protectionist trade practices.” These officials reject the American government’s claims as “so-called ‘national security.’” Yet such countermeasures as anti-dumping investigations and blocking mergers and acquisitions are a logical preventative step to take against heavily state-supported Chinese companies. Since China’s plans to upgrade its economy rely so heavily on foreign technology, the Chinese government should realize that foreign governments will not give that technology freely or easily. With protectionist economic sentiments toward China on the rise in both America and Europe, the Chinese government needs to take steps to ensure that its economic transformation is seen as universally beneficial and not as a threat.

Zachary Torrey is an analyst focusing on Asian security and economics.