comment from a long-time reader

Hi Alan,

You always have interesting questions/comments.

“Is putting an embargo on selling electronic components to Huawei very different than China deciding to embargo rare earths?”

My short answer is “No.”  In both cases, a country is seeking a strategic advantage by denying a rival an essential material used in making a key product.

To my mind, there is a difference, though.  In the Huawei case, the US is not just trying to make it harder for the Chinese company to make telecom equipment by denying it raw materials.  We are also threatening other OECD countries with reprisals if they buy Huawei products, whether they contain US-made components or not.  The ostensible reason is the worry that programs buried deep in the Huawei network software will give Beijing the ability to monitor communications or even shut the networks down if it so chooses.  I have no idea whether this fear is well-grounded or whether the attack is designed mostly to buy time for US competitors to catch up with Huawei technology.

Also, adding Huawei to the “entity list” effectively cuts off access to all technology from US companies, including the Google Android operating system which drives Huawei phones.  UK-based ARM Technology has also withdrawn the use of its chip design cores, which seems to me to be at least as damaging as the Google action.  (The ARM decision is not the clear-cut condemnation of Huawei it might seem.  ARM is owned by Softbank, which has been aggressively, and so far unsuccessfully, lobbying Mr. Trump to green-light the merger of T-Mobile with Sprint, which Softbank owns and which has been an albatross around its neck because of its lack of scale.)

 

As to Mr. Trump himself, I personally think history will regard him as an important transformational figure, not only for American national policy but also for the structure of both major political parties.  For good or ill, he’s laid bare how inadequate and dysfunctional the status quo is.

 

My main question about Huawei is whether this action is part of an overall government plan or whether it’s a more or less random event.  I really don’t see any overarching strategy in the changes the US wants to make in the relationship with China, so my guess is the latter.

We can look into Mr. Trump’s business career for evidence of his strategic acumen and business savvy.  The case we have the most information on is his foray into Atlantic City casino gambling, which to my eye shows neither:

–By 1985, eight years after the first Atlantic City casino opened, the limitations of this market–lack of road, rail and air infrastructure to deliver gamblers to the city; lack of hotel rooms to allow more than day trips; the beach in the summer as the only non-casino attraction (meaning that the resort was half-empty for maybe 40% of the year)–were very well-know.  The savviest operators had already begun to withdraw from AC in favor of redeveloping Las Vegas.  That’s when Donald Trump bought in.

–Trump added capacity and spent lavishly on decor with an eye to attracting high-end clients, despite accumulated evidence that this strategy didn’t work.  This created overhead that would be impossible to cover during the long off-season. He took out very large loans that he personally guaranteed–an unusual and risky move.  He was saved from personal bankruptcy when his public company, Trump Hotels and Casinos (DJT), collapsed only by his creditors’ decision that loan collateral would be worth less if the Trump myth were shattered.  To give him credit, he survived and ultimately did not lose the money he inherited.  Equity and junk bond holders, however, lost virtually everything.

 

 

 

 

4 responses

  1. Wait ; Isn’t the entity list classification based on trading with Iran ; and not the larger (neboulous) security concerns

    Granted the Iran thing seems very ginned up ; Basically they are duplication of Reuter’s reporting from 2013.

    Clearly there are elements pushing for a harder line : and the ban on 5g networks is part of that.

    • Last year, Canada detained the CFO of Huawei, who is also the daughter of the founder, on an arrest warrant from the US, apparently accusing her of fraud in tricking US banks into violating US sanctions on Iran.
      Ten days ago, Mr. Trump signed an executive order which led to Huawei being put on the Entity List as a threat to national security. Basically, that prevents any US company from doing business with Huawei without Washington permission. However, Mr. Trump has said the disposition of both issues is subject to developments in trade negotiations with China–implying the actions are more about wringing trade concessions from China than national security.

  2. Pingback: What stocks to invest in = comment from a long-time reader « PRACTICAL STOCK INVESTING | Stock Investing

  3. Don’t know if you can read these links:

    https://www.ft.com/content/0421d498-8002-11e9-b592-5fe435b57a3b

    https://www.ft.com/content/978f169a-8175-11e9-b592-5fe435b57a3b

    The problem with politics is that it usually isn’t apparent who your counterparty is — an so arguing about politics can leads to blows.

    I’ll stick to my guns here and see this as extremely analgous to the ZTE situation and with the same possible resolution (fire somebody, pay a fine, hire a compliance guy). The only other angle is Huawei coming clean on their union owned ownership.

    https://www.baldingsworld.com/2019/04/26/making-sense-of-huawei/

    FWIW, I am reading the generally good “Wages of Destruction” on german economy during ww2, and when FDR put 25% tarrifs in Germany they considered that economic warfare.

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