Keystone Cops: the U.S. Oughtta Level Up Priorities in China Trade Dispute
The international situation remains touchy in the tech industry. U.S. policy with respect to China is lurching all over the place. Unintended consequences are rife. We risk hurting ourselves more than the other guy.
The Trump administration’s application of the blunt instrument of tariffs may damage its intended targets, but it will also disrupt U.S. firms. When it comes to the tech industry, the United States and China are more intertwined than any other two nations on earth. Almost all supply chains involve shipment back and forth between them.
The disruption goes both ways, as U.S. firms trying to sell in China are thwarted while Chinese companies attempting to invest in the United States are disqualified. And each story of product lines and services has its own particular twists and turns, but nearly all of them are diminished commercially by political chaos and uncertainty.
It is against this background that the race to the next generation of wireless service — 5G — is playing out. A year ago, Huawei was just another competitor in the wireless equipment market. Yes, it’s true, the company already had somewhat of a reputation in the industry for playing fast and loose with intellectual property, but it also had an interest in protecting intellectual property rights, since it was steadily building a formidable portfolio of technology patents of its own. All the players — American, Chinese, European, and other technology enterprises around the world — had agreed to a standard set during meetings of the worldwide standards body 3GPP — rivals Qualcomm and Huawei included.
But what a difference a year makes. In the United States, a belief has solidified that China’s potential dominance in 5G is an existential threat. And Huawei is viewed as nothing less than an extension of the Chinese government, bent on stealing U.S. trade secrets and spying on Americans. If one is willing to don a set of glasses that filters out the more paranoid elements of this competitive view, there is still a lot to look at. While Huawei and Qualcomm are matched competitors in some ways, the playing field is deeply tilted in the Chinese company’s favor in others.
A key difference: Qualcomm must thrive in a fully competitive market, whereas the Chinese government has Huawei’s back. Essentially, Huawei is subsidized by Chinese industrial policy tools and lucrative contracts. Whether or not the Chinese government is using Huawei as a front for spying activity, it certainly has an interest in seeing Huawei be successful. Perhaps the U.S. government should pay more attention to ensuring the prosperity of Qualcomm, its best hope for maintaining leadership in wireless communications.
Qualcomm is essentially the R&D arm of the telecommunications industry, a goose that lays thousands of golden eggs. At the moment, Qualcomm also leads in cellular semiconductor devices.
Huawei’s ambition is to rule a vertically integrated cellular ecosystem. It already leads in infrastructure and is pushing to be number one in handsets. At the same time, it has invested in — and is increasingly using — its own semiconductors.
In a scenario where Qualcomm is hampered or even crippled by U.S. government constraints or interference, Huawei will be able to fill the vacuum, eventually dominating the entire industry. To have a foreign company, particularly a Chinese one, become the well to which everyone in the cellular business must trek for their essential technology would lead to a poor national outcome for the United States.
In the recent Federal Trade Commission (FTC) v. Qualcomm decision by Judge Lucy Koh of the Northern District of California, the judge imposed draconian penalties against Qualcomm, which, if carried out, could destroy the company’s licensing business model, particularly its ability to finance R&D for the whole U.S. cellular industry. This decision is such a travesty that a dissenting FTC commissioner felt it necessary to publish an editorial in the Wall Street Journal at the end of May decrying it.
The federal government came to Qualcomm’s rescue once before, when a foreign company (Broadcom) tried to buy it. In the FTC case, Koh’s judicial activism flies in the face of the stated positions of the Department of Defense (DoD), the Department of Justice (DoJ), and the Department of Energy (DoE), all of which understand that this is not just a one-off thing.
These other agencies are asking, what are you thinking, FTC?
The winner of the race to 5G will dominate the industry for at least the next decade, as the technology evolves and new 5G releases come out every 18 months to two years. Thus, an isolated FTC finds itself in a rare dispute with departments in the executive branch that it normally works with quite closely. The DoJ, typically the go-to U.S. government authority on antitrust, disagrees fundamentally with the FTC’s willingness to use antitrust rules to find liability in this case.
When the FTC first brought its case, the agency was joined at the hip to Apple, which, in order to drive a beneficial settlement with Qualcomm, abetted the case and others like it throughout the world. But when Apple settled its lawsuit with Qualcomm in March this year, the FTC’s case continued to roll on under its own momentum. The commission itself is divided on the subject, with two commissioners each on either side of the partisan line and the new chair having recused himself. This state of affairs doesn’t allow the FTC to call off its own dogs.
For now, the case is out of Koh’s hands and in those of the 9th Circuit Court of Appeals. The DoJ, DoD, DoE and several other parties recently filed statements of interest (like friend-of-the-court briefs but without the requirement of court approval) with this court.
We can only hope that the appeals court does its job, which should be to grant a stay and then reverse the absurd stance of the Northern District. Otherwise, the next decade of innovation in telecommunications could end up under the yoke of Chinese hegemony.