Huawei, ZTE Brace For EU Winter
I’ve managed to go all of this week without writing on the latest looming trade war between China and Europe over telecoms equipment, but it really would be remiss of me not to mention this intensifying dispute at all. I’ll rehash all the details shortly and also discuss the potential consequences; but before I do, I want to start off with a look at the less obvious element of who is driving this latest conflict.Put simply, I’m not sure who exactly is driving this latest confrontation, which saw the European Union formally warn China this week that it is opening an investigation into unfair support from Beijing for Chinese telecoms equipment makers. (English article) The investigation is primarily targeted at the Chinese telecoms equipment duo of Huawei and ZTE (HKEx: 763; Shenzhen: 000063), both of which have made huge strides onto the global stage over the last 5 years. Huawei in particular has had strong success in most of the EU’s wealthiest markets, including Britain and the Netherlands.
Huawei’s and ZTE’s gains have come almost exclusively at the expense of European rivals, led by Sweden’s Ericsson (Stockholm: ERICb), France’s Alcatel Lucent (Paris: ALUA) and Finnish-German joint venture Nokia Siemens Networks. Thus some might conclude that these European companies are the driving force behind this EU probe, since those firms are losing big business to Chinese rivals that now control about a quarter of the European market.
But the European companies say they strongly oppose this investigation, and I personally believe they really do. The main reason is simple: these companies fear that any limitations on Huawei and ZTE in Europe would result in retaliatory moves by Beijing, just as China gets set to award tens of billions of dollars in new contracts to build 4G wireless networks. Beijing immediately expressed its strong opposition to the EU probe, and has even threatened its own retaliatory action. (English article)
So this brings me back to my original questions, namely who exactly is driving this latest trade war. I suspect the real people driving the EU campaign are local politicians who are tired of seeing Beijing pump billions of dollars in government support to “focus” industries that China has targeted for development.
That support often does give the Chinese firms an unfair advantage, and in this case undermines an important European sector. We’ve seen similar developments in recent weeks in the equally important solar panel sector, with the EU also carrying on an investigation into unfair support by Beijing that has pushed most western panel makers to the brink of bankruptcy. (previous post)
We got a rare glimpse into the European mindset earlier this year, when EU Trade Commissioner Karel De Gucht took the unusual step of openly asking Huawei to raise its prices in the EU by 29 percent and demanding that European firms get at least 30 percent of the Chinese telecoms equipment market. (previous post) That would seem to indicate that European government officials are increasingly worried about the growing difficulties being faced by their homegrown players, especially names like Alcatel Lucent that is losing big money.
China has taken the step of trying to negotiate a resolution to this latest crisis, but followed its usual pattern of waiting until the issue reached crisis levels before offering such talks. Many of the issues at the heart of this and similar disputes are so deeply ingrained in the Chinese system that I’m not very optimistic the 2 sides will be able to reach any resolution on this issue, which in the end will cause everyone to suffer.
Bottom line: The latest telecoms equipment dispute between Beijing and Europe is most likely being driven by EU politicians, and is unlikely to get resolved without trade war.
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