WEBVTT - Why President Trump's Move Against Huawei Is Such A Big Deal 0:00:10.920 --> 0:00:15.560 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:15.760 --> 0:00:20.240 I'm Joe Wisenthal. Uh. My co host Tracy Alloway. She's off. 0:00:20.280 --> 0:00:23.960 She couldn't make today's episode. It's kind of an emergency 0:00:24.360 --> 0:00:27.680 at last minute episode though, because we wanted to do 0:00:27.840 --> 0:00:32.080 something very timely with just the right guest. Obviously, the 0:00:32.240 --> 0:00:36.200 trade tensions with China continuing to ratchet up, and it's 0:00:36.240 --> 0:00:40.559 really becoming less and less I would say about the 0:00:40.600 --> 0:00:44.120 trade deficit and some of these classical topics that we 0:00:44.159 --> 0:00:46.960 think of in a trade war, and much more about 0:00:47.040 --> 0:00:50.840 this sort of brewing technology cold war as people are 0:00:50.880 --> 0:00:54.240 putting it, and the moves that the Trump administration has 0:00:54.360 --> 0:00:59.080 taken against some of China's big tech companies. Today, I'm 0:00:59.120 --> 0:01:02.280 going to be speaking on the subject with a previous 0:01:02.320 --> 0:01:05.800 Odd Lots guest. Going to be talking with Dan Wong. 0:01:05.880 --> 0:01:10.039 He's a technology analyst at gav Quel dragon Omics. He's 0:01:10.080 --> 0:01:14.440 also a Bloomberg opinion columnist, which is very cool. You 0:01:14.520 --> 0:01:16.959 might recall we spoke to Dan a while ago about 0:01:16.959 --> 0:01:21.360 the China Initiative, the endeavor on the part of the 0:01:21.440 --> 0:01:26.040 Chinese government to really sort of build its own domestic 0:01:26.560 --> 0:01:29.640 leadership and all these big tech areas. So Dan is 0:01:29.720 --> 0:01:32.960 really the perfect person to discuss these new developments with. 0:01:33.480 --> 0:01:35.919 Wanted to get him on, wanted to get his perspective 0:01:36.080 --> 0:01:40.080 on the latest development. So without further ado, I want 0:01:40.080 --> 0:01:42.880 to bring in Uh Dan Dan Wong, thank you very 0:01:42.920 --> 0:01:48.400 much for joining us. So obviously pretty uh, pretty interesting 0:01:49.080 --> 0:01:51.600 moves we've seen over the last few weeks, a very 0:01:51.680 --> 0:01:56.320 serious ratcheting up in the trade war talks as President 0:01:56.360 --> 0:02:00.360 Trump has moved to uh really uh put the pressure 0:02:00.400 --> 0:02:04.560 on Huawei, major Chinese tech giant. What do you describe 0:02:04.600 --> 0:02:07.200 to us to start? What is Huahwei? What is their 0:02:07.280 --> 0:02:12.239 significant in the global or in the Chinese tech ecosystem? 0:02:12.240 --> 0:02:14.560 Where did they come from? How did they become so important? 0:02:15.080 --> 0:02:18.519 So I think Huawei is the most important technology company 0:02:18.520 --> 0:02:21.560 in China uh, and it has a few major business lines. 0:02:22.000 --> 0:02:24.800 I think the two most important ones are it's smartphone 0:02:24.840 --> 0:02:28.280 business UH and then it's a network equipment business. So 0:02:28.320 --> 0:02:31.640 as a matter of comparison, Huawei sold about as many 0:02:31.720 --> 0:02:36.440 smartphones as Apple did last year, although much lower profits UM. 0:02:36.480 --> 0:02:39.760 But it is a major seller of smartphones around the world, 0:02:40.040 --> 0:02:42.640 not just in China but also in Southeast Asia and 0:02:42.680 --> 0:02:46.640 now increasingly UH in Europe. The other major business line 0:02:46.639 --> 0:02:50.480 it has is network infrastructure equipment. So all of these 0:02:50.480 --> 0:02:54.880 things that make mobile calling possible and for G or 0:02:55.000 --> 0:02:57.920 LTE possible. This a lot of it, at least outside 0:02:57.919 --> 0:03:01.600 the US, is provided by Huawei, And as the world 0:03:01.680 --> 0:03:04.800 is getting ready to transition to the next generation, the 0:03:04.840 --> 0:03:09.280 fifth generation of mobile network technologies or five G, Huawei 0:03:09.520 --> 0:03:13.200 is a pretty major player in that ecosystem. How cutting 0:03:13.320 --> 0:03:15.959 edge are they? I mean, if you look at the 0:03:16.000 --> 0:03:19.359 company and I guess either on both lines, whether it's 0:03:19.360 --> 0:03:23.240 smartphones or networking equipment, are they sort of a best 0:03:23.280 --> 0:03:26.560 of breed player on this stuff? I think the consensus 0:03:26.600 --> 0:03:29.160 is that Huawei is very competent on both the smartphone 0:03:29.200 --> 0:03:32.600 business and then also the network business. So on the smartphones, 0:03:33.040 --> 0:03:36.160 I think people in the US don't really get to 0:03:36.200 --> 0:03:38.800 see this, But a lot of the reason that Apple 0:03:38.840 --> 0:03:41.280 has been doing not so well in China is that 0:03:41.480 --> 0:03:45.000 basically Huawei and a few other players have made pretty 0:03:45.000 --> 0:03:48.920 good phones at quite a bit lower prices than Apple does. 0:03:49.400 --> 0:03:52.160 In fact, Samsung has been almost completely squeezed out of 0:03:52.200 --> 0:03:55.800 the China market because Huawis phones are really good, and 0:03:56.040 --> 0:03:58.920 Huawei is giving a run for Samsung's money basically and 0:03:59.520 --> 0:04:02.240 many more kids in the world. But you know, plausibly, 0:04:02.280 --> 0:04:04.520 Huawei is a little bit behind, are quite a lot 0:04:04.560 --> 0:04:08.240 behind Apple on the smartphone business. On the network equipment business, 0:04:08.440 --> 0:04:12.080 I think it is arguably really eating everything I hear 0:04:12.280 --> 0:04:16.600 is that basically the network equipment business. Uh. Not only 0:04:16.680 --> 0:04:19.359 is it selling as good or cutting edge equipment or 0:04:19.360 --> 0:04:22.080 even better equipment than its competitors, which are mostly Ericson 0:04:22.080 --> 0:04:26.159 and Nokia, it is also often significantly cheaper. Talk to 0:04:26.240 --> 0:04:32.040 us about the action that Trump took. Obviously, the companies 0:04:32.080 --> 0:04:36.200 that supplied technology to Huahwei, including many American companies, are 0:04:36.240 --> 0:04:40.440 now theoretically restricted from doing business with them. So how 0:04:40.560 --> 0:04:45.600 existential is this to Huahwei's business? Uh, this move from 0:04:45.600 --> 0:04:49.920 the Trump administration, I think it is a pretty existential threat. Now, 0:04:49.960 --> 0:04:52.719 what the Trump administration did was about two weeks ago 0:04:52.839 --> 0:04:56.799 it added Huawei to this UH list called the Entity List. 0:04:57.080 --> 0:05:01.239 And what this is effectively as this export blacklist, which 0:05:01.279 --> 0:05:06.039 doesn't allow US companies to export any equipment basically any 0:05:06.040 --> 0:05:10.600 components or any technologies over to Huawei. And I think 0:05:10.640 --> 0:05:13.480 this is a really big deal because Huawei depends very 0:05:13.520 --> 0:05:17.120 significantly on US technology to make a lot of its 0:05:17.160 --> 0:05:20.840 own systems function. So on the smartphone side, it needs 0:05:20.839 --> 0:05:23.680 a lot of different types of chips. On the network 0:05:23.680 --> 0:05:25.760 equipment side, it also needs a lot of chips, and 0:05:25.760 --> 0:05:30.080 then also some specialty laser products. Not only is the 0:05:30.200 --> 0:05:34.440 US are the US chips companies prevented from selling to Huawei. Basically, 0:05:34.480 --> 0:05:37.160 the US is able to cut off Google's Android from 0:05:37.200 --> 0:05:40.280 supplying to Huawei as well. This is another big risk 0:05:40.640 --> 0:05:44.560 this to the company. This is able to Basically I 0:05:44.560 --> 0:05:48.160 think there's a good chance that Huawei's smartphone sales overseas 0:05:48.160 --> 0:05:51.080 outside China could very well collapse this year because it 0:05:51.080 --> 0:05:54.920 doesn't have access to Android. And uh, there's just a 0:05:54.920 --> 0:05:59.480 lot of components that Huawei needs that are almost exclusively 0:05:59.520 --> 0:06:02.120 supplied by the US. There's a lot of these types 0:06:02.160 --> 0:06:03.680 of chips, you know, if you have if you lack 0:06:03.760 --> 0:06:07.320 even a single chip inside inn a system, the entire 0:06:07.400 --> 0:06:09.400 thing may not work. And so I think this is 0:06:09.440 --> 0:06:11.480 a pretty big deal. And not only is the US 0:06:11.560 --> 0:06:15.880 able to stop basically U S companies from supplying to Halweih, 0:06:15.920 --> 0:06:18.760 the US has a little bit of an extra territorial 0:06:18.839 --> 0:06:21.560 reach as well. So the U S Department of Commerce 0:06:21.920 --> 0:06:25.960 defines has this di Minimus threshold standard. If it takes 0:06:25.960 --> 0:06:28.400 a look at any foreign product sold by let's say 0:06:28.440 --> 0:06:32.719 European or Japanese or Korean company, and if over the 0:06:32.760 --> 0:06:35.479 value was generated in the US, then the U S 0:06:35.520 --> 0:06:39.120 Department of Commerce asserts that to be a US product. 0:06:39.480 --> 0:06:42.040 And so in this way, basically it can deny non 0:06:42.160 --> 0:06:45.520 U S firms from selling to the Chinese UH controlled 0:06:45.600 --> 0:06:48.280 entity in this case allway as well. And so from 0:06:48.279 --> 0:06:51.000 news reports we've seen that basically in fine On, a 0:06:51.160 --> 0:06:55.599 German semi conductor firm, arm a UK semi conductor firm, 0:06:55.880 --> 0:06:58.880 and then also Panasonic, a Japanese firm, all have announced 0:06:58.920 --> 0:07:01.160 that they are going to stop us supplying to Haalwei. 0:07:01.920 --> 0:07:04.760 And as soon as this happened, the founder came out 0:07:04.920 --> 0:07:07.120 saying that's basically this may not be too big of 0:07:07.160 --> 0:07:09.480 a deal. We have plenty of spare tires. I really 0:07:09.520 --> 0:07:11.560 don't buy that argument. I think that it is very 0:07:11.600 --> 0:07:14.960 unlikely that while we can still survive basically being cut 0:07:15.000 --> 0:07:19.200 off from almost all of its forts suppliers. So I mean, 0:07:19.280 --> 0:07:22.200 that's exactly right. I mean there had been reports and 0:07:22.240 --> 0:07:26.640 I guess Huawei itself saying that it had a stockpile 0:07:26.840 --> 0:07:30.600 of chips. Maybe it anticipated a potential action like this, 0:07:31.160 --> 0:07:34.880 but ultimately, in your view, it just doesn't have many 0:07:34.920 --> 0:07:38.240 cards to play as long as this action by the 0:07:38.240 --> 0:07:43.640 Trump administration remains in effect. That's right. It's really striking 0:07:43.880 --> 0:07:48.040 just hearing you describe the severity of this, and to 0:07:48.200 --> 0:07:50.640 think that a few months ago we were talking about 0:07:51.240 --> 0:07:54.600 China is going to increase its purchase of US soybeans 0:07:54.680 --> 0:07:57.360 and that was going to help get a deal you 0:07:57.400 --> 0:08:01.920 can just send. This is a very serious escalation. I 0:08:01.960 --> 0:08:04.680 think it is a very serious escalation that basically the 0:08:04.760 --> 0:08:08.360 US has this ability to turn off one of China's 0:08:08.400 --> 0:08:11.800 most important companies period that this is a company that 0:08:12.360 --> 0:08:15.080 is really important domestically in China as one of the 0:08:15.160 --> 0:08:18.480 few firms that really do have does have an international 0:08:18.520 --> 0:08:22.600 presence selling smartphones all over the world outside of the US. 0:08:22.920 --> 0:08:25.920 Then also selling network equipment all over the world, but 0:08:26.000 --> 0:08:28.720 again outside the US, just to illustrate a little bit 0:08:28.760 --> 0:08:32.400 of how important this company is. Basically, you know, if 0:08:32.440 --> 0:08:35.960 you ignore the smartphones and focus on the network equipment business, 0:08:36.240 --> 0:08:40.680 it's become an incredibly consolidated market. So always main competitors 0:08:40.679 --> 0:08:43.120 selling four gen now as soon to be five G 0:08:43.280 --> 0:08:46.760 equipment are ericson in Nokia. Basically a lot of the 0:08:46.840 --> 0:08:50.760 US position has pretty much vanished. These firms that used 0:08:50.800 --> 0:08:55.040 to be major US of phone technology mobile telephony technology 0:08:55.480 --> 0:09:01.120 companies included names like Motorola, Lucent and in Canada based Nortel. 0:09:01.840 --> 0:09:06.000 Basically none of these are going independent concerns anymore, and 0:09:06.200 --> 0:09:09.079 a Huawei Arison and Nokia are really the big players 0:09:09.120 --> 0:09:11.920 left in the game. You know, if you go is 0:09:12.320 --> 0:09:15.120 an incredibly consolidated market, and if the US is able 0:09:15.120 --> 0:09:18.400 to knock out the biggest player in a consolidated market, 0:09:18.400 --> 0:09:21.320 bring the number of players from three to two. Basically 0:09:21.360 --> 0:09:24.840 the prices may not rise by only a few percentage points. 0:09:24.880 --> 0:09:28.559 For service providers let's say like Deutsche Telecom or Vota 0:09:28.600 --> 0:09:32.640 Phone or British Telecom, prices can may well double because 0:09:32.679 --> 0:09:34.760 there's just so much less competition and there's just so 0:09:34.840 --> 0:09:37.840 much more collusion when you have the world being supplied 0:09:37.840 --> 0:09:40.560 by this Nordic duopoly. And so, you know, I think 0:09:40.559 --> 0:09:43.800 this is the actions are of the US are having 0:09:43.920 --> 0:09:47.200 reverberations around the world on not just in the U 0:09:47.240 --> 0:09:50.280 S and China as well. Is there something about the 0:09:50.280 --> 0:09:55.680 telecom equipment industry that has naturally caused it to have 0:09:55.840 --> 0:09:58.280 so many major flame outs. I mean you I forgot 0:09:58.400 --> 0:10:02.480 you know all these names that you mentioned, like Motorola, Lucent, 0:10:02.760 --> 0:10:06.640 nor Tell, all those companies like just sort of I 0:10:06.640 --> 0:10:09.360 don't remember exactly. I think when a Motorola like selled 0:10:09.360 --> 0:10:12.440 a Google or something like that. Uh yeah, all these 0:10:12.440 --> 0:10:16.160 companies sort of like evaporated as shelves of their former selves. 0:10:16.320 --> 0:10:21.120 Why has this business been so brutal and gotten to 0:10:21.160 --> 0:10:27.280 the point where there's just a few a few oleglopolistic players. Arguably, well, arguably, 0:10:27.320 --> 0:10:29.440 I think that is a lot of the story with 0:10:29.559 --> 0:10:33.400 the uh, you know, chech general technology sector and not 0:10:33.520 --> 0:10:35.760 so much talking about the Internet companies here, although I 0:10:35.760 --> 0:10:38.160 know that's a big debate. Basically, if you look at 0:10:38.200 --> 0:10:41.040 something like chips, something really striking to me recently was 0:10:41.120 --> 0:10:45.120 that Apple had to settle very long running litigations with 0:10:45.200 --> 0:10:49.480 Qualcom firm. It's been embroiled with in litigation for a 0:10:49.520 --> 0:10:53.120 really long time, mostly because a firm like Intel couldn't 0:10:53.120 --> 0:10:55.920 step up and be a credible supplier on something called 0:10:56.000 --> 0:10:59.080 moting chips. And so just generally, I think the story 0:10:59.240 --> 0:11:04.160 in this hardware space and technology is consolidation everywhere and uh, 0:11:04.440 --> 0:11:09.120 limited players in basically every segment of hardware technologies. Is 0:11:09.160 --> 0:11:12.240 it a situation where it's just really hard technologically to 0:11:12.360 --> 0:11:14.800 produce this at scale? And so even you know, you 0:11:14.840 --> 0:11:18.120 mentioned a giant like Intel. I think they're still the 0:11:18.120 --> 0:11:22.240 biggest semiconductor company in the world and they're unable to 0:11:22.520 --> 0:11:26.439 deliver these motive chips to Apple at scale. Is it 0:11:26.559 --> 0:11:29.800 just because it's hard stuff to get right and get 0:11:29.840 --> 0:11:32.920 good and doing high quantity? My understanding is that this 0:11:33.000 --> 0:11:35.320 is not one of the most difficult technologies that the 0:11:35.360 --> 0:11:38.240 world can produce. UM. A lot of this is still 0:11:38.280 --> 0:11:41.240 fairly low margin, and that's uh one of the reasons 0:11:41.240 --> 0:11:44.800 why so many firms have accidented the market. So one 0:11:44.800 --> 0:11:48.000 of the things I mentioned it in the intro um. 0:11:48.040 --> 0:11:52.880 But obviously last time you're on the podcast, we're talking 0:11:52.920 --> 0:11:58.000 about the China Initiative and its efforts to become a 0:11:58.080 --> 0:12:00.760 world leader at all these different areas like aerospace and 0:12:00.840 --> 0:12:05.280 semiconductor and medical equipment and robotics, transportation, things like that. 0:12:06.040 --> 0:12:10.440 The fact that the US can, in theory still unilaterally 0:12:10.480 --> 0:12:14.800 deliver a death penalty to a major Chinese player. It 0:12:15.000 --> 0:12:18.760 can't do anything, I would imagine except remind the Chinese 0:12:18.880 --> 0:12:21.679 leadership how important it is to build up their own 0:12:21.760 --> 0:12:25.400 domestic tech sector. I think that's exactly right. And I 0:12:25.440 --> 0:12:28.240 think in an area like semiconductors is where the U 0:12:28.320 --> 0:12:31.360 S power is clearest, that basically a lot of the 0:12:31.360 --> 0:12:34.480 world has given up on semiconductors. A lot of the 0:12:34.480 --> 0:12:37.160 European firms that used to be big have gone away, 0:12:37.640 --> 0:12:40.920 the same ghost for Japan uh and China's trying to 0:12:40.960 --> 0:12:44.520 work really hard to enter this technology space, in part 0:12:44.559 --> 0:12:48.480 because it is just so owned by the US. And 0:12:48.520 --> 0:12:51.480 I think that, um, you know, the Chinese response to 0:12:51.679 --> 0:12:53.439 a lot of these actions really has to be to 0:12:53.520 --> 0:12:56.680 try to double down on its efforts to develop all 0:12:56.679 --> 0:12:59.839 of these different technologies. Not only can it basically not 0:13:00.160 --> 0:13:03.400 count on US supply, a lot of foreign supply may 0:13:03.400 --> 0:13:05.559 not be able to flow to China because of this 0:13:05.720 --> 0:13:08.760 the Minimus threshold. And you know, I think it is 0:13:08.800 --> 0:13:13.120 politically intolerable for the Chinese that the US has this 0:13:13.200 --> 0:13:16.920 at will ability to shut off a major technology company. 0:13:17.040 --> 0:13:19.319 This is not the first time over the last year 0:13:19.400 --> 0:13:21.280 that the US has done this. In fact, the US 0:13:21.360 --> 0:13:23.840 has done this three times over the last twelve months. 0:13:24.559 --> 0:13:26.839 In April last year, the U s A. This is 0:13:26.920 --> 0:13:29.280 z T, which is kind of like a small Quahwei 0:13:29.400 --> 0:13:33.440 with both smartphone presents and then also network equipment presence. 0:13:34.160 --> 0:13:36.440 And also did this to a company called fusansin KLA, 0:13:36.559 --> 0:13:39.360 which is a memory chip maker in Southeast China. And 0:13:39.400 --> 0:13:41.760 now the US is doing this to Huawei, And so 0:13:41.840 --> 0:13:45.200 I think the Chinese leadership really feels that needs to 0:13:45.200 --> 0:13:48.040 do a lot more to promote its own capabilities and 0:13:48.200 --> 0:13:52.880 these trips. So is this always where it was inevitably headed? 0:13:52.960 --> 0:13:57.800 Because when Donald Trump decided to really change the US 0:13:57.920 --> 0:14:02.160 trading polished your with China the start of administration, the 0:14:02.240 --> 0:14:06.480 critique was that, you know, his complaints about the trade 0:14:06.520 --> 0:14:10.240 deficit and how much we import from China were off 0:14:10.280 --> 0:14:14.120 the mark or maybe not clear economic thinking, but that 0:14:14.160 --> 0:14:17.920 there really was some merit to this idea that on 0:14:18.200 --> 0:14:23.000 areas like technology and intellectual privacy, China really did pose 0:14:23.120 --> 0:14:26.040 some sort of threat and it didn't play by the rules, 0:14:26.160 --> 0:14:30.640 arguably according to some people we've spoken with, So these 0:14:30.720 --> 0:14:34.160 moves against the Chinese tech sector, is this sort of 0:14:34.200 --> 0:14:37.880 always what it was really about? I think that's a 0:14:37.920 --> 0:14:40.840 really fair assessment. And basically, if you look at the 0:14:40.880 --> 0:14:44.320 report that launched this trade war UH and referring specifically 0:14:44.360 --> 0:14:47.720 to the US Trade Representatives Section three or one report, 0:14:48.160 --> 0:14:51.160 Basically it lists a lot of these technology issues of 0:14:51.240 --> 0:14:55.000 front and center and core, including basically the term that 0:14:55.040 --> 0:14:58.440 they use force technology transfer UH and it mentions made 0:14:58.480 --> 0:15:01.920 in China. I believe over a hundred times in the 0:15:01.920 --> 0:15:06.160 section three of one report basically that the US feels 0:15:06.280 --> 0:15:09.400 challenged on a lot of these technology areas, that it 0:15:09.480 --> 0:15:13.040 alleges that China doesn't play fair trying to compete against 0:15:13.040 --> 0:15:15.400 the US and a lot of these areas, and so 0:15:15.560 --> 0:15:39.320 it really has to maintain its technological edge over the Chinese. 0:15:43.800 --> 0:15:47.560 Now as of right now when we're recording this UM, 0:15:47.600 --> 0:15:49.840 I guess people are still holding out some hope for 0:15:49.880 --> 0:15:54.200 a deal. If you talk to investors and traders, they're like, oh, 0:15:54.280 --> 0:15:57.760 they'll come to something. There's an upcoming G twenty meeting 0:15:58.040 --> 0:16:01.760 and Trump and she shouldn't paying or might meet. Maybe 0:16:01.800 --> 0:16:04.600 they'll shake hands there and there will be a thought. 0:16:05.160 --> 0:16:08.400 Do you see any possibility of a thought on the 0:16:08.440 --> 0:16:11.320 tensions here still at this point or have we sort 0:16:11.360 --> 0:16:14.960 of hit a point of no return in which the 0:16:15.040 --> 0:16:17.200 book sides are really going to be dug in for 0:16:17.280 --> 0:16:21.640 a while, and the relationship between these two countries is 0:16:21.680 --> 0:16:26.440 sort of permanently and revocably changed. I think it is 0:16:27.520 --> 0:16:31.480 a permanent change in many ways. Now, I think it 0:16:31.560 --> 0:16:33.840 is really difficult to predict whether there will be a deal. 0:16:34.080 --> 0:16:37.080 I think it is at least still plausible that you 0:16:37.120 --> 0:16:40.080 can read a lot of the actions in recent weeks, 0:16:40.240 --> 0:16:42.480 ever since the Trump tweets on the tariffs on the 0:16:42.600 --> 0:16:46.560 five to be basically this negotiating, you know, tactic to 0:16:46.640 --> 0:16:48.840 get the Chinese to concede on a little bit more 0:16:48.960 --> 0:16:51.720 basically at the end of the process um or you know, 0:16:51.800 --> 0:16:54.840 maybe it is the case that both sides are basically 0:16:54.840 --> 0:16:57.800 walking away from a deal. And if you had to 0:16:57.840 --> 0:16:59.840 push me, I would say it's a little bit of 0:16:59.880 --> 0:17:02.360 the ladder. It is um you know, especially with this 0:17:02.520 --> 0:17:04.960 escalation on Huawei, I think it just makes it much 0:17:04.960 --> 0:17:07.679 more difficult for the On the one handed, you know, 0:17:07.960 --> 0:17:10.359 taking down one of their major companies, it's really a 0:17:10.400 --> 0:17:14.520 big deal, and Chinese diplomats are not willing to see 0:17:14.520 --> 0:17:17.520 one of its major companies fail. On the other hand, 0:17:17.880 --> 0:17:19.879 you know, it just makes it much more difficult to 0:17:19.920 --> 0:17:22.080 come to a deal. But one core point that I 0:17:22.080 --> 0:17:24.840 want to make is that regardless of whether there will 0:17:24.880 --> 0:17:26.880 be a trade deal, I think a lot of these 0:17:26.880 --> 0:17:32.040 technology issues are permanently changed. Basically, by that, I mean 0:17:32.119 --> 0:17:34.960 that while the White House was prosecuting this trade war, 0:17:35.400 --> 0:17:37.560 Congress has handed a lot of tools so the rest 0:17:37.560 --> 0:17:40.560 of the bureaucracy to deal with the tech sector, not 0:17:40.640 --> 0:17:43.360 just in China but also in the US by passing 0:17:43.680 --> 0:17:47.479 various laws. Dan Agri go into that further, I hadn't 0:17:47.560 --> 0:17:49.600 seen much or heard much about this. So what are 0:17:49.720 --> 0:17:53.160 the sort of uh, the specific laws that Congress has 0:17:53.240 --> 0:17:57.040 passed to what you're referring. So I think this is 0:17:57.200 --> 0:18:00.679 the shows that the US has a really wide toolbox 0:18:00.760 --> 0:18:03.920 to deal with the Chinese and then also to some extent, 0:18:03.960 --> 0:18:08.280 the American tech sector. One recent legislative change is the 0:18:08.320 --> 0:18:12.399 Foreign Investment Risk Review Modernization Act or FIRMA. So this 0:18:12.480 --> 0:18:15.080 is a bill that Congress passed last year that significantly 0:18:15.119 --> 0:18:19.399 strengthens this fairly obscure government body called CIFIUS c f 0:18:19.480 --> 0:18:21.720 i U S, which is the Committee for Foreign Investment 0:18:21.960 --> 0:18:27.159 into the United States. Previously, SIFIAS was scrutinizing acquisitions of 0:18:27.440 --> 0:18:31.720 US companies by foreigners for a national security review. And 0:18:32.520 --> 0:18:35.840 you know, if this uh interagency body, which is staffed 0:18:35.880 --> 0:18:38.919 mostly by Treasury but also has representatives from Department of 0:18:38.960 --> 0:18:41.520 Defense and Department of Commerce and a few other places, 0:18:41.680 --> 0:18:45.760 decides that a foreigner cannot own a US asset, then 0:18:45.800 --> 0:18:48.879 it has the ability to uh, you know, block that acquisition. 0:18:49.480 --> 0:18:52.720 And what firma the legislative act passed in August did 0:18:53.040 --> 0:18:57.040 was expand the SIFEST power to scrutinize beyond acquisitions to 0:18:57.359 --> 0:19:01.360 into non controlling investments. So basically, a deal now that 0:19:01.800 --> 0:19:06.359 involves a foreigner that is offers a foreigner any information 0:19:06.440 --> 0:19:10.960 rights or decision making rights has the chance to be rejected. 0:19:11.240 --> 0:19:16.120 And this is applies mostly to technology companies, even unlisted ones. 0:19:16.680 --> 0:19:19.280 So I think the interesting news from last month was 0:19:19.320 --> 0:19:23.680 that siphias forced the divestment by a Chinese company of Grinder, 0:19:24.000 --> 0:19:26.080 which is, uh, you know, I'm not sure if everybody 0:19:26.080 --> 0:19:28.840 on Bloomberg knows this, but it is a gay dating app. 0:19:29.080 --> 0:19:31.359 This was a gay dating app that had been acquired 0:19:31.440 --> 0:19:35.439 by a Chinese firm. The sifia's body has decided that 0:19:35.520 --> 0:19:38.000 this is a national security risk for the Chinese to 0:19:38.040 --> 0:19:40.840 own our gay dating apps and therefore must be divested. 0:19:41.160 --> 0:19:44.520 And that's because of the data and the information that 0:19:44.680 --> 0:19:48.480 could be gleaned from that app presumably, but Siphias is 0:19:48.560 --> 0:19:52.159 not very often open about publishing these opinions. But I 0:19:52.160 --> 0:19:55.320 think that is the right idea. What are there Are 0:19:55.359 --> 0:19:58.240 there any other tools that the US has available to 0:19:58.320 --> 0:20:02.440 you mentioned Sifia's I've usually we talked about export controls 0:20:02.520 --> 0:20:05.439 in the beginning. Are there any other tools in the 0:20:05.480 --> 0:20:09.879 administration's toolbox at this point to further apply pressure on 0:20:10.480 --> 0:20:14.600 Chinese investors or Chinese tech or Chinese companies. Another tool 0:20:14.840 --> 0:20:18.439 tool in the toolbox is um criminal prosecutions from the 0:20:18.480 --> 0:20:22.000 Department of Justice, and there is a formal named initiative here. 0:20:22.160 --> 0:20:25.840 Basically it is called the China Initiative. Right before Jeff Sessions, 0:20:25.920 --> 0:20:29.120 the previous Attorney General, departed from his post, he announced 0:20:29.160 --> 0:20:32.400 this China Initiative, which is this political instruction on the 0:20:32.440 --> 0:20:35.120 rest of the bureaucracy to scrutinized Chinese actions a lot 0:20:35.119 --> 0:20:38.560 more closely. It includes a lot of things, but mostly 0:20:39.000 --> 0:20:43.200 ideas like trade secret misappropriation. If a Chinese person or 0:20:43.240 --> 0:20:45.160 firm has done that, then the US ought to really 0:20:45.160 --> 0:20:48.200 bring it to prosecution. One interesting thing to note about 0:20:48.200 --> 0:20:51.080 the China initiative is that it designates five U S 0:20:51.080 --> 0:20:53.760 attorneys as part of a working group to carry this out. 0:20:54.160 --> 0:20:56.080 One of the five US attorneys is the U S 0:20:56.119 --> 0:20:58.359 Attorney for the Eastern District of New York, who is 0:20:58.400 --> 0:21:01.240 the person who issued the arrest warrant for Moment Show, 0:21:01.320 --> 0:21:04.080 who is the CFO of Allway. This is a very 0:21:04.160 --> 0:21:08.840 novel sort of prosecution, basically nabbing the CFO of a 0:21:08.840 --> 0:21:11.480 company alleged you to have broken sanctions and then also 0:21:11.520 --> 0:21:15.199 committed financial fraud while she wasn't transit in Canada. And 0:21:15.240 --> 0:21:17.920 so this is creating basically a political issue as well. 0:21:18.680 --> 0:21:21.080 But basically you can see how these types of fairly 0:21:21.119 --> 0:21:25.840 novel prosecutions are now permissible in this new political environment. 0:21:26.040 --> 0:21:29.560 After you know, something like the China Initiative has been announced, 0:21:30.200 --> 0:21:32.280 we just have a few minutes left, so let's talk 0:21:32.320 --> 0:21:36.000 about what we should be watching for next. So from 0:21:36.119 --> 0:21:41.320 China's perspective, obviously the moves against Huawei will encourage them to, 0:21:41.720 --> 0:21:44.800 you know, double down on building their domestic tech sector. 0:21:44.840 --> 0:21:47.520 But you know that's an overnight thing that's gonna it's 0:21:47.560 --> 0:21:50.640 a long term project. You can't just snap your fingers 0:21:50.640 --> 0:21:54.240 and create domestic replacements for chip suppliers. So what else 0:21:54.320 --> 0:21:58.600 might we see from the Chinese in your view, to 0:21:58.760 --> 0:22:01.040 address the current tent and both in terms of their 0:22:01.040 --> 0:22:05.320 own domestic needs and also from a retaliatory perspective. So 0:22:05.359 --> 0:22:11.280 we believe that the Chinese retaliatory toolboxes quite weak. Um, Basically, 0:22:11.400 --> 0:22:14.320 you know, there's some news now that they may impose 0:22:14.760 --> 0:22:17.440 rare earth bands. I think that is a temporary sort 0:22:17.440 --> 0:22:20.159 of thing that will cause some pain. Our view is 0:22:20.200 --> 0:22:24.000 that it will not harass the U S companies too much, 0:22:24.359 --> 0:22:28.199 mostly because the Chinese companies are not very entwined in 0:22:28.359 --> 0:22:31.520 the US, but US companies are very entwined in China. 0:22:31.680 --> 0:22:34.480 So Apple employees something like, you know, a few hundred 0:22:34.480 --> 0:22:39.080 thousand young Chinese men uh making iPhones through Fox Con 0:22:39.840 --> 0:22:42.440 and basically the Chinese government would like to see these 0:22:42.480 --> 0:22:45.480 people continue to be employed. A similar story goes for 0:22:45.720 --> 0:22:49.000 major US firms like GM or even Starbucks and McDonald's. 0:22:49.000 --> 0:22:52.000 It keeps a lot of people employed. So the Chinese 0:22:52.320 --> 0:22:55.840 you know, harassment tool basically also hurts itself quite a lot. 0:22:56.600 --> 0:22:59.760 We really don't buy the idea that the Chinese will 0:22:59.760 --> 0:23:03.800 sell US treasuries. That is not unnecessarily a very effective option. 0:23:04.359 --> 0:23:07.800 But basically what they can do is to permit the 0:23:07.920 --> 0:23:11.800 currency to depreciate, which is mostly a market driven process 0:23:11.880 --> 0:23:14.679 that you know, if the U S imposes greater tariffs 0:23:14.760 --> 0:23:17.159 than the currency should weaken, and the People's Bank of 0:23:17.240 --> 0:23:19.080 China is not going to get in the way, uh 0:23:19.160 --> 0:23:23.840 necessarily unless it is quite a steep fall from basically 0:23:24.000 --> 0:23:26.960 allowing the currency to depreciate a little bit. Further, real 0:23:27.040 --> 0:23:30.320 quickly on the rare Earth's questions, So it's literally just 0:23:30.600 --> 0:23:33.040 as of this morning when we're recording it, and this is, 0:23:33.080 --> 0:23:35.439 by the way, recording it on the twenty nine. There's 0:23:35.480 --> 0:23:38.320 a lot of rare earth talk today because of something 0:23:38.320 --> 0:23:41.520 that was published in Peopil's Daily. Why is that people 0:23:41.600 --> 0:23:43.960 hear that and I see rare earths and apparently they're 0:23:43.960 --> 0:23:46.600 not even that rare, but they know that they're important 0:23:46.640 --> 0:23:49.960 for all kinds of advanced technologies and that currently about 0:23:49.960 --> 0:23:52.960 eighty percent of them come from China. Why is that 0:23:53.240 --> 0:23:56.480 threat not really as big of a deal as maybe 0:23:56.520 --> 0:24:00.199