Information Technology Is Hard To Contain: Just Look At The Huawei Case

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Includes: INTC, MU, ON, QCOM
by: John M. Mason
Summary

US companies have been banned from exporting their products to Chinese technology giant Huawei.

The effort is aimed at stopping Huawei, and China, from stealing intellectual property from the United States in order to thwart the Chinese from becoming the top technology country.

This effort is already having problems as major companies find loopholes or other means to get around the restrictions because the incentives are sufficiently high.

Historically, the only way a country can stop this type of behavior from happening is to be overly restrictive, but this, in the end, only hurts the country that is trying to protect itself.

Recently… yesterday… I wrote a post on why the United States must not try to isolate itself from what is going on in the world of information technology.

There are many reasons why a country, like the United States, might want to try and set up barriers so as to avoid technology theft or technology transfer, especially from a competitor like China.

If the barriers set up are successful, then the country that originates the restraints may end up on the lonely end of the spectrum.

First, other countries are not likely to stop dealing with each other. And, they are not likely to stop dealing with a leader like China. So, the country putting up the barrier sees others continuing to deal with those that seem to abuse their position in terms of technology interaction. The US cannot stop this.

Second, these countries are likely to stop dealing with organizations from the country that is putting up the barriers, because they do not want to be penalized for dealing with someone like China. That is, the US could penalize another country for dealing with China, and rather than face the US acting in this way, they will just stop dealing with the United States.

However, the basic problem, as I wrote in the earlier article, is that the growth and spread of information really cannot be contained. If there is a reason for information to spread, if the incentives are large enough, organizations will try and find a way around the barriers.

A prime example of this in the current environment is that of the Chinese tech giant Huawei Technologies Co., which was blacklisted by the Trump administration to prevent exports entering the US.

Huawei had been a big buyer of American technology. In 2018, the company spent $11 billion in the United States.

But, in May 2019, the US Commerce Department put Huawei on its blacklist, requiring companies that supplied Huawei with equipment sourced in the United States to obtain licenses.

So, American companies had to stop shipments to Huawei. And, many firms stopped dealing with the Chinese company. This included companies like Alphabet Inc.'s Google. Furthermore, some companies from the United Kingdom also stopped dealing with Huawei as well.

There is a gap, however. As reported by Dan Strumpf, Asa Fitch, and Yoko Kubota in the Wall Street Journal,

"The blacklisting means that exports from the US to Huawei of any type of equipment or technology are prohibited. But the regulations don't prohibit shipments to Huawei of components made in foreign countries, as long as they don't contain more than 25 percent of US-originated material that would be otherwise subject to US export controls."

Furthermore,

"Companies also need to decide whether they can classify products as foreign-made, potentially exempting them from Huawei restrictions. Regulations don't say precisely what criteria need to be met to qualify as being manufactured overseas…."

The bottom line: every company is in a different situation. This depends upon the specific products and supply chains of each company.

Therefore, each company must evaluate what it needs to do and remain in compliance.

Micron Technology, Inc., (NASDAQ:MU) for example, after stopping all shipments, began shipping some after they examined all they did and decided that some of their exports satisfied the requirements of the order.

Micron CEO Sanjay Mehrotra stated, however,

"that uncertainty surrounding the business with Huawei hadn't abated, and it was unclear how many products the company would be able to ship to Huawei and for how long."

The point is that Micron is shipping for the time being.

For that matter, so is Qualcomm Inc. (NASDAQ:QCOM) and Intel Corp. (NASDAQ:INTC) have resumed shipping while other companies like ON Semiconductor Corp. (NASDAQ:ON) are "examining ways" that would let them get back to shipping.

In this day and age, all openings are sought. Nothing goes unexamined. So, one can expect that many other firms are doing the same thing.

This is the thing about information technology in this day and age. The knowledge and knowhow that is captured in this information age is valuable - very valuable - and organizations are sophisticated enough to look at a situation from every angle.

This is why we can say confidently that information grows and spreads and those that try to put a halt to these movements are facing substantial difficulties. People will try and get around the barriers erected, and if that doesn't work, they will move elsewhere, leaving behind the person or organization or country that tries to constrain this growth and flow.

There is only one way, in my mind, to compete in such a world. Capital, especially human capital, must be supported to make a country the best, or, at least, closely competitive. If a country is not willing to make such a commitment, then they must be willing to take a lesser seat in the room.

But to promote and support change like this, a country must be willing to let go of a good portion of the past. One cannot be aggressively forward-looking while, at the same time, wanting to hang on to what is being replaced. This is a hard lesson, but the world is changing, and it is changing more rapidly with each passing decade.

The reality of the situation is that you work with the change, there really is no good alternative.

Investors should look for companies that innovate, that keep on innovating and don't complain about others copying them. These companies are the leaders and work very hard to maintain that edge. They know that they will not get a break from this and so put their heads down and keep ahead of the competition.

I want to be associated with companies that don't complain and just go out and surpass others. I don't want to be associated with the complainers!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.