Business leaders are expressing frustration and uncertainty about the US-China trade war

Business leaders are expressing frustration and uncertainty about the US-China trade war

Mikhail Svetlov/Getty Images

  • Executives at S&P 500 companies sounded off on the US-China trade war during their first-quarter conference calls.
  • Goldman Sachs equity strategists analyzed a selection of executive commentary across S&P 500 earnings calls and found trade-related uncertainty to be a major theme plaguing business.
  • Visit Markets Insider’s homepage for more stories.

If there’s an elephant in the room that US multinational corporations are grappling with, it’s the ongoing trade war between the two largest economies.

Executives at S&P 500 companies addressed how the US-China trade dispute influenced their companies’ first-quarter earnings results, detailing a significant degree of uncertainty and the extent of their exposure.

It’s one of the three major themes highlighted by Goldman Sachs strategists in a quarterly report released this week analyzing excerpts from 40 first-quarter conference calls.

Executives said the uncertainty over trade made it more difficult to navigate their relationship with China but did not have significant near-term ramifications.

“The decision by President Trump to raise tariffs surprised both managements and investors who had believed the trade friction was moving towards a resolution,” the strategists, led by David Kostin, wrote in a report to clients out Monday.

Downward pressure on profit margins remains a risk for many companies, the strategists said, while some corporations were already preparing to shift their supply chains away from China to minimize the effect.

“We’ve been very, very highly focused not only at fixing long-term problems by diversifying away from China our supply, but also by creating, through our procurement organization and supply chain, a number of partnerships which are almost standby partnerships, ready to jump in as soon as we have issues,” Pierre Brondeau, the chairman and CEO the chemical manufacturer FMC, said on his company’s earnings call earlier this month.

It should be noted that the comments listed below were made before the most recent escalation in the trade war, which rocked global markets over the past week. China on Monday hiked tariffs on $60 billion worth of US goods, sending markets plunging.

That followed President Donald Trump’s surprise announcement on Friday that the US would raise tariffs on $200 billion worth of Chinese imports to 25%. The announcement took investors by surprise after Trump earlier this month said Beijing and Washington’s trade talks were progressing.

Below is a selection of what companies said about the trade war’s influence on business:





Electronic Arts

Lucy Nicholson/Reuters

Ticker: EA

While the company hadn’t “heard anything or seen anything that would imply pressure,” an executive said on the earnings call earlier this month that the dispute was a source of uncertainty for the business.

“In terms of China, trade policy is a daily question in our mind when we see what tweets come out each morning, so it’s hard for us to gauge,” Blake Jorgensen, the chief operating officer and chief financial officer at Electronic Arts, said.





United Parcel Service

Rachel Premack/Business Insider

Ticker: UPS

UPS CEO and chairman David Abney said the US-China trade uncertainty has prompted “softer” industry forecasts throughout the first quarter.

“We certainly encourage leaders of the two countries to find solutions that support increased two-way trade, but also by ensuring many US companies have access to export to China,” he said.

Some UPS customers had adjusted their own supply chains to adapt to “changing trade dynamics,” he added.





Microchip Technology

Duke Health

Ticker: MCHP

“I think having seen the yo-yo sentiment on the trade talks, I would rather wait for the talks to conclude than analyze what that finality is, whether it ends up at 10% duty or something higher than that or goes all the way to 0%,” Microchip Technology CEO and chairman Stephen Sanghi said earlier this month.

Sanghi said he wanted to wait to make an informed opinion about the trade war’s effect on the business by speaking with salespeople “rather than just throw something out.”





Church & Dwight

Flickr/katzenfinch

Ticker: CHD

“The other thing that’s hurting the business is the tariff war,” Matthew Farrell, the Church & Dwight president and CEO, said on the company’s first-quarter earnings call earlier this month.

He pointed to China being the No. 1 importer of whey protein from the US and that lower demand has in turn depressed milk prices.

“But long term, we still feel good about the business because we are effectively making the move diversifying away from dairy,” he said.

Farrell made a similar comment on Church & Dwight’s quarterly earnings call in November.





Fortune Brands Home & Security

Getty/Oli Scarff

Ticker: FBHS

All of the Fortune Brands businesses are “attacking the tariff situation” through a combination of cost and pricing, CFO Patrick Hallinan said on the company’s first-quarter earnings call in April.

“I would say, in the case of plumbing, more specifically, it’s more cost takeout in areas where we could accelerate it, pricing and some cost sharing with vendors more than getting out of China,” he said.

That’s been more difficult to do within its plumbing category than it has been within other areas, such as cabinets, where its wood-product business is already departing China.





International Paper

AP Images

Ticker: IP

“I think we’re learning every time there’s a disruption with China how much of a role it plays in the global economy,” International Paper chairman and CEO Mark Sutton said on the company’s first-quarter earnings call in April.

While International Paper has customers in 150 countries, Sutton said many of the company’s US-based packaging customers have faced uncertainty because they export a portion of their goods to China.

“It’s not a big part of their business, but it’s a meaningful part,” he said. “And it’s disruptive to some extent due to tariffs and other things.”





Aptiv PLC

Aptiv.com

Ticker: APTV

“We are certainly dealing with some of the FX and tariffs,” said Joseph Massaro, the chief financial officer of Aptiv, a Dublin-based global auto-parts company that’s partnered with Lyft.

“We don’t give up on those. They’re hard to deal with in a particular quarter, over particular couple of quarters, depending on how significant the movement is,” he said, adding Aptiv would focus on cost structure to “work to offset those.”

More broadly, the company is facing a decline in vehicle production in China, CEO Kevin Clark said.





Leggett & Platt

https://www.leggett.com/

Ticker: LEG

“A lot of uncertainty” related to the trade dispute has negatively affected consumer confidence through the back half of last year and into the first half of 2019, J. Mitchell Dolloff, Leggett & Platt’s chief operating officer, said on the company’s first-quarter earnings call in April.

“Certainly retaliatory tariffs in China have reduced demand for inputs there,” Dolloff said, adding that steel and aluminum tariffs have raised transaction prices and slowed sales in the US. “Those are really coming through lower incentives that the consumer is having to absorb.”





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China’s tech transfer problem is growing, EU business group says

China’s tech transfer problem is growing, EU business group says

FILE PHOTO: An attendant walks past EU and China flags ahead of the EU-China High-level Economic Dialogue at Diaoyutai State Guesthouse in Beijing, China June 25, 2018. REUTERS/Jason Lee/File photo

By Michael Martina

BEIJING (Reuters) – Cases of European firms forced to transfer technology in China are increasing despite Beijing saying the problem does not exist, a European business lobby said, adding that its outlook on the country’s regulatory environment is “bleak”.

China’s trading partners have long complained that their companies are often compelled to hand over prized technology in exchange for access to the world’s second-largest economy.

Demands by the United States that China address the problem are central to the two countries’ ongoing trade war, which has seen both sides pile tariffs on billions of dollars of each other’s goods.

The European Union Chamber of Commerce in China said on Monday that results from its annual survey showed 20% of members reported being compelled to transfer technology for market access, up from 10% two years ago.

Nearly a quarter of those who reported such transfers said the practice was currently ongoing, while another 39% said the transfers had occurred less than two years ago.

“Unfortunately, our members have reported that compelled technology transfers not only persist, but that they happen at double the rate of two years ago,” European Chamber Vice President Charlotte Roule said at a news briefing on the survey.

“It might be due to a number of reasons… Either way, it is unacceptable that this practice continues in a market as mature and innovative as China,” Roule said.

In certain “cutting edge” industries the incidence of reported transfers was higher, such as 30% in chemicals and petroleum, 28% in medical devices, and 27% in pharmaceuticals, she added.

China’s top Communist Party newspaper, the People’s Daily, said on Saturday that Washington’s complaints on the issue were “fabricated from thin air”.

Chinese Foreign Ministry spokesman Lu Kang told a daily news briefing that the government did not have any policy forcing foreign enterprises to give up technology, and that if any company came forward with facts proving otherwise China would be able to “resolve” it in a cooperative manner.

“But we very much oppose fabrications under any situation in which a factual basis cannot be provided,” Lu said.

Nonetheless, companies have long feared retribution for speaking up about abuses by government administrators or state-backed local partners, particularly without true recourse in China’s Communist Party-controlled courts.

Amid the escalating U.S.-China trade war, Beijing has put pressure on the EU to stand with it against U.S. President Donald Trump’s trade policies, though the world’s largest trade bloc has largely rebuffed those efforts.

The EU has also become increasingly frustrated by what it sees as the slow pace of economic opening in China, even after years of granting China almost unfettered access to EU markets for trade and investment. However, European officials say publicly that they do not support the use of tariffs as a solution.

Trump earlier this month raised tariffs on $200 billion in Chinese imports to 25 percent from 10 percent, and has said the duties are causing companies to move production out of China to Vietnam and other countries in Asia.

The majority of European firms in the chamber’s survey said that their business strategies were not changed by the trade war, though it was completed by 585 respondents in January and February, well before the United States’ latest tariff increase.

At the time, 6% of respondents said they were moving or had moved production out of China as a result of the tariffs, and 4% said they were considering or had already decreased investment in China. Forty-nine percent of the respondents affected by U.S. tariffs said their companies had covered the cost themselves and kept prices the same.

The chamber added that members had a “bleak outlook” on China’s regulatory environment, with 72% of members saying they expected obstacles to increase or stay the same in the coming five years, even as the Chinese government has vowed continued reform and opening.

(Additional reporting by Ben Blanchard; Editing by Jacqueline Wong)

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Trump’s Trade War Escalation Will Exact Economic Pain, Adviser Says

Trump’s Trade War Escalation Will Exact Economic Pain, Adviser Says

Image

President Trump’s confidence in the strength of the American economy is fueling his decision to escalate his trade fight with China.CreditCreditTom Brenner for The New York Times

WASHINGTON — President Trump’s chief economic adviser said on Sunday that American consumers would bear some pain from the escalating trade war with China, contradicting Mr. Trump’s claim that his tariffs are a multibillion-dollar, mostly one-way payment by China to the American Treasury.

The comments from Larry Kudlow, the director of the National Economic Council, came after the 11th round of trade negotiations broke off without a deal, prompting Mr. Trump to raise tariffs on $200 billion worth of Chinese products and begin a process to impose levies on nearly every product China exports to the United States.

“In fact, both sides will pay,” Mr. Kudlow said on “Fox News Sunday.” “Both sides will suffer on this.”

Mr. Kudlow’s acknowledgment of economic pain, while widely shared by economists, contradicted the president’s view that trade wars are easy to win and that the burden falls disproportionately on America’s trading partners. Mr. Trump again asserted on Monday that there was “no reason” that American consumers would pay the tariffs.

Both Mr. Kudlow and the president say that a protracted trade war will ultimately be in the United States’ financial interest. Mr. Kudlow said that any pain would be worth the price if it forced China to treat American companies more fairly.

“You’ve got to do what you got to do,” Mr. Kudlow said. “We have had unfair trading practices all these years and so in my judgment, the economic consequences are so small that the possible improvement in trade and exports and open markets for the United States, this is worthwhile doing.”

Financial markets reflected the potential for pain. Asian and European stocks were mostly lower early on Monday, and futures markets suggested Wall Street would open down, too.

Negotiations between the countries broke down last week after administration officials accused the Chinese of backtracking on several key provisions of a proposed deal, including agreeing to codify changes in Chinese law. Administration officials insist the talks have been constructive, and say they will continue; Mr. Kudlow said that could possibly include a meeting next month between Mr. Trump and President Xi Jinping of China at the Group of 20 summit meeting in Osaka, Japan. But Mr. Trump has muddied that message with tweets suggesting he would be happy to leave tariffs in place indefinitely.

Mr. Trump’s confidence in the strength of the American economy is fueling his decision to escalate the trade fight. But it is an economic gamble, one that could inflict lasting damage depending on how far Mr. Trump is willing to take his battle and what it produces in the end.

In a tweet on Sunday, Mr. Trump said the United States was “right where we want to be with China,” adding that the United States “will be taking in Tens of Billions of Dollars in Tariffs from China.”

Economists differ on how much the trade war will crimp economic growth, but most agree that the cost of tariffs is passed on to businesses or consumers in the form of higher prices on everything, including lighting fixtures and art supplies. Among the items covered by the administration’s latest increase in tariffs to 25 percent: computers, toilet paper, dog collars, Christmas tree lights and mattress supports.

The new tariff will not knock the American economy into recession, forecasters say, but it will hurt economic growth — and could do so drastically — if Mr. Trump follows through with his plan to place the tariff on all imports from China.

Image

The Everwin Precision Technology factory in Guangdong Province, China. The company produces casings for phones, tablets and laptop computers for Apple, Samsung and Huawei.CreditAleksandar Plavevski/EPA, via Shutterstock

The United States imported $540 billion worth of goods from China in 2018, according to government statistics.

“Trump is dragging a dangerous misconception into a critical moment in his standoff with the Chinese,” Chad Bown, an expert on trade at the Peterson Institute for International Economics, said last week. “And American businesses and consumers stand to pay the price.”

Tariffs enacted last year reduced the inflation-adjusted income of American consumers by $4.4 billion each month by November, according to one study. That loss, which arose both from the tariff and from more expensive or foregone imports, breaks out to about $419 per household over a year. The latest round of increases will push the per-household cost above $800, said David Weinstein, a Columbia University economist and a co-author on the research.

Mr. Trump and his advisers insist his approach will ultimately pay off for the American economy — either by prodding China to open its markets and treat American firms more fairly, or by encouraging companies to shift manufacturing to the United States to avoid tariffs.

But the decision to prolong the trade war could upend economic projections that showed robust hiring, growth and investment this year, in part because of fading concerns about a protracted trade fight. And it could defy steady predictions by administration economists that Mr. Trump’s trade policy will help increase growth in 2019 to 3.2 percent — well above what most other forecasters expect.

“There is absolutely no question that these tariffs, if imposed and sustained, increase the probability of a recession,” Rob Martin, a former Fed section chief who is now an executive director at UBS, said of a potential escalation. “It makes you more vulnerable.”

Mr. Martin and his colleagues estimate that Mr. Trump’s latest increase could shave 0.25 to 0.35 percentage points off gross domestic product over six months. If the remainder of China’s products get hit with a 25 percent tariff, it could shave up to another full percentage point from G.D.P.

“If we move into that next tranche of tariffs, we’re in 100 percent uncharted territory,” Mr. Martin said. The products in that category are about two-thirds consumer goods and for many — which could include toys, bicycles and iPhones — it could be hard to find quick substitutes.

A prolonged trade war could inflict damage on China’s economy. Economic growth in China slowed in the second half of last year, in part because tariffs hurt business confidence. Since then, the Chinese government has poured billions of dollars into the financial system and pressed state-run banks into service extending credit.

Officials said last month that the economy grew 6.4 percent in the first quarter of the year, matching the pace from the previous quarter.

But Mr. Trump is clearly banking on a protracted fight to shift the economic calculus, warning China in a tweet that “a deal will become far worse for them if it has to be negotiated in my second term.”

While Mr. Trump is confident in his approach, his decision to add new trade barriers with China — in the form of higher tariffs — has confounded analysts and some business groups that have otherwise praised his handling of the economy.

Analysts at the Tax Foundation, a Washington think tank that forecast a large increase to economic growth from the tax cuts Mr. Trump signed in 2017, now say that the tariffs the president has put in place or threatened — and the effects of Chinese retaliatory tariffs on American exporters — would more than cancel out all the economic benefits of the tax law.

“The tariffs, if allowed to continue, will mute the economic benefits of tax reform,” said Nicole M. Kaeding, a Tax Foundation economist — particularly for low- and middle-income consumers who will be stuck paying higher prices. “Economists argue about many things, but the impact of tariffs on the economy is not debated. They are harmful.”

Image

“Both sides will pay,” Larry Kudlow, the director of the National Economic Council, said on “Fox News Sunday.” “Both sides will suffer on this.”CreditSarah Silbiger/The New York Times

Many of those groups say growth would be even stronger this year if Mr. Trump had reached a deal with China and averted a prolonged government shutdown. They blame Mr. Trump’s fundamental misunderstanding of tariffs — which he believes are lifting the economy — for driving the country into a danger zone.

Analysts at Goldman Sachs said in a research note that further escalation of the trade war could reduce growth by nearly half a percentage point this year, and that “if trade tensions sparked a major sell-off in the equity market, the growth impact could worsen considerably.”

Stocks swooned last week but had begun to rebound by Friday afternoon. Financial conditions have tightened, but remain well below levels seen late last year.

“So far, U.S. markets don’t express a lot of concern — I think everybody expects a deal,” said Roberto Perli, an economist at Cornerstone Macro. “The risk is that time passes, nothing happens and the market realizes — maybe we were too optimistic.”

Mr. Trump has expressed satisfaction with “big beautiful tariffs” that he said were producing “billions of dollars” for America.

“I am very happy with over $100 Billion a year in Tariffs filling U.S. coffers…great for U.S., not good for China,” Mr. Trump said on Twitter last week.

Of the $419-per-household cost of last year’s tariffs, most of the hit — $286 — came from the levy itself. Because the American government collected that money, it was able to redistribute it, including through a $12 billion program of farm subsidies. But that could change as the trade war persists.

“It’s pretty likely that the tariff revenue is going to fall,” Mr. Weinstein of Columbia University said, as firms find themselves unable to shoulder the higher rates and stop importing from China. “We’re going to see a lot of supply chains shifting around.”

That means Chinese companies will also lose out as businesses buy more American-made goods or continue turning to other low-cost producers outside China, like Vietnam and Malaysia.

Mr. Trump’s shift on tariffs appears to have surprised Fed officials, who had been expecting the trade dispute to calm down. This month, the Fed chairman, Jerome H. Powell, told reporters at a news conference that risks to growth from trade policy had “moderated somewhat,” citing “reports of progress in the trade talks between the United States and China.”

It is unlikely that Mr. Powell and his colleagues will react quickly to the higher tariffs and renewed trade war. The Fed will most likely judge any inflation that comes from trade policy as temporary, and may want to see economic growth weakening before acting on it through a rate cut or other measures.

“The Fed is unlikely to act immediately, in part because it is unclear whether this drama will end in a deal, an all-out trade war or something in between,” said Krishna Guha, head of the Global Policy and Central Bank Strategy team at advisory firm Evercore ISI.

If the central bank does react, it is more likely that it would cut rates to offset the economic pain. Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, said at a National Association for Business Economics conference last week that the tariff increase could prompt a rate cut if higher costs cause consumers to pull back, “depending on the severity of the response.”

Mr. Guha concurred, saying that the Fed would not hesitate to react if there were signs of a real risk to economic growth. Instead, it will most likely “cut rates on insurance grounds, in particular given weak inflation.”

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China won’t take Trump’s Huawei ban lying down – Fox Business

China won’t take Trump’s Huawei ban lying down – Fox Business

So much for the events surrounding Chinese tech giant Huawei not being important to the U.S.-China “trade issue” — which is now a much bigger issue.

A bunch of very important American companies are cutting ties with Huawei on Monday after the Commerce Department added the Chinese telecom giant to its restriction list late last week. Implications: 1) U.S. companies restricted from selling to Huawei unless specifically granted a license (waiver) 2) RETALIATION (a lock) 3) supply heads south…demand heads south, and uncertainty.

MORE FROM FOXBUSINESS.COM…

    This can and will have serious consequences for Huawei, the U.S.-China trade talks and much more.

    As of Monday morning, some of Huawei’s biggest suppliers such as Intel, Qualcomm, Xilinx and Broadcom said they would not supply Huawei until further notice, while Google cut off the supply of hardware and some software services to Huawei smartphones.

    Huawei bonds have been hitting the skids on this news. All these stocks are hitting the skids.

    TickerSecurityLastChange%Chg
    GOOGLALPHABET INC.1,138.61-6.73-0.59%
    INTCINTEL CORPORATION44.57+0.04+0.09%
    XLNXXILINX INC.101.21-1.09-1.07%
    AVGOBROADCOM LIMITED255.91-4.18-1.61%
    QCOMQUALCOMM INC.66.21-2.04-3.00%

    We continue to hear that the U.S. and President Trump have the upper hand in trade talks. If it wasn’t clear that the president was ready to use Huawei as a “chip” in the trade talks, it should now be. But anyone who thinks that China will take this sitting on its rear end has probably been betting the Mets every day.

    The problem for Huawei is that it is heavily dependent on U.S. semiconductor products and one has to ask the question on whether they can find supplies elsewhere.

    It looks like the “trade issue” no longer has Huawei as a separate issue. If the president wanted Huawei as part of the negotiations, he now has it … but at what cost?

    Technology stocks are again bludgeoned this morning. Technology leads the markets both up and down. For a president who watches every tick in the market, I am not so sure he is going to be thrilled with this latest reaction. We suspect we are going to see a decent amount of technology warnings based on one sentence: “Trade and Huawei!”

    CLICK HERE TO GET THE FOX BUSINESS APP

    We think tariffs suck, but we do understand China was the side that backed away recently from things they had agreed to in negotiations. We only care about outcome and unfortunately, we are not so sure the president understands that this “trade issue” is just starting to heat up — and we suspect markets will not be too friendly to it.

    Gary Kaltbaum is a registered investment adviser with more than 30 years of experience in the markets. He is owner and president of Kaltbaum Capital Management, a financial investment advisory firm headquartered in Orlando, Florida. He is a Fox News Channel Business Contributor regularly appearing on Fox News Channel and the Fox Business Network. Gary is the author of the book “The Investors Edge” and is also the host of a nationally syndicated radio show with the same title “Investors Edge,” which is broadcast on numerous stations across the U.S.

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    Google Restricts Huawei’s Access to Android After Trump Order

    Google Restricts Huawei’s Access to Android After Trump Order

    Image

    A Huawei store in Beijing. The Chinese company’s products have effectively been blocked in the United States, but its business has grown rapidly in Africa, Asia and Europe.CreditCreditLam Yik Fei for The New York Times

    LONDON — The Chinese technology giant Huawei on Monday began to feel the painful ripple effects of a Trump administration order that effectively bars American firms from selling components and software to the company, ramping up a cold war between the two countries over technology and trade.

    The fallout began when Google cut off support to Huawei in recent days for many Android hardware and software services, according to the companies. The move, a response to the Trump administration’s order last week, could hamstring Huawei by restricting its access to future versions of the Android operating system. Google will also limit access to popular applications like Maps, Gmail and the Google Play store in new handsets made by Huawei, the world’s second-largest smartphone maker, behind Samsung.

    But Huawei was given a temporary reprieve from Google’s abrupt pullback by the Commerce Department, which last week had added Huawei to a list of companies deemed a national security risk, effectively preventing it from buying or licensing American parts and technology without special permission from Washington. Late Monday afternoon, the department said in a notice posted to the Federal Register that it would grant 90-day permissions for transactions necessary to maintain and support existing cellular networks and handsets.

    Google said that it would work with Huawei during the 90 days to provide security updates to its Android operating system, but that it planned to abide by the Commerce Department’s orders when the period expired.

    Chip makers have also started stepping back from dealings with the Chinese firm. The German supplier Infineon said on Monday that it would restrict its business with Huawei. And Intel and Qualcomm, two of the world’s largest chip makers, have told employees to cease working with the Chinese company until further notice, according to Bloomberg.

    The mass flight of American technology companies from Huawei, one of China’s proudest corporate champions, is a stark escalation in the high-tech battle that has simmered between the two powers for years.

    China has long prevented many American internet giants from providing services within its borders, and it has placed tight strictures on how other American technology firms can operate. The enormous commercial potential of the Chinese market made it hard for the companies to put up much of a fight as Beijing declared, in effect, that their business interests were subservient to China’s national security interests.

    Now, the United States government is showing that it, too, has ways of getting foreign companies to play by its rules in the name of upholding national security. Its asset is not a giant, untapped market for technology products, but the technology itself — the know-how and capabilities without which Huawei would not have achieved so much of its success.

    “We have made substantial contributions to the development and growth of Android around the world,” Huawei said in a statement about Google’s pullback. “As one of Android’s key global partners, we have worked closely with their open-source platform to develop an ecosystem that has benefited both users and the industry.”

    The company’s decision to halt work with Huawei was earlier reported by Reuters. Intel declined to comment, and Qualcomm did not respond to requests for comment.

    Major American wireless companies have effectively been blocked from buying Huawei’s telecommunications equipment for years, but the company’s business has grown rapidly in Africa, Asia and Europe, where its affordable prices have been embraced by consumers and by phone companies that use its antennas, base stations and other hardware to make wireless networks.

    In recent months, the United States has stepped up its campaign against Huawei, which it has said poses a national security risk. American authorities have worked to persuade allies like Britain and Germany to block the use of Huawei telecommunications equipment. But the efforts have had limited success, as many countries rely on Huawei gear in the race to build up fifth generation, or 5G, wireless communication networks.

    Last week, President Trump issued a ban prohibiting American telecommunications firms from installing foreign-made equipment that could threaten national security. The order instructed the commerce secretary, Wilbur Ross, to stop transactions “posing an unacceptable risk.” Although the order did not single out specific companies, it was widely believed to be directed at Huawei and others in China’s tech sector.

    The actions put pressure on American allies that have so far resisted urging from the Trump administration to issue complete bans against Huawei. James Lewis, a senior vice president and the director of the technology policy program at the Center for Strategic and International Studies, said that most European countries would prefer a softer approach.

    “I don’t think Europeans realize the extent of the strength of feelings in the U.S. that we need to block Huawei,” Mr. Lewis, a former official at the State and Commerce Departments, said.

    China has not said whether it plans to retaliate against the United States in response to Mr. Trump’s move. On Monday, shares in Qualcomm, Infineon, Intel and Alphabet, Google’s parent, all fell. Apple, which depends on the Chinese market for a large portion of its revenue, also dropped amid concerns that the tech battle between the two powers made it a potential target.

    The Chinese government also suggested the possibility of a legal challenge against the Trump administration order on Monday. Asked about Google’s decision at a regularly scheduled news briefing on Monday, Lu Kang, a spokesman for the Ministry of Foreign Affairs, said, “China encourages Chinese companies to take up legal weapons to defend their own legitimate rights.”

    For now, the flight of tech suppliers will test the durability of Huawei’s business, which has long depended on access to products from American companies. It is now on the verge of reliving a run-in that another Chinese tech company, ZTE, had with Washington not long ago. To Chinese leaders and business executives, that episode remains a vivid cautionary tale of the United States government’s ability to weaponize American companies’ technological superiority for political ends.

    That incident also began with a listing by the Commerce Department. ZTE, which competes with Huawei in telecom equipment, was determined to have sold American-origin goods to Iran. The department added the company to the entity list in 2016, putting a cloud over its future.

    In time, ZTE negotiated a lighter sentence with the department, and its business with American suppliers was allowed to continue unrestricted. But last spring, commerce officials said the company had not disciplined the employees responsible for the transactions that had violated American export controls — and that the company had lied to American authorities about it.

    Washington cut ZTE off from all purchases of American components and technology. Within weeks, the company was at death’s door. Production stopped. Workers idled in their dorms.

    Huawei is a much larger company than ZTE, with a bigger global footprint. If it is brought to its knees as ZTE was last year, then the consequences could be devastating for smartphone users and mobile networks across a far wider stretch of the planet.

    If the Commerce Department’s order goes into full effect as currently stipulated, Google’s change will apply to new Huawei devices and future versions of the Android operating system. Security and feature updates will still be available for Huawei users with Google apps already loaded on their devices.

    By adhering to the Commerce Department’s order, Google would undercut ties with an important and fast-growing partner. Huawei’s smartphone sales in the year’s first quarter grew 50 percent compared with the same period a year earlier, even as the broader handset market stagnated, according to the market research firm IDC. Google gets revenue from ads that are shown with the apps carried on Huawei devices.

    Adam Satariano reported from London, Raymond Zhong from Beijing, and Daisuke Wakabayashi from San Francisco. Kate Conger contributed reporting from San Francisco.

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    China’s Luckin Coffee raises up to $651M in upsized US IPO

    China’s Luckin Coffee raises up to $651M in upsized US IPO

    Another week, another cash-burning tech IPO in the U.S. Following on from Uber’s high-profile listing, ambitious Chinese startup Luckin Coffee has raised up to $650.8 million on the Nasdaq after it priced its shares at $17.

    Despite concern at its high losses and little chance of near-term profitability, Luckin seems to have been greeted positively by investors. The company priced its shares at the top of its $15-$17 range and it upsized the share offering to 33 million, three million more than previously planned. That gives Luckin an initial net raise of $571.2 million, although that could increase to $650.8 million if underwriters take up the full additional allocation of 4.95 million “greenshoe” shares that are on offer.

    The company will list on Friday under the ticker “LK.”

    Luckin filed to go public last month, just weeks after it closed a $150 million Series B+ funding round led by New York private equity firm Blackrock, which interestingly holds a 6.58% stake in Starbucks. The deal valued Luckin at $2.9 billion and it took the three-year-old company to $550 million raised from investors to date.

    The company has burned through incredible amounts of cash as it tries to quickly build a brand that competes with Starbucks, and the presence that the U.S. firm has built over the last 20 years in China. Through aggressive promotions and coupons, the company posted a $475 million loss in 2018, its only full year of business to date, with $125 million in revenue. For the first quarter of 2019, it carded an $85 million loss with total sales of $71 million.

    We recently went in-depth on the business, which you can read here with a subscription to our Extra Crunch service, but we’ve long covered the startup’s “money is no object” approach to building a digital rival to Starbucks in China.

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    Losing Google support would ruin Huawei’s global smartphone business

    Losing Google support would ruin Huawei’s global smartphone business

    It took less than two days after the announcement of President Trump’s executive order to increase scrutiny of business dealings between foreign and U.S. technology companies for the first major shoe to drop: Huawei is expected to fully lose access to Google apps and services, as well as future Google-approved Android updates. And unlike previous government intervention that only affected Huawei’s ability to sell its smartphones in the U.S., this decision has ramifications for the company’s global operations — and if it comes to fruition, will irreparably damage Huawei’s smartphone business.

    It simply isn’t reasonable in 2019 for any company to launch a phone outside of China without Google services.

    Huawei, just like every other company successfully selling Android phones, relies on support from Google. Android is open source, yes, but as has been shown time and time again, an “Android” phone without Google apps and services isn’t something that consumers want. (This is, coincidentally, exactly what the European Commission and Google are constantly fighting over.) Last week’s actions by the U.S. government have made it so that Google simply cannot provide certification or apps and services to Huawei. And as such, Huawei seems destined to have to retreat to only selling phones in China, where it doesn’t have access to Google services as it is, and certain very specific market and price segments where Google services aren’t as important.

    Many companies have tried to make Android devices without the Play Store, and while there are a number of success stories across the technology space in general, there’s nothing but a long line of failures when it comes to smartphones. It simply isn’t reasonable in 2019 for any company to launch a phone outside of China without Google services and expect it to actually sell. It can have the best cameras, hardware, specs and core operating system we’ve ever seen, but unless it has Google’s apps, and crucially the Play Store, effectively zero people will be interested in buying it. I’m sure Huawei can (and does) make a fine phone with all of its own services — but if it intends to compete in a market filled with 100% of phones having access to Google services and the Play Store, it has to have them as well.

    Huawei P30 Pro

    It can be tough to break out of our U.S. perspective and realize just how big of a deal Huawei is in the smartphone world. Though its phones are effectively a non-factor here, Huawei’s global smartphone market share is approaching 20%, which is now above Apple. It built most of that market share on providing value-minded consumers around the world get phones with solid specs and capabilities at exceptional prices. But even in high-income countries, Huawei has finally managed to make inroads in the highly competitive flagship phone space. It’s a real competitor in most major countries around the world, and a leader in some. Now, it’s destined to lose all of that momentum.

    Even if the ban were only in place for a short period, only to be reversed by some sort of specific deal with China or a future U.S. administration, the damage would already be done. Consumers are, ultimately, fickle — the first time someone goes to buy a Huawei phone and finds that it doesn’t have Google services on it, the Huawei brand name will be tarnished and you can bet they won’t be looking to Huawei the next time they upgrade. It will ultimately be extremely difficult to make back that ground lost with even a short period of attempting to sell phones without Google services; and things would be no better by Huawei missing out on a year or two of not being in the market with new devices of any kind.

    Huawei’s global smartphone business will be damaged beyond repair if this ban fully goes into effect.

    Huawei, of course, has a history of making phones for China without Google services or support. And there are over 1.3 billion people in China — that’s a healthy marketplace in its own right. Huawei has nearly 30% market share there as it is. It has built up its own operating system, services and partnerships to make its phones competitive in China, and this would lead you to think it could theoretically do the same globally. But there are clear differences that make that idea a non-starter, namely the history of Google services never being available in China meaning Huawei been competing on even footing with other companies building their own ecosystems and not adopting Google’s superior one.

    You can bet Huawei’s market share in China will grow if it’s effectively its only market to invest in. But considering its strong global market share and sales, only selling in China would mark a dramatic reduction in its smartphone operations. A consolation prize.

    The question remains just how quickly Huawei will choose to wind down, or pause, its smartphone development outside of China. We thankfully know that existing Huawei devices will continue to have Google support and receive updates, which will obviously keep things rolling for some time to come. But if this ban from the U.S. government on business operations goes into full effect longterm, we’re only a handful of months away from Huawei having to make a very tough decision on whether it will choose to try and launch an Android phone outside of China without Google services, or put the entire operation on hold in hopes of a reversal of the decision. As painful as it would be for Huawei, my vote goes for the latter.

    This post may contain affiliate links. See our disclosure policy for more details.

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    Alibaba-backed facial recognition startup Megvii raises $750 million

    Alibaba-backed facial recognition startup Megvii raises $750 million

    One of China’s most ambitious artificial intelligence startups, Megvii, more commonly known for its facial recognition brand Face++, announced Wednesday that it has raised $750 million in a Series D funding round.

    Founded by three graduates from the prestigious Tsinghua University in China, the eight-year-old company specializes in applying its computer vision solutions to a range of use cases such as public security and mobile payment. It competes with its fast-growing Chinese peers, including the world’s most valuable AI startup, SenseTime — also funded by Alibaba — and Sequoia-backed Yitu.

    Bloomberg reported in January that Megvii was mulling to raise up to $1 billion through an initial public offering in Hong Kong. The new capital injection lifts the company’s valuation to just north of $4 billion as it gears up for its IPO later this year, sources told Reuters.

    China is on track to overtake the United States in AI on various fronts. Buoyed by a handful of mega-rounds, Chinese AI startups accounted for 48 percent of all AI fundings in 2017, surpassing those in the U.S. for the first time, shows data collected by CB Insights. An analysis released in March by the Allen Institute for Artificial Intelligence found that China is rapidly closing in on the U.S. by the amount of AI research papers published and the influence thereof.

    A critical caveat to China’s flourishing AI landscape is, as The New York Times and other publications have pointed out, the government’s use of the technology. While facial recognition has helped the police trace missing children and capture suspects, there have been concerns around its use as a surveillance tool.

    Megvii’s new funding round arrives just days after a Human Rights Watch report listed it as a technology provider to the Integrated Joint Operations Platform, a police app allegedly used to collect detailed data from a largely Muslim minority group in China’s far west province of Xinjiang. Megvii denied any links to the IJOP database per a Bloomberg report.

    Kai-Fu Lee, a world-renowned AI expert and investor who was Google’s former China head, warned that any country in the world has the capacity to abuse AI, adding that China also uses the technology to transform retail, education and urban traffic among other sectors.

    Megvii has attracted a rank of big-name investors in and outside China to date. Participants in its Series D include Bank of China Group Investment Limited, the central bank’s wholly owned subsidiary focused on investments, and ICBC Asset Management (Global), the offshore investment subsidiary of the Industrial and Commercial Bank of China.

    Foreign backers in the round include a wholly owned subsidiary of the Abu Dhabi Investment Authority, one of the world’s largest sovereign wealth funds, and Australian investment bank Macquarie Group.

    Megvii says its fresh proceeds will go toward the commercialization of its AI services, recruitment and global expansion.

    China has been exporting its advanced AI technologies to countries around the world. Megvii, according to a report by the South China Morning Post from last June, was in talks to bring its software to Thailand and Malaysia. Last year, Yitu opened its first overseas office in Singapore to deploy its intelligence solutions to partners in Southeast Asia. In a similar fashion, SenseTime landed in Japan by opening an autonomous driving test park this January.

    “Megvii is a global AI technology leader and innovator with cutting-edge technologies, a scalable business model and a proven track record of monetization,” read a statement from Andrew Downe, Asia regional head of commodities and global markets at Macquarie Group. “We believe the commercialization of artificial intelligence is a long-term focus and is of great importance.”

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    Why the U.S.-China Trade War Could Be Long and Painful: No Off-Ramps

    Why the U.S.-China Trade War Could Be Long and Painful: No Off-Ramps

    The Upshot|Why the U.S.-China Trade War Could Be Long and Painful: No Offramps

    There’s a shrinking supply of the ‘constructive ambiguity’ that would let each side present a deal as a win.

    Neil Irwin

    Image

    President Trump and China’s president, Xi Jinping, at a meeting in Beijing in 2017. This time, both leaders seem headed toward confrontation.CreditDamir Sagolj/Reuters

    Just two weeks ago, the United States and China seemed to be gliding toward a trade deal meant to resolve tensions between the world’s two largest economies.

    But the breakdown in talks since — the United States raised tariffs to 25 percent on $200 billion of Chinese imports, for example, and is threatening to tax an additional $300 billion — worries people who study international economic diplomacy.

    That’s because both the United States and China seem to be digging into their positions in ways that will be hard to resolve with the mutual face-saving that typically turns high-stakes negotiations into deals.

    To use a common negotiating metaphor, it is not clear what the offramps might be that would allow a de-escalation and prevent a major trade war that would prove costly to both nations.

    In effect, President Trump appears to view continuing tension with China as good for him politically and has said, contrary to the view of mainstream economists, that tariffs are a reason for the United States’ recent economic good fortune.

    China’s leaders may not reveal their thinking in real time on Twitter, but they have signaled that many of the concessions the United States wants would require China to sacrifice core parts of its economic strategy and national sovereignty — in particular its ambitions to lead in the high-tech industries of the future.

    “Each side has dug itself into some fairly deep holes such that it will be difficult to emerge from,” said Douglas Rediker, chairman of International Capital Strategies and a former U.S. representative to the International Monetary Fund. As is often the case in negotiations, the pathway to a deal may rest in a “constructive ambiguity” that both sides can present to their domestic audiences as a win.

    “Do I believe there’s enough room to find common ground?” Mr. Rediker said. “Yes, but only based on this ambiguity that doesn’t necessarily resolve the issues in one party’s favor or another.”

    Both sides have taken subtle steps to allow time for last-ditch efforts. China sent a senior negotiator to Washington last week despite the breakdown in talks, and it delayed the start of its retaliatory tariffs on American imports until June 1. The United States applied the newest wave of higher tariffs based on when ships containing the affected goods arrive, adding a few weeks in which a reversal could be hammered out.

    And President Trump and President Xi Jinping of China could meet at the G20 summit in late June in Osaka, Japan, which would be an opportunity for de-escalation at the highest levels.

    But open lines of communication and time to work won’t by themselves solve the problem of how to finesse some mutually agreeable deal, particularly given that both countries view this negotiation as resetting their economic relationship in ways that would have long-lasting consequences.

    Add in Mr. Trump’s tendency to view every negotiation through a zero-sum prism, and it may be hard to find a pathway for both parties to go home able to proclaim victory.

    When the negotiations seemed to be going well a few weeks ago, “I thought we were going toward constructive ambiguity,” said Mary E. Lovely, an economist and trade expert at Syracuse University’s Maxwell School.

    The United States is demanding that China codify rules into law to protect American companies (and their technology) that do business in China. Chinese negotiators now reject that possibility; American officials said they had agreed to those provisions.

    “It looks like there was a level of specificity that China wasn’t willing to accept and a level of ambiguity that the Trump administration wasn’t willing to accept,” Ms. Lovely said. “It looks like the Chinese are firm that there are some areas where they are not willing to go, that they see as disrespectful.”

    If the escalation now being signaled by both sides goes into force, Americans will face higher prices for a wide range of goods, and certain American manufacturers will face less demand for their products. Already, American farmers are suffering amid reduced Chinese demand for soybeans and other products. The Chinese manufacturing sector is hurting as well — and is likely to suffer further if tariffs reduce American demand for their products or drive relocation of production to other countries.

    Ultimately the question becomes how much of that pain each side will be willing to endure, and whether the two nations’ leaders feel a sense of urgency to each help the other save face domestically.

    Things can change quickly. In a different sphere, for example, Mr. Trump went from threatening North Korea with nuclear annihilation to acting as if they were old friends practically overnight.

    But given where things stand, it may take that kind of surprising reset between two top leaders, built on personal relationships, rather than the slow grind of hammering out an agreement that is more typical of economic diplomacy.

    “The off-ramps are tricky here because the president believes this is good policy, and the Chinese are loath to cave on it,” said Jay Shambaugh, a professor of international economics at George Washington University and director of the Hamilton Project at the Brookings Institution. “It’s not abundantly clear how you climb down without any damage.”

    The question for the weeks and months ahead is how much damage each side will tolerate before rethinking some of those basic assumptions and deciding that they don’t want to dig in quite so hard, after all.

    Neil Irwin is a senior economics correspondent for The Upshot. He previously wrote for The Washington Post and is the author of “The Alchemists: Three Central Bankers and a World on Fire.” @Neil_Irwin Facebook

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    Tencent’s latest education push is a nod to new collaborative structure

    Tencent’s latest education push is a nod to new collaborative structure

    When Tencent announced it had formed a new education brand this week, the internet giant wasn’t just flexing its muscles to conquer China’s booming online education sector. The new initiative is also an early result of Tencent’s long plan to foster more internal collaboration at a time when its core businesses, the lucrative video gaming segment and the billion-user WeChat, are under attack.

    Called “Tencent Education,” the new brand consists of 20 products across all six of the firm’s business groups, announced executive senior vice president Dowson Tong at the company’s annual ecosystem summit on Wednesday. According to Tong, Tencent has over the years served some 15,000 schools and 70,000 educational institutes, giving it a reach of more than 300 million users in the sector.

    What this means is when it comes to making education products, there will be more teamwork among Tencent divisions, from the one overseeing WeChat to the entertainment-focused unit operating some of the world’s most played games. The catalog of services ranges from face recognition technology to monitor students during class time (I know, it makes me cringe) to personal development classes for adults.

    This level of cross-department cooperation had been rare at Tencent until recently. For years, the Shenzhen-based company fostered a competitive culture it compares to horse races. On the one hand, internal rivalry spawns innovation. The success of WeChat has demonstrated Tencent’s willingness to let a new product eat into its legacy social network QQ. The strategy doesn’t always work, though. To contain TikTok’s rise, Tencent has churned out a dozen short-video apps, but none has reached their rival’s supremacy.

    Competition, on the other hand, produces internal silos and hurts collaboration. This is a critique that has often come at Tencent, although Tong refuted the notion in a recent interview with local news outlet Yicai, saying that Tencent actually had a history of keeping a data system for internal collaboration.

    Meanwhile, its rival Alibaba has gotten more credit for structuring business units under one cooperative umbrella. When founder Jack Ma set up an “underlying unified data, safety, risk management and technology foundation” almost seven years ago, his goal was to tear down “internal corporate walls.” The integration was targeted at customers, as well. For instance, Ma envisioned a future where a merchant on Alibaba’s consumer-facing marketplace Taobao would directly source from 1688.com, its business-to-business e-commerce arm.

    Tencent is undergoing a similar transformation. In October, the company announced a sweeping reorganization that saw it knit together a few disparate business lines primed for synergies. Take the Platform and Content Group. The newly minted group consolidated all non-WeChat social and content services — spanning QQ, an app store, a web browser, two news apps, an esports platform and several video services — under one single division.

    Historically, Tencent has derived a bulk of its income from video games and a handful of popular social media apps. But the cards are increasingly stacked against these ventures as China exerts more control over the gaming sector and ByteDance seizes more online attention, so part of the October reorg was aimed at fending off imminent competition from new rivals by better utilizing internal resources, as it’s the case with PCG.

    The other part of the agenda is set for what’s further down the road. Tong told Yicai that the time is ripe for “the industrial internet,” a buzzword in China that refers to the upgrade of traditional industries with technology. Tencent wants to be a leading force in the revolution, and the plan is to open up its technology to other enterprises, as Tencent has done through the education initiative.

    “In the age of the industrial internet, I think the ultimate job is to be open… so we are opening a lot of the technologies we’ve accumulated in the past and integrating them for the use of other companies,” said Tong.

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