The Phone War

Sep 7, 2023

Approximately 6.3 billion people own smartphones, 68% of the world’s population. It is the ultimate consumer appliance—offering interpersonal connectivity, access to the Internet, a platform for a wide range of leisure activities, a revolution in imaging (cameras and photo albums), a digital wallet, state-of-the-art analytical tools, and on and on. It is portable, easily chargeable, incredibly (and increasingly) powerful, and still a bargain considering all the above. Today, you literally can’t be a consumer without a smartphone.

That’s certainly true in the United States, where smartphone penetration is around 90% of the total population. It’s also the case in China where the smartphone penetration rate was 72% in 2022 and projected to rise sharply further in the years ahead. And perhaps because of the near ubiquitous role of smartphones in the consumer societies of both nations, it was only a matter of time before the ever-escalating US-China conflict—the trade war, the tech war, and the early stages of a new cold war—led to a phone war.

That now seems to be the case. Last week, undoubtedly timed to coincide with US Commerce Secretary Gina Raimondo’s visit to Beijing, Huawei, China’s leading technology company, released its new Mate 60 Pro smartphone. According to a TechInsights breakdown commissioned by Bloomberg, the new phone is powered by a 7nm Kirin 9000s processor that was fabricated by China’s leading chip company, SMIC (Semiconductor Manufacturing International Corporation). While that still leaves China behind the US, where Apple’s soon-to-be released iPhone 15 is rumored to be powered by a 3nm chip, Huawei’s breakthrough came as a big surprise to sanctions-focused US officials who have been intent on denying China access to 14 nm chips. Huawei’s Mate 60 Pro blows through that threshold and appears to provide 5G capabilities that are very comparable to those currently being offered by Apple.

This breakthrough clearly took US National Security Advisor, Jake Sullivan, by surprise. As the architect of America’s “small yard, high fence” China technology access strategy, Sullivan has championed export sanctions on shipments of advanced semiconductors to China and related restrictions on outbound US foreign direct investment into Chinese semiconductors, artificial intelligence, and quantum computing sectors. Under this sanction regime, the Huawei breakthrough is especially surprising, prompting Sullivan to offer the cryptic comment on the new chip that “we [need to] get more information about precisely its character and composition.”

What are we to make of these developments?

  • First, it should hardly be surprising that China’s leading technology company has responded to Washington’s aggressive campaign to restrict its core businesses and supply-chain dependencies. While Huawei’s once dominant smartphone business has taken a severe hit since the company was first put on the US entity list in 2019, it was only a matter of time before China’s leading R&D-intensive enterprise countered with an indigenous product of its own.
  • Second, the security-focused US approach has been directed at China’s so-called dual fusion model, the blurring of the distinction between civilian and military applications of advanced technologies. Sullivan’s thinly veiled warning that the US may use this same lens to assess the new Mate 60 Pro, takes dead aim on China’s ultimate consumer appliance, with potential adverse implications for the consumer-led strain of Chinese growth that most western economists, including myself, have long favored.
  • Third, as its recent actions against Apple indicate, China also holds some important cards in the phone war. China has started to restrict iPhone purchases by government officials and there are hints that it may broaden the curtailments to include workers at state-owned enterprises. With the Chinese market accounting for nearly 20% of Apple’s total global revenues, these actions are hardly inconsequential for America’s most valuable company. The biggest risk of all: Apple’s commitment to China as its major offshore production and assembly platform, despite small recent diversification moves to India and Vietnam.

Six years ago, in August 2017, former President Donald Trump asked the US Trade Representative to investigate Chinese trading practices. Since then, conflict escalation has been fast and furious. Notwithstanding recent efforts to achieve a diplomatic thaw this summer through the Beijing missions of Blinken, Yellen, Kerry and Raimondo, there can be no mistaking the implications of the phone war for a superpower conflict that has taken on a life of its own. Where it goes, and when it stops, is anyone’s guess.

You can follow me on Twitter @SRoach_econ

Sign up for Stephen’s Dispatches: