Not too surprisingly, China is responding to U.S. restrictions on Huawei and ZTE with efforts to ban or curb the use of various American tech suppliers.
And while obtaining alternatives to U.S. tech will in many cases prove easier said than done, it's pretty clear at this point that Beijing's efforts will have meaningful long-term consequences.
The latest evidence of this was provided on Monday morning, when The Financial Times reported that Chinese government agencies and public institutions have been ordered to stop using foreign PCs and software (much of it American) by 2022. Organizations are expected to remove 30% of the foreign PCs and software that they currently have in 2020, 50% in 2021 and the final 20% in 2022.
Needless to say, this isn't good news for companies such as HP Inc. (HPQ) , Dell Technologies (DELL) , Microsoft (MSFT) and Oracle (ORCL) , and not only because of the direct impact of Beijing's order. Indirectly, the order sends a clear message to state-owned enterprises (SOEs) and privately-owned Chinese firms that Beijing would prefer that they not use American hardware and software.
From the looks of things, a lot of these companies have already gotten this message loud and clear. Just ask Cisco Systems (CSCO) . In August, Cisco CEO Chuck Robbins said his company, which has seen its Chinese sales fall sharply this year, is being "uninvited to bid" on some Chinese enterprise deals.
One important qualifier here: Many U.S. IT giants don't get a large portion of their sales from China. Cisco, for example, now gets less than 3% of its revenue from the Middle Kingdom, and while Microsoft doesn't break out its Chinese sales, piracy is known to have long had a major impact on them. Last year, Steve Ballmer claimed that while 90% of Chinese firms are using Windows, only 1% are paying for it.
Nonetheless, since this is the world's second-largest economy that we're talking about, many billions of dollars worth of hardware and software sales are still in the crosshairs.
U.S. chip companies are also starting to feel some effects from China's attempts to reduce its reliance on American tech products. Since the Trump Administration banned Huawei's U.S. chip, component and software suppliers from doing business with it in May (the ban has since been partly lifted), Huawei, now the world's No. 2 smartphone supplier by volume, has stepped up its use of non-U.S. chips within high-volume phones.
Teardowns of a pair of recently-launched, high-end, Huawei phones -- the Mate 30 Pro and the Mate 20 X 5G -- by research firm TechInsights reveal the extensive use of chips from Huawei's HiSilicon unit, including HiSilicon-developed modems, app processors, power management chips, RF chips and Wi-Fi/Bluetooth combo chips. Huawei also seems eager to use chips from European suppliers such as STMicroelectronics (STM) and NXP Semiconductors (NXPI) .
However, the teardowns also show that U.S. chip suppliers still have a meaningful presence, even if it's less than what existed for prior Huawei phones. Audio amplifiers from Cirrus Logic (CRUS) , interface chips from Texas Instruments (TXN) and RF chips and modules from Skyworks (SWKS) , Qorvo (QRVO) and Qualcomm (QCOM) can still be spotted.
The teardowns shine a light on how hard it is to fully end the use of American-designed chips within a product as complex and silicon-packed as a smartphone. Fully replacing U.S. RF chip suppliers could be especially tough, given the combination of design and manufacturing expertise needed to be a major player in this space.
Outside of smartphones, there are also a lot of fields where China is likely to remain a big buyer of American-designed silicon. Just to give one example, the new Chinese PCs set to go inside of government offices will almost certainly rely on Intel (INTC) and AMD (AMD) CPUs, as will (in spite of some attempts to develop alternatives) a very large portion of Chinese server deployments in the coming years.
And when it comes to replacing American tech products in general, there will probably be some situations where a Chinese firm chooses not to due to factors such as performance and software compatibility, even if it could do so in theory. For example, if Huawei or another Chinese smartphone OEM concludes that replacing RF chips from American suppliers would hurt a phone's battery life and 5G upload/download speeds, it might choose not to do so.
With all that said, U.S. and Chinese companies are clearly in uncharted territory here, as a lot of business relationships that were taken for granted for many years are (if not unraveling) getting a lot more complicated. Even if some kind of trade deal is reached, there's likely to be more fallout in 2020.
