How high is the cost of the US-China technology cold war? In the next five years, the overall industry will lose more than $3.5 trillion

The escalating tensions between China and the United States are often seen as a new era of the Cold War. The battlefield between the two sides has clearly extended from the trade war to the technology war. How much will the industry have to pay for this?

Deutsche Bank technology strategist Apjit Walia attempted to quantify this number by taking a top-down approach to analyzing the impact of a full-scale Cold War on Information and Communication Technologies (ICT). He estimated that demand disruptions, supply chain disruptions, and the resulting "tech wall" caused by the US-China technological friction could cost the industry more than $3.5 trillion over the next five years.

To further explore the geopolitical risks between China and the United States, Deutsche Bank created a system using machine learning to quantify the intensity of the Cold War and named it the "Tech Cold War Index." Not surprisingly, this index has been rising since 2016, and since April this year, the COVID-19 epidemic has exacerbated this risk, causing the index to reach a record high and has continued to rise since then. 

Trend surveys conducted from April to June showed that more than 41% of Americans and more than 35% of Chinese were unwilling to buy each other's products. With the US election year approaching, this geopolitical dynamic has been further exacerbated.

The impact of the Cold War on the global information and communications industry

Since the 1970s, the United States and China have been increasing their technological capabilities and beginning an unprecedented convergence. After 40 years of development, this has created a complex network of demand and supply chains, forming interdependencies and increasing the difficulty of analysis.

Against this backdrop, Deutsche Bank believes that the impact of the technological cold war can be seen from three aspects: the decline in domestic demand in China, the cost of transferring the global supply chain, and the rising costs caused by the formation of a "technological wall" due to different technological standards.

China's domestic demand

Globally, China accounts for about 13% of ICT industry revenue, about $730 billion per year. However, a large part of this is demand from China's technology industry, which is exported abroad after certain value-added, assembly and packaging, which poses supply chain risks.

The range of re-export combinations varies greatly, ranging from software that is mainly for domestic consumption, with low or no re-export, to semiconductors, electronic components, computer hardware, computer peripherals, electronic equipment, etc., which are re-exported at around 5%-75%. Overall, the weighted average re-export demand for the entire ICT industry is 45%, and after deduction, the end demand in China accounts for about 55%, nearly $400 billion in annual revenue.

Deutsche Bank pointed out that in the worst case scenario, the information and communications industry will suffer these revenue losses for more than five years.

Supply Chain Risks

It may take 5-8 years for the supply chain to be successfully transferred, but some believe it will take more than 10 years. The supply chain will be moved out of China, mainly to Vietnam, India and Malaysia, but compared with China, these regions lack infrastructure, agglomeration effects and skilled labor, and must be upgraded.

Experts believe that the main cost of supply chain transfer will fall on the final product manufacturers. When they move out of China, most electronic component manufacturers only move the semi-finished products or raw materials to foreign countries. Otherwise, it will require greater reconstruction costs.

Deutsche Bank estimates that the book value of China-related information and communications industries is about $500 billion. According to technical experts, the average cost of rebuilding the supply chain is about 1.5 to 2 times the book value, so Deutsche Bank calculates the transition cost of supply chain transfer at $1 trillion over 5-8 years.

Tech Wall Risk

Not only will the tech cold war create shocks in demand and supply chain shifts, tech companies will inevitably have to operate efficiently in much of the “non-aligned” world while complying with two competing global standards.

Differences in standards can increase costs in a number of ways: Increasing the manufacturer's spending on research and development, design, product development and related costs.

Similarly, different technology sectors have considerable differences in this cost. Deutsche Bank estimates that the impact of the technology wall on the information and communications industry may be between 2-3% of incremental costs (capital expenditure, manpower) or $100-150 billion per year. After a period of time, as economies of scale arrive, these costs will be absorbed, but it will take an average of about 5 years to accumulate at least $500 billion.

Second and third order effects

Deutsche Bank pointed out that in addition to these three factors, there will also be cross-effects and second-order effects. For example, under the background of the "Belt and Road Initiative", the loss of market share in the information and communication industry is not limited to China, but may also expand to markets related to China, which will produce cross-effects. For another example, dragged down by the economic downturn, there may be a second-order effect, but this part is highly uncertain.

However, Deutsche Bank pointed out that although the potential impact of the technological cold war is estimated to be US$3.5 trillion over five years, the actual outcome will obviously depend on how the two countries handle economic and geopolitical trade-offs.

2. The British government's ban on Huawei has sparked fierce criticism: it will cause British creativity to stagnate for decades

Recently, the UK announced that it will completely remove Huawei equipment from its 5G network by 2027. Once the decision was issued, it caused a lot of controversy. CNN reported on the 18th that for the UK's China hawks, the introduction of the Huawei ban may be a victory, but in fact, decoupling from China is easier said than done.

British economist: What reason does the UK have to isolate itself from China?

On the 18th, British economist Jim O'Neill told The Guardian: "In the past 20 years, China has been the largest contributor to global GDP growth. What reason does the UK have to isolate itself from China?" In 2001, it was O'Neill who first proposed the concept of the "BRIC" including China (expanded to the "BRIC" in 2010), specifically referring to the world's emerging markets.

CNN reported that in the past 20 years, the British government has actively conducted a series of contacts with China in order to establish a deep economic cooperation partnership with China. At present, China and the UK have inseparable ties in many aspects.

CNN stated that the economic and trade cooperation between China and the UK has reached a considerable scale. In 2019, the bilateral trade volume between China and the UK hit a record high of 104.5 billion pounds. The large number of Chinese students studying in British universities has also brought huge profits to the UK. In addition, China has participated in many infrastructure construction projects in the UK, including several nuclear power plant projects in southern England. Tom Tugendhat, chairman of the UK's Foreign Affairs Select Committee, said: "The Bradwell nuclear power project will use a Chinese-made reactor, which requires China for daily maintenance. We are also technically dependent on China."

Based on the above facts, CNN commented: "It remains to be seen whether the UK can actually implement this subversive Huawei ban."

Malcolm Rifkind, former British Foreign Secretary, said: "Generally speaking, there should be no controversy about our economic and trade relations with China... For the UK, as long as it can achieve more trade and attract more foreign investment, it should be a better choice."

Reuters: Consumers will pay for replacing Huawei equipment

Once the UK ban on Huawei is implemented, many UK telecom operators will have to find new suppliers to build 5G networks and replace existing Huawei equipment. Japan's Nikkei Asian Review reported on the 18th that British officials are in contact with Japan, and NEC and Fujitsu Group may become new suppliers of 5G network equipment in the UK. The report also mentioned that Huawei, Ericsson, and Nokia have occupied nearly 80% of the global 5G market, while NEC and Fujitsu have a market share of less than 1%.

Reuters reported on the 16th that the cost of removing Huawei equipment will exceed 2 billion pounds for the British telecommunications industry. The cost of replacing Huawei equipment may eventually be paid by consumers.

Analysts from British market analysis firm CCS Insight told Reuters: "Huawei's infrastructure is the most economical and practical. If Huawei's equipment is removed, the cost of deploying the network will increase. Unfortunately, the costs incurred may eventually be passed on to consumers." It is reported that the construction of 5G networks requires dense antenna arrays, which means that the power consumption of cellular base stations will increase, and Huawei's 5G base stations consume 20% less power than the industry average.

British official: Huawei ban is influenced by geopolitics and does not consider the cost to the British economy

In May this year, the United States imposed a new round of sanctions on Huawei. US President Trump recently publicly admitted that he persuaded several countries not to use Huawei. Kevan Jones, former British Shadow Cabinet Defense Secretary and current member of the House of Commons Intelligence and Security Committee, told The Guardian on the 18th: "It is clear that the pressure from the United States has shaken the British government. The decision to ban Huawei was made for geopolitical reasons without considering the economic cost to the UK."