On the 1st of December, Meng Wanzhou, chief financial officer of Chinese telecom giant Huawei and the daughter of the founder was arrested in Canada on charts of supplying Huawei phones to Iran and North Korea. This is a clear violation of the American sanctions on both these countries since Huawei uses parts made in the US, which automatically makes sanctions applicable to them. Canada has agreed to extradite Meng to the United States. She was arrested from Vancouver in Canada.
US media reported that the US was investigating Huawei for clear violation of sanctions on Iran by selling network equipment to the country. Meng was subsequently released on a bail of C$10 million but the damage had been done. At a time when the US and China are in the midst of a bitter trade war, this arrest has been seen by China as a clear violation of human rights and it has led to deterioration of relations of China with the US and Canada.
Obviously, China is not happy
There were varying degrees of responses from China. While the Huawei website just made a terse statement of arrest, the Chinese embassy in Canada proved to be a lot more hostile considering that Meng was the daughter of the promoter and her father was not only a prominent citizen of China but also considered close to the ruling Communist Party. China had actually urged Canada and the US to clarify the reason for the arrest of Meng and demanded her immediate release. Meanwhile, Huawei has issued a clear statement that it was unaware of any wrongdoing by Meng, and added that it complies with all relevant laws.
The Chinese side has also lodged stern representations with the US and Canadian side and taken the diplomatic battle to the next level.
Relations with the US and Canada to take a turn for the worse
The arrest of Meng is related to violations of US sanctions on Iran and North Korea. In fact, currently the US authorities are investigating whether Huawei, which is one of the world’s top telecom network equipment makers, had violated sanctions on Iran. This is how the dodgy linkage comes about. Huawei is one of the largest manufacturers of smart phones in the world, currently holding second position after Samsung. Interestingly, the second place has been long occupied by Apple but this position has recently been conceded to Huawei by Apple. China has cited this one of the major reasons for the arrest. According to China, the US was using these kinds of back door tactics to prise out healthy competition from Huawei.
The chart below clearly captures the way Apple has been losing market share to Huawei in the last few months and only underscores what China has been alleging against the US.
The yellow shaded portion shows how Apple has been losing market share to Huawei in terms of the number of smart phones sold. According to China, the US is applying pressure at two levels. Firstly, it is using the sanctions as a ruse to damage the market share advantage that Huawei has gained over Apple, as per IDC data. Secondly, China has also alleged that the US is using this legal case as an arm twisting tactic to push China to a corner so as to relent and to accede more space to the US in the global trade war.
But, China is retaliating and really hard
China matters because it is the largest matters for a lot of products; from Latin American commodities, to American corn to beef and pork. But post Huawei, the wind may be blowing against the US. Consider these instances. Chinese companies are rallying behind Huawei following the arrest of its CFO in Canada by offering subsidies for their staff to purchase smart phones from Huawei. In fact, Chinese businesses have promised subsidies if they buy Huawei smart phones in these trying times. While some companies are subsidizing 20% of the purchase price others are covering the full amount. Many Chinese companies took to social media also agreed to shift from US products to Huawei for most of their network product needs. In fact, some Chinese brewers in Henan Province have offered employees free alcohol up to 30% more if they showed receipts of purchase of any Huawei products. Interestingly, Chinese companies have come together like never before in a show of solidarity in favour of Huawei.
The brand of nationalism in China is also talking an anti-US tone. For example, certain companies are boycotting Apple products (one of the key beneficiaries from this arrest). In Shenzhen, machinery manufacturers have threatened to confiscate all Apple devices used by employees and even dismiss those who did not comply from service. A Chinese court has banned the sale of older I-Phones in the country on Dec. 10th 2018/
Nationalist posturing is nothing new in China and has been taken up in the past against Japanese and Korean products. The only problem is that this time around it is likely to further complicate the discussions over the trade war. We will have to await the outcome.