China tech/Lenovo: battle standard

Beijing should remember that all armies depend on their supply lines

The Chinese tech industry may have scored a small victory in its battle against the hegemony of the US technology sector. Beijing has ordered all government offices and public institutions to remove foreign computer equipment and software within three years. This comes as little surprise following US sanctions on Huawei and a ban on US federal dollars spent on Chinese telecom and surveillance equipment. But this win will be a pyrrhic one at best.

On the face of it, China’s shift to domestic hardware should mean more orders for local tech groups. Up to 30m pieces of computer hardware could need replacing as a result of the directive. Local PC maker Lenovo, currently the preferred brand in China, should get a large chunk of the orders starting next year. US rivals including HP, Dell and Microsoft would lose out. 

But all this is contingent on China speeding up the development of homemade software systems to replace US-made ones such as Microsoft’s Windows and Apple’s macOS. Removal of US suppliers would create new domestic supply chain disruptions for Lenovo and others. Already its share price has fallen a third since April partly because of component shortages.

Even an increase in sales from home would not offset the loss from the US. Lenovo itself receives a third of its revenues from the Americas. China provides just over a fifth of total revenues. Having said this, Lenovo’s domestic business does provide most or all of its profits every year. HP and Dell together have 39 per cent of the local PC market, against a quarter for Lenovo.

Since Huawei was banned from buying from US suppliers this year China has made headway in reducing dependence on US suppliers for chips and software. Yet most of its locally made alternatives lag behind global standards. Imported components cannot yet be fully replicated domestically.

Beijing fired its warning shot too early. Slowing growth at home means China cannot afford to complicate US trade talks. The December 15 deadline, when Washington’s next round of tariffs against Chinese goods are scheduled to take effect, is looming. US tariffs have already done damage to China. November exports to the US fell 23 per cent. All armies depend on their supply lines. China’s tech industry is no different.

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