Your browser is not supported. Please update it.

12 January 2021

NYSE flip-flops on delisting Chinese telcos, as Biden seeks new approach

The New York Stock Exchange (NYSE) shocked investors and analysts alike with its abrupt U-turn over an earlier decision to delist China’s big three telcos, China Telecom, China Mobile and China Unicom. The shock was amplified further when, just a day later, the NYSE U-turned a second time, to reinstate the original delisting decision.

No explanation was given for this apparent indecision. The initial plan to delist the three telcos was announced by NYSE on the last day of 2020 to conform with an executive order signed on November 12 by outgoing president Donald Trump, outlawing American investment in Chinese firms deemed to be either owned or controlled by the country’s military.

It appeared the NYSE felt forced to delist the three telcos as a last resort and then seized on what proved an unexpected lifeline from regulators to reverse the decision. As service providers whose operations are almost entirely confined to the Chinese mainland, rather than technology vendors, these three telcos were considered by some to pose little threat to US national security. There was a sentiment to calm tensions and await clearer signals of Biden’s forthcoming strategy for relations with China, with the U-turn over delisting serving as a palliative.

Some signals had already been made, with Biden indicating that his stance will differ from Trump’s in two key related respects. First, he will seek to separate trade from technology, aiming to reverse some of the negative aspects of Trump’s approach on the first while consolidating the second. Second, he will seek to establish a broader consensus to contain Chinese military and commercial expansionism while competing on the key technology fronts such as 5G, AI and quantum computing, which were all cited by Trump as critical for future US competitiveness.

The issue of trading is perhaps the more nuanced, given that many existing or potential US allies in Europe and Asia-Pacific agree that China presents military and technology challenges, as well as abusing human rights. Biden had observed that, paradoxically, Trump’s tough stance on trade with China, and with Huawei in particular, had had negative consequences in some of the red rust heartlands where many jobs would be lost as a result. It was voters in those heartlands who had helped to tip the balance towards Trump in the 2016 presidential election.

By some estimates up to 50,000 US jobs depend at least partly on the global supply chain feeding Huawei. What is clear is that Huawei spent $18.7bn on US components for its smartphones in 2019, way up on the $11bn in 2018, since this was confirmed by founder and CEO Ren Zhengfei in April 2020.

There are no signs of Biden backtracking on commitments to expunge Huawei equipment from US 5G infrastructure, after US legislators in late December 2020 backed a $1.9bn program to remove telecom equipment deemed to present a national security risk (Chinese firms have been barred from critical national networks, including national cellular systems, since president Obama’s time.) But Biden is far more likely to stall on further moves to prevent US exports for use in less sensitive products such as smartphones.

There are signs of this hybrid strategy emerging among the Biden camp and also potential partners in a more unified strategy relating to China as a whole. This was seen perhaps in Huawei’s original cautious welcome of the Biden victory, in the knowledge this may well not let the company off the hook. Huawei’s fear is that Biden will assemble a more effective broad coalition against the company, which will gain support in Europe if backed by coherent measures to ensure a diverse supply chain for 5G infrastructure.

It is two European companies, Ericsson and Nokia, that stand to benefit from Huawei’s exclusion, but at the same time there is concern among governments as well as big operators there over lack of competition, which is stoking interest in the Open RAN (O-RAN) initiative and Telecom Infrastructure Project (TIP). This has led to comments such as one from Viviane Reding, former European commissioner for justice, who was heavily critical of Trump’s pressure on Europe to ban Huawei, suggesting that Biden would bring “less noise and more content”.

All this suggests there is scope for a compromise position that in Europe would most likely condone individual countries making their own decisions perhaps with advice to curtail Huawei’s involvement in 5G infrastructure over the long term. The Biden victory may also reduce any prospect of many countries in Asia-Pacific and Latin America acting now to eliminate Huawei from 5G infrastructure plans.

This will certainly be the case while the future success of O-RAN is unclear. Even if it is successful, telcos will still want to see significant vendors emerging that can be trusted to become long term partners and it remains to be seen which will emerge as major competitors to Ericsson, Nokia and Samsung, alongside Huawei and ZTE.

We know there had been some pressure from the Trump administration on US vendors, notably Cisco as the biggest network hardware maker, to get involved in RAN equipment, possibly through acquisition of Ericsson or Nokia. Cisco was already in the 5G core business but has stated several times over the past year that Nokia, Ericsson and Huawei have business models better suited to margins and market structure of 5G radio infrastructure.

Huawei, meanwhile, remains in limbo until Biden’s position crystallizes after inauguration. After President Trump’s meeting with President Xi in June 2020, US manufacturers and suppliers were invited to apply for licences to sell products to Huawei. But while about 140 companies then filed applications, the process stalled again and none was approved, with communication silence.

Huawei sought to maintain relationships with these suppliers, including some big ones like Intel and Qualcomm that were seeking these exemptions from trade restrictions, and has been waiting to see if the change of government unlocks the process before deciding whether to pursue alternative suppliers more actively.

There is, though, another geopolitical point relating to the devastation being wrought on many European economies especially as a result of the Covid-19 pandemic. This will reduce appetite to take a strong line against China and was a factor behind the country’s recent trade deal with the EU.

Nonetheless the second U-turn in quick succession by NYSE suggests that Biden’s hands will be tied to some extent by the current legislation unless he moves to revoke it, which seems unlikely for now anyway. So the delisting stands.