Our own worst enemies

Our own worst enemies

“You can kill ten of my men for every one I kill of yours. But even at those odds, you will lose and I will win.”

– Viet Minh leader Ho Chi Minh in a warning to French colonialists in 1946

The above quote comes from an article I found called “The Vietnam War in Forty Quotes.”

That was the first quote in the article, and it essentially sums up the entire conflict. In the end, that is what happened.

The Vietnam War was a war of ideologies. Many of the 20th century’s wars were.

They weren’t about gaining territory, they weren’t so much about winning territory as winning minds. Converting people to “the right” way of thinking.

Advancements in communication now meant you could get your message out to people all around the world. And the general public could now see all the new threats hiding at in various corners of the globe in real time, live on TV.

The Cold War, between the US and Russian ideologies, took up almost the entire latter part of the 20th century.

What we are now watching between the US and China could be seen as a hangover from the Cold War.

The US’s capitalism vs China’s communism. Only China isn’t really communist, is it? It’s sort of a weird mixture between capitalist and communist.

From Shropshire Star:

The private sector in China, which contributes a greater percentage of GDP than the state sector, is still very receptive to the state – and China isn’t classed as a market economy by the World Trade Organisation, in part because of how much the state intervenes.

But that doesn’t mean the country is purely socialist, with the economic reforms introduced by Deng Xiaoping following the death of revolutionary leader Mao Zedong transforming China completely.

Xiaoping was influenced by Singapore, French socialism, and the “power and wealth” of America, according to author, professor and CEO Ann Lee.

“That basically informed his thinking, which culminated in various slogans that people now repeat attributing to Xiaoping such as ‘it doesn’t matter whether the cat is black or white, as long as it catches mice’.”

And very few news organisations are painting this conflict as an ideological one. It’s simply China vs the West.

It’s not a war over territory. It’s not a war over ideology. It’s not a war over religion. It’s simply a war over power. I guess you could say at their hearts all wars are.

But most wars have a clear aim. This one does not.

What does each side want to achieve, what is the end goal here? If you have any ideas, let me know on harry@southbankresearch.com, because I haven’t got a clue.

The reason I am writing about it today is because this conflict will have a massive impact on our current and future technologies. And the companies producing them.

After all, this is a “trade” war. It is going to affect companies a lot more than it is going to affect people. At least in theory.

From extraditions to death sentences

At the heart of this trade war right now is Huawei. This company is the world’s largest maker of networking equipment.

It is the number one company when it comes to 5G. And as I have written about many times before, 5G is going to be very important.

In fact, 5G is going to be so important that it will form the backbone of most of the world’s communication networks.

Given that Huawei is top dog in 5G, it has been, and continues to be, instrumental in building these networks.

The problem, at least for the US – and by proxy any of the US’s allies, essentially the UK, Australia, Canada, New Zealand and Europe – is that Huawei is a Chinese company.

In 2012 the US government banned Huawei from selling network equipment in its country, stating it was a national security risk.

Over the next few years, the US pressured its allies to do the same. As the trade war heated up, so did the US’s pressure. And now we are in the situation where all the Five Eyes nations, and much of Europe, have banned Huawei as well.

And in the last few months things have really escalated.

Canada kidnapped Huawei’s CFO, Meng Wanzhou, on 1 December while she was on a layover between Hong Kong and Mexico.

She is to be extradited to face trial in the US this month. The reason given was that Huawei has broken sanctions and sold products to Iran.

Huawei didn’t take this news well, given that Wanzhou also happens to be its founder’s daughter.

China, took the news even less well. And this week it upped the stakes.

On Monday it retried a Canadian man accused of drug smuggling and sentenced him to death.

It is clear that the West isn’t going to be letting Huawei back into its networks anytime soon.

Cutting off your nose to spite your face

From one angle the US’s logic here is sound.

The US is at (trade) war with China. The Chinese state owns or partially owns most of its biggest companies – Huawei being one.

You don’t want your enemy’s company to be building your communication networks and potentially putting in back doors for your enemy to snoop on you.

However, from another angle. The logic is flawed.

You are in a trade war with China.

Most of the world’s most successful companies are now technology based.

Your biggest and most successful companies are in the communication business – think Google, Apple, Facebook, etc.

China has better technology than you, and you refuse to use it because you are afraid it will one day flip a switch and turn it all against you.

But if most of the world’s biggest firms are based on technology and you are essentially handicapping your networks, then those companies are likely to move to places with better ones.

Even if they don’t, companies in countries that continue to use the most advanced (Chinese) tech are likely to supersede your US-based hamstrung ones.

And the countries that continue to use those Chinese technologies will, by definition, not be your allies. And not the sort of countries you want advancing past you.

If there is a switch, if there are backdoors, if there is state spying then the US’s strategy is the only realistic one to take. But it may not go well in the long run.

What did the Romans ever do for us?

There’s a scene in Monty Python’s Life of Brian where they ask, what have the Romans ever done for us?

Here’s how it goes:

REG: And what have they ever given us in return?!

XERXES: The aqueduct?

REG: What?

XERXES: The aqueduct.

REG: Oh. Yeah, yeah. They did give us that. Uh, that’s true. Yeah.

COMMANDO #3: And the sanitation.

LORETTA: Oh, yeah, the sanitation, Reg. Remember what the city used to be like?

REG: Yeah. All right. I’ll grant you the aqueduct and the sanitation are two things that the Romans have done.

MATTHIAS: And the roads.

REG: Well, yeah. Obviously the roads. I mean, the roads go without saying, don’t they? But apart from the sanitation, the aqueduct, and the roads–

COMMANDO: Irrigation.

XERXES: Medicine.

COMMANDOS: Huh? Heh? Huh…

COMMANDO #2: Education.

COMMANDOS: Ohh…

REG: Yeah, yeah. All right. Fair enough.

COMMANDO #1: And the wine.

COMMANDOS: Oh, yes. Yeah…

FRANCIS: Yeah. Yeah, that’s something we’d really miss, Reg, if the Romans left. Huh.

COMMANDO: Public baths.

LORETTA: And it’s safe to walk in the streets at night now, Reg.

FRANCIS: Yeah, they certainly know how to keep order. Let’s face it. They’re the only ones who could in a place like this.

COMMANDOS: Hehh, heh. Heh.

REG: All right, but apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, a fresh water system, and public health, what have the Romans ever done for us?

When the Roman Empire fell, most of this technology fell with it. It took hundreds of years before most of it became commonplace again.

It’s hard not to see a parallel between the satire above and the idea of rejecting better technology because you don’t trust who’s selling you it.

Like I said, it’s a double-edged sword. You can reject it, knowing your “enemies” will not and will end up with better tech than you have.

Or you can accept it, give the target of your trade war money and potentially compromise your national security by doing so.

But there is a third way, and one which could lead to Western companies making investors a lot of money in the process.

The upside, for workers and investors in the West

War both prevents progress and spurs on progress.

If the West really does stop relying on China for its technology, it is going to have to up its own technology game.

This will mean big money being injected into promising Western tech firms, and big contracts being handed over to less well-established companies.

A US 5G specialist may be way behind where Huawei is today, but you can be sure the US government will do everything in its power to ensure it isn’t still behind three years from now.

This means smaller, overlooked companies in the US, UK and Europe could soon see massive growth as they land contracts they would never dreamed of getting before the trade war began.

Small companies in the UK that could never have hoped to compete with incumbents like Huawei, may soon become almost state-sponsored.

From an investment point of view, this is certainly an interesting area to start looking into. And it’s a story I’ll be continuing to cover throughout 2019.

Until next time,

Harry Hamburg
Editor, Exponential Investor