Don’t fall into the “do everything yourself” trap

Back in August, Chinese technology company Huawei released its latest smartphone. To the surprise of everyone, it was powered by a high-quality semiconductor chip 100% made in China.

According to the US, such a chip was impossible. And yet, there it was.

The chip shouldn’t exist because the Trump administration created heavy sanctions to block the main suppliers of semiconductor chips from trading with China and slow down its development of high-end technology. The US regulators knew the importance of these tiny components for firms like Huawei and wanted to hit China where it hurt.

The sanctions deeply impacted Huawei, one of the world’s largest providers of telecommunications equipment. Without access to the chips, Huawei couldn’t produce many of its products. Huawei was forced to ask the Chinese government for a $US948 million line of credit in 2022 to help fund R&D into building home-grown semiconductors. That cash lifeline was more than double the amount it received from Beijing the previous year, according to the company’s annual report.

The Chinese government understood the importance of creating an alternative to foreign-sourced chips and the new Huawei phones clearly show its investment has paid off.

So, were the US sanctions a failure? Is China now thumbing its nose at the US?

Not so fast.

The line of credit extended to Huawei to keep it afloat and the home-grown chips should be a warning sign, not a signal that everything is okay in the Middle Kingdom.

Ideally, given that semiconductor chips are so critical for Huawei’s business, the company is acting rationally in its attempts to control the entire supply chain. That’s the only way to ensure the risk drops almost to zero.

Since owning a full supply chain is effectively impossible for any single company in a globalised world, Huawei had to create supplier relationships with companies in Taiwan or the Netherlands that were already making these chips and had all the right industry expertise. When those companies refused to do business with Huawei, it had no choice other than to build its own factories.

But this is exactly the trap the US hoped Chinese companies would fall into – the same one that helped the US defeat the Soviet Union 30 years ago.

What collapsed the Soviet Union wasn’t US shopping malls or Hollywood propaganda. It wasn’t even the spy games. The beginning of the end of the Soviet Union began on March 23, 1983. That was the day US President Ronald Reagan announced the Strategic Defence Initiative (nicknamed “Star Wars”).

Reagan’s policy was a response to US worries that the Soviets had more advanced technology. To plug this gap, Reagan dramatically increased spending on new and expensive R&D projects on things like missiles, computers and space flight. History now shows that the Soviet Union wasn’t pulling ahead of the US after all. In fact, it was well behind. But Washington didn’t know this at the time.

The Soviet response to Reagan’s Star Wars policy was to ramp up its spending on national defence. Soon enough, both sides were throwing insane money into expensive projects with no real end in sight.

The US could afford to do this (only just) but because the Soviets lacked supplier relationships with other countries it was forced to do everything in-house and that ended up bankrupting the communist state. By the end of the decade, the entire Soviet regime was gone, never to return.

Forcing an adversary to build expensive things at home and cutting them off from suppliers turned out to be a great way to hurt the Soviet Union. Perhaps the US is doing the same thing to China.

The US knows that every dollar China spends developing its own semiconductors is a dollar it can’t spend on anything else. That’s why sanctions can be so crippling.

So, what can companies learn from these geopolitical squabbles?

Necessity may be the mother of invention, but what they don’t tell you is that it is always a better strategy to avoid necessity in the first place.

Granted, most companies reading this article will never suffer from government sanctions. But supply chain disruptions happen all the time. If you’ve outsourced a crucial part of your business to a third party, you might find yourself in trouble if (or when) that relationship breaks down.

The only way to defend against this is to understand which assets are truly mission-critical to your business. Then you can focus your precious time and effort on protecting these assets before connecting with suppliers. The last thing you want is to be forced into building all your most precious assets in-house just because you relied a little too heavily on third parties.

It’s crucial to ask: could you survive if a supplier relationship suddenly breaks down?

Think about it from your competitor’s point of view. They want you to do everything yourself. Your competitors know this will spread your attention too broadly and divert resources away from more important projects. They want you to make this mistake, just as the US wanted China to make that mistake.

When you take the time to understand your most valuable intangible assets, you will be free to establish relationships with suppliers in ways that don’t threaten the ‘mission-critical’ parts of your business.