Asia’s tech industry is scrambling to figure out how to comply with US sanctions on Russia, which potentially apply to shipments of everything from telecom equipment and smartphones to PCs and gaming consoles.
Trade restrictions were slapped on Russia days after its invasion of Ukraine; they took immediate effect and could cover any product made with American technology. The suddenness and sweeping scope of the rules caught many Asian tech companies off guard. This has been especially true for those not caught up in the US crackdown on Huawei Technologies.
“We quickly set up a team of eight people to study the economic sanctions and US export laws,” James Hwang, chair of Taiwan’s Getac Holdings, told Nikkei Asia. “They are so difficult, complicated and vague. I even had to look up the term ‘dual-use’, and we still aren’t very sure if our products fall into the scope of the controls.”
Dual-use technologies and products serve civilian and military uses. The label is a key criterion in determining whether shipments are subject to export controls.
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Getac, the second-biggest maker of “rugged” computers in Europe, is one of many Asian electronics companies that make sales or products in Russia.
South Korea’s Samsung and China’s Xiaomi have leading shares in Russia’s smartphone market, while Taiwan’s Acer and Asus as well as China’s Lenovo are major PC players in Russia. LG Electronics, another South Korean company, produces and sells home appliances in Russia, while Japan’s Sony sells electronics there.
At issue is the Foreign Direct Product Rule, a key tool in the US’s trade control arsenal. It is used to block goods containing or developed with American technologies from being shipped to designated entities, even if those products are made by non-US companies. The FDPR was used to cut off Huawei’s access to global chip suppliers.
This time, experts say, the scope of restrictions goes far beyond semiconductors and other components to include telecommunications and information security equipment, sensors, lasers and computers — and possibly consumer electronics like laptops and smartphones.
“A broad range of consumer electronic and telecommunication devices could be subject to the expanded export controls on Russia, with the exception of some consumer communication devices going to certain Russian end users,” said Clinton Yu, a Washington-based partner specialising in international trade and export control regulations at business law firm Barnes & Thornburg.
A senior Taiwanese trade official told Nikkei Asia that high-end PCs, such as gaming computers with advanced graphic processing functions, could fall within the scope, based on a preliminary evaluation of the sanctions document.
The logic is that the computing power and high-end components of these devices could be harnessed for military purposes.
The first step in determining if a product or component is subject to the FDPR is to find its relevant Export Control Classification Number (ECCN), which is then cross-referenced with US trade regulations.
But this is not a straightforward task.
“Not all manufacturers have classified their products, and therefore some will not know which ECCNs would apply to their products,” said international trade lawyer Christopher Timura of Gibson Dunn. “When this occurs, we sometimes work with a buyer or a manufacturer to determine the ECCN of a product.”
Typically, he added, this required “sitting down with an engineer or developer to learn about a product and determine whether it has characteristics that are described under an ECCN”.
For standard consumer electronics like smartphones, shipments to Russia will not be subject to export controls if companies can be sure the end users are civilian, non-government and non-military users, a spokesperson at the Department of Commerce told Nikkei Asia.
Timura, however, pointed out another hurdle. “In practice, it can be very difficult to identify military end users who are not specifically identified by the [Department of Commerce],” he said. “Companies will not always be willing to answer questions that you may ask regarding their past support of military end-uses or may even be blocked by domestic law from answering questions that relate to the US export control laws.”
Like Getac, many of the more than a dozen Asian electronics makers interviewed by Nikkei Asia said they were still working through the implications of the new US rules.
“We are still evaluating whether we need to hire external counsel to help us check the new export control regulation while keeping close contacts and attention to fit our local government’s regulation,” said Eric Chen, president of general management at Advantech. This is despite the industrial computer maker’s business in Russia accounting for only about 1 per cent of revenue.
Representatives at other companies say they are keeping quiet regarding the status of their operations in Russia.
“We would prefer to keep our heads down on this matter, and I am sure many of our peers feel the same,” said a manager at an Asian PC company. “It’s dynamic, and we don’t want to say the wrong thing.”
In another sign of caution, Taiwan’s MSI, the biggest gaming PC maker in Russia, has quietly followed Intel and Advanced Micro Devices of the US in halting sales of its products in the country to avoid any violations, a source with direct knowledge of the matter told Nikkei Asia.
Failure to comply with US trade rules, experts say, can result in harsh penalties.
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“It’s not uncommon to see companies pay hundreds of millions of dollars in fines for non-compliance,” Barnes & Thornburg’s Yu said. “Even companies that are entirely outside the US should care about potential consequences since failure to comply can result in . . . being placed on one of the US’s ‘blacklists’.”
Pulling out of Russia would bring business consequences as well.
Samsung’s smartphone shipments in Russia grew 14 per cent in 2021, and Xiaomi’s swelled 29 per cent, Counterpoint Research’s data shows. Samsung also provides telecom equipment to the country, as do Huawei and China’s ZTE, according to research agency Lightcounting.
HP of the US, Lenovo, Acer and Taiwan’s Asustek Computer lead Russia’s PC market, which is relatively small in global terms. HP and Acer have participated in bidding for government contracts in Russia.
The cautious response of many Asian tech companies contrasts with that of western peers such as Apple, Google and Microsoft, which were quick to condemn the war and suspend operations or sales in Russia. HP also told Nikkei Asia that it has paused sales and marketing activities in the country.
LG says it is paying “careful attention to the situation”. Sony told Nikkei Asia that sales of its electronics products in Russia not directly managed by the company are continuing but said it will respond promptly to any change in the situation.
Acer and Asustek declined to say if they had suspended business in Russia. Lenovo and Xiaomi did not respond to Nikkei Asia’s requests for comments. MSI declined to comment.
“Compared with their western counterparts, we can totally understand why Asian and Taiwanese tech companies are generally more reluctant to disclose their relations with Russia and how they cope with sanctions, as they may not have strong governments behind their backs,” a chip industry executive who dealt with the US’s clampdown on Huawei told Nikkei Asia.
The executive described a quandary that these companies suddenly find themselves in. “They don’t know how long the war will last and they are not only wary of later retaliation from Russia and its partners and their customers there,” the source said. “They also harbour concerns of potential geopolitical consequences from China, one of Russia’s strongest allies.”
Additional reporting by Kim Jaewon in Seoul.
A version of this article was first published by Nikkei Asia on March 4. ©2022 Nikkei Inc. All rights reserved.