US warns Italy over the Huawei job

US Secretary of State Mike Pompeo is back in Europe and this time he is attempting to scare the Italians into line.

It has been a quiet few months for the White House enforcer, though Pompeo is back in the European ring throwing punches towards Italy and his old foe, Huawei. At a press conference in Rome, the same line has been delivered to the Italian press; if Italy works with Huawei, it does not bode well for its relationship with the US.

“And so to the extent that an Italian company makes a decision to invest in or provide equipment that has a network that our national security teams – our intelligence teams, our Department of Defence – conclude isn’t a trusted network, where we have risk to our information that we can’t figure our way through, we’ll have to make some very difficult decisions,” Pompeo said.

“We want to be a partner with Italy in all of these things, but it is not the case that we will sacrifice America’s national security to put our information in a place where there’s risk that adversaries or the Chinese Communist Party might have access to that.”

Although this is the most relevant point to the telecommunications industry, it should also be noted there is existing tension between the US and Italy.

The US is unhappy over loans and subsidies which have been granted to EU aerospace company Airbus. Thanks to this assistance, Airbus is now able to challenge US rival Boeing on the global stage, though the means by which success has been realised has irritated the White House. Tariffs have been suggested on certain European food exports such as whiskies from Ireland and Scotland, as well as wine and cheese from Italy.

While there have been protests from officials against the tariffs, the World Trade Organization (WTO) has said the US is free to pursue the charges if it chooses to. This has led to increased tension between the US and various European nations, including Italy. During his four-day tour of the country, Italian farmers exchanged stern words with Pompeo to demonstrate their frustration.

It might not be directly relevant to the Huawei saga, but it is another chapter in the story which indicates the US and Italian Governments are not on the friendliest of terms.

In terms of the telco and technology space, Italy has not made any commitments to ban Huawei to date, though Pompeo seems to think it is necessary to edge the Italian Government along. It is a message which the statesman has delivered on several occasions to European counterparts; if you work with Huawei, we might not work with you.

What is odd, however, is that the Italian telecommunications scene hasn’t been the most profitable for Huawei to date. Vodafone and Telecom Italia both rely on Ericsson as their main equipment provider, while Iliad recently announced it was continuing its relationship with Nokia. Wind Tre’s main supplier Chinese state-owned ZTE, which might irritate a few in the US, though Huawei, the victim of much of the White House’s aggression, isn’t a major player here.

More than anything else, this seems to be more symbolic from Pompeo. There might be other distractions in the world of politics, but it is always useful to re-iterate it point about Huawei.

This threat from the White House is not necessarily new however. The same has been said to the UK, largely ignored by the Germans, irritated Hungary and proved somewhat successful in Poland. Only the Poles have taken a firm stance against Huawei, aligning themselves with the US by signing an agreement on 5G security which effectively bars Chinese vendors from supplying equipment for Polish 5G networks.

Looking at the economics side of the argument, the US accounts for 9.3% of all exports, making it the third-largest destination behind Germany and France. Wine accounts for 4.1% ($1.83 billion) of the exports to the US, pasta 0.69% ($310 million) and cheese 0.71% ($317 million). The US is a very important trade partner of the Italian economy, and the tariffs mentioned above will certainly have an impact.

While banning Huawei from the Italian market would not necessarily have a material impact, it would be a symbolic gesture. This is another example of the US attempting to harness support in its on-going battle with the Chinese, though the Pompeo threat causes any reaction from the Italian Government remains to be seen.

Google writes opening line of Huawei smartphone obituary

Huawei’s next flagship smartphone will not feature official Google applications as the weight of the US ban finally hits home.

Speaking to reporters in the US, and first reported by Reuters, a Google spokesperson said the Huawei Mate 30 rumoured to be launched in October, cannot be sold with licensed Google apps and services. This is a significant setback to Huawei’s consumer division and begs the question as to whether anyone would now consider the devices without the Android OS and supporting app ecosystem.

The blow from Google of course leads back to the White House. In entering Huawei and its affiliate companies on the Entity List, US suppliers are banned from supplying any products, components or services to the Chinese vendor. This includes Google, with its horde of popular applications and platforms.

There has of course been a moment of reprieve for some US suppliers. President Trump said there will be an extension on the ‘grace period’ afforded to Huawei and its US supply chain, though Google has now stated this only applies to devices which are already on the market. As long as the conflict between Beijing and Washington persists, it looks like the new Huawei devices will have a Google-shaped hole in them.

Although Google has not confirmed whether it has applied for an exemption from the ban, it has said in previous months it wishes to continue working with Huawei. Of the 130 applications sent to the US Commerce Department to seek a special licence to continue working with Huawei, none have been accepted thus far.

This is of course not as simple a situation as one might expect. Google owns Android, the open-sourced operating system. Huawei is not banned from using Android, it can’t be, but it is banned from being an official Android partner of Google. This means it will not be entitled to security and performance updates as soon as there are available. It can use the basic Android building blocks, but it will effectively have to build its own OS, which it has pretty much already done, but it will be a completely different product.

The confirmation from Google here is the news many Huawei fans will not want to have heard. The Mate 30 will not feature popular applications such as Google Maps, or the Goole Play Store where users can download other apps. These are only two examples, though they are critical elements of any Android smartphone.

The question which remains is whether anyone will buy a Huawei smartphone now?

We suspect not, assuming they have kept up-to-date with developments or done the slightest bit of research. There will of course be a market for Huawei in China, there is a sense of patriotism there propping up the business, though this could be the beginning of the end for Huawei in Western (perhaps all international?) markets.

A Google-less future is the new status-quo for Huawei, and unless this changes quickly, we suspect its smartphone business will be a shadow of its former-self in a very short period of time.

For those who have been plotting and scheming the downfall of Huawei, this is the first sign of success. For months, the Chinese vendor seemed to be immune to the collateral damage from the US/Chinese trade-war, though now it has finally hit home.

The consumer business unit has been very kind to Huawei executives over the last couple of years. Thanks to the creation of consumer devices which performed well and were reasonably-priced, and an extensive above-the-line advertising campaign to drive the Huawei brand, Huawei has become one of the most popular consumer electronics brands worldwide. It has consistently been the number two smartphone brand for shipments globally in recent years, while the consumer business group is now the largest contributor to group revenues at the firm.

In its recent financial statement, Huawei reported another year-on-year revenue increase, though it did appear growth in the smartphone business was driven by domestic smartphone sales. Research from Canalys suggests smartphone sales in Western Europe were down for the second quarter by 16%, with Samsung and Xiaomi benefitting. Unless the situation changes, we cannot see anything but a dramatic decline in Huawei smartphone sales in Western markets, and perhaps this misery will spread to all of Huawei’s international market.

This is currently an incredibly profitably and valuable business to Huawei executives and shareholders, though now it appears it has been cut-down at the knees by the White House and the Trump administration.

‘No technical grounds’ to ban Huawei says UK Parliament committee

Chair of the Science and Technology Committee in the UK, Norman Lamb, has stated there is not enough technical evidence to ban Huawei and is demanding a final decision by the end of August.

In a letter written to Jeremy Hunt, Secretary of State for Digital, Culture, Media and Sport (DCMS), Lamb has demanded a conclusion to the Supply Chain Review which has staggered the progress of 5G networks in the UK. Many in the industry have become increasingly frustrated with the state of purgatory which has loomed over the UK telecoms industry, and now the influential Science and Technology Committee has had enough.

“Following my Committee’s recent evidence session, we have concluded that there are no technical grounds for excluding Huawei entirely from the UK’s 5G or other telecommunications networks,” said Lamb.

“The benefits of 5G are clear and the removal of Huawei from the current or future networks could cause significant delays. However, as outlined in the letter to the Secretary of State for Digital, Culture, Media and Sport, we feel there may well be geopolitical or ethical considerations that the Government need to take into account when deciding whether they should use Huawei’s equipment.”

This is the interesting aspect of the letter to Wright. Lamb is effectively telling DCMS and the National Cyber Security Centre (NCSC) to hurry up and make a decision, but not to come to a conclusion too quickly as there are ethical and political considerations to account for. It’s a bit of a mixed message, but a deadline is perhaps overdue for this saga.

The message from Lamb is relatively simple; there are no technical grounds to ban Huawei. Quoting the NSCS’ assumption that 100% secure is impossible, suggesting a lack of concrete evidence against Huawei espionage, reasserting legal obligations placed on telcos to maintain security and pointing towards the international nature of supply chains nowadays are all points made by Lamb to suggest Huawei should be allowed to contribute to network infrastructure.

There are of course concessions make in the letter. Lamb is suggesting Huawei should be excluded from contributing to the network core, while there should also be a mechanism introduced to limit Huawei should it fail on-going competency tests and security assessments, but the message seems to be focused on the idea that Huawei is no more of a security threat than any other organization.

“Supply chains for telecommunications networks have been global and complex,” the letter states. “Many vendors use equipment that has been manufactured in China, so a ban on Huawei equipment would not remove potential Chinese influence from the supply chain.”

Another interesting point raised by Lamb is the legal obligation which has been placed on the telcos to ensure security. Communications infrastructure is a key component to today’s society, but the telcos are the ones who will suffer some of the greatest consequences for poor risk mitigation and due diligence. None of the telcos have raised concerns of an increased security risk from Huawei, and this should be taken as some of the most important evidence when considering the fate of the Chinese vendor.

Ultimately, this is action from the Government. It might kick-off some bickering between the parties (Lamb is a Liberal Democrat) and between departments, but finally someone is forcing DCMS and NSCS into a decision. It seems Lamb is not concerned about the distraction of a party leadership contest or Brexit, he simply wants an answer by the end of August.

Interestingly enough, this letter also forces DCMS into basing the outcome of the Supply Chain Review on politics. By stating there are no technical grounds for a ban, should Wright and his team want to exclude Huawei it will have to be done for another reason. Lamb has asked DCMS to consider the ethical and political weight of a decision, as well as the impact it might have on relationships with allies.

This is now a very difficult decision for DCMS. Lamb has seemingly taken technical considerations off the table; any ban would have to be political.

Industry quietly lobbies against Trump’s anti-globalisation agenda

Slowing down the progress made by Huawei on the global stage might be a win for the White House, but US firms are not seeing the benefits as some are reportedly lobbying against the infamous ban.

In a televised interview this morning, Huawei Founder Ren Zhengfei suggested sales forecasts will be negatively hit by the firms debut onto the US ‘Entity List’, taking two years to get back onto the 2018 trajectory. For the White House, this might be vindication of its aggressive anti-Huawei agenda, but not everyone is happy about how events are unfolding.

According to Reuters, US semiconductor firms are quietly lobbying the US Department of Commerce in an attempt to limit the negative impact of the ban. Let’s no forget that while the White House might seem against globalisation trends right now, the success of these firms is largely based on the idea of free-trade and capitalising on the rapid evolution of international markets.

The issue which these firms face is one of commercial loss and gain. Huawei is one of the industry’s biggest consumers of semiconductor products, with the firm rumoured to spend roughly $20 billion a year on such products. When you look at the impact on some firms, you can see why the semiconductor industry is getting a bit twitchy.

Last week, Broadcom lowered its sales forecast for the year by $2 billion, pointing towards one of its customers being caught up in an international trade-war. Although Broadcom has not explicitly stated how much of the total revenues are attributable to Huawei, firms are only compelled to do so when it is more than 10% of the total, the numbers would suggest it is not far off that percentage.

And Broadcom is not alone on relying on Huawei as a customer. Qorvo depends on Huawei for 11% of its total revenues, while Lumentum has said Huawei accounted for 18% of all shipments during the last quarter. As a result, Lumentum’s sales forecast is now $30-35 million less for the year. Xilinx is another chipmaker which has been impacted by the ban on selling components to Huawei, and there are others as well including Intel and Qualcomm.

As a result, numerous lobbying efforts are reportedly being held behind closed doors to mitigate the impact. This might be exemptions or the creation of loopholes, but the friendly-fire is quite notable in this segment.

What is worth noting is that there are other lobby efforts going on also. Google is rumoured to be in active conversations, suggesting its operating system Android should be exempt from the ban on the grounds of national security. Google is arguing that should it be banned from working with Huawei, it would not be able to provide timely security updates which could make the devices vulnerable to hacking and data breaches.

However, there is a commercial angle to all of these arguments which might gain more traction in the minds of the government puppeteers.

At Google, the firm has a dominant position in the OS market. Huawei’s alternative OS might not be able to dislodge this position, but it does have a significant domestic market to drive user adoption. If a suitable alternative to Android emerges from the Chinese telco flagbearer, it would not be unimaginable to see mass adoption in the Chinese market. Once it has domestic domination, it would not be unusual to see international expansion to the China-friendly nations. This would potentially erode Google’s influence on the world.

In the semiconductor space, the risk is of the emergence of a homegrown Chinese-semiconductor industry.

This is not to say China does not already have a presence in the semiconductor space but forcing Huawei away from the US could be the catalyst the slumbering sector needs. Companies like Shenzhen Fastprint Circuit Technologies and Jiangsu Changjiang Electronics Technologies have been making financial gains in recent months, both in terms of revenues and share price, while Huawei’s HiSilicon has also been ramping up.

The US is dominant in the semiconductor market and will probably continue to be. There is a gap in competence for core technologies in the Chinese segments to eclipse this position, though the risk is erosion of profits. The more competitors there are on the market, the lesser the market share for US firms. This assumption might well be exaggerated when you consider the preference of Chinese firms for a homegrown supply chain.

For the semiconductor industry, this should be seen as a red-flag. The Semiconductor Industry Association (SIA) has already suggested the industry is in a bit of a slump at the moment, with sales for April down 14.6% year-on-year. The SIA does have international members, though its biggest role is to represent the interests of US manufacturers. The last thing these firms need right now is more bad news when the market is already dampening.

The result of this friendly-fire is conversations behind closed-doors. The Trump administration is seemingly trying to dilute the influence of China on the rest of the world, though it appears to be having the same impact on some US firms. We’ve said this before, but the result of this trade-war seems to be nothing by a net-loss globally right now; no-one is winning, and it seems to be a matter of damage limitation.

What the White House should be wary of is whether this anti-China agenda is starting to look like a personal vendetta for the President. If there is notable damage to US firms as well as Chinese, the White House must question whether the current strategy is the most effective.

Is ‘Make America Great Again’ is the motto of the White House, it would be useful for the rest of us to understand how much friendly-fire will be tolerated in the quest to destroy the Silk Road.

US officials ask for delay to Huawei ban on competition grounds – report

Deputy Director of the Office of Management and Budget Russell Vought has requested the ban on Huawei technologies be delayed by two years, sounding very similar to Huawei’s own argument.

In a letter to the White House, Vought is arguing the ban should be delayed in certain areas to ensure national security considerations and objectives can be suitably met in the new procurement landscape. Vought is currently on the clock, as rules signed into law last year are to be officially introduced in 2020. These laws would place a ban on any government funds being used to purchase Huawei products, services or components.

The issue which is currently being faced is in the procurement functions. Vought is suggesting the ban has been rushed in and would significantly reduce the number of vendors available for government agencies to work with. Interestingly enough, this is remarkably similar to the argument Huawei has been using to counter the ban. Of course, this reference would certainly not be made by the White House.

Plenty of arguments have been put forward by the under-fire Chinese firm, most recently there has been a challenge to the constitutional legitimacy of the rules, though the competition claim is one which was made back in October 2018.

At the time, Huawei suggested that banning its technologies and services in the US could hand control of the global 5G economy over to China. In a filing to the FCC, Huawei suggested the price and speed of infrastructure deployment would be impacted as competition would be reduced. This is quite a reasonable point to make as this segment of the telecom’s world is incredibly short on tier-one suppliers, or at least those which can match the quality of equipment provided and the support services which follow.

The letter from Vought is not making the exact same point, but the principle is very similar. Too many contractors rely on Huawei in their own supply chain, therefore banning Huawei would prevent any government agencies from working with these vendors. This would decrease competition for valuable contracts, potentially pushing up the price while lowering the quality of service offered.

Although the US has made its stance against China and Huawei very clear, the White House has shown on numerous occasions it is willing to be flexible with its own principles if it suits its own agenda. President Donald Trump attempted to reverse the ban on ZTE last year, once it had achieved its aims, only to face opposition in the House.

It would appear the national security argument can once again be ignored if there is too much pain is experienced by federal agencies. There seems to be little concern of the impact to private industry, see the complaints from rural telcos or those organizations where Huawei is an important customer, with these companies little more than pawns ready for sacrifice.

Perhaps we should be surprised at the consistency of hypocrisy coming out of the White House, but such are the lowly levels standards are currently being set, we are not.

Huawei claims its US ban is unconstitutional

Huawei has continued its counter-assault against the US, suggesting the 2019 National Defense Authorization Act (NDAA) contradicted the country’s constitution.

Signed into law in August 2018, the NDAA effectively banned Huawei and ZTE from any meaningful work in the US. The language was suitably nuanced to ensure this wasn’t a total ban, but the conditions made it difficult for Huawei to contribute any components, products or services to government or state-funded projects. Due to the intricacies of network investments, almost all major projects could be deemed state-funded by one means or another.

While Huawei has not taken this action from the US Government sitting quietly, this latest move challenges the legal foundations of the legislation, suggesting such actions from the White House and Congress are unconstitutional.

“As explained in the motion, the Constitution generally limits Congress to enacting laws and requires that application of those laws be left to the Executive and the courts,” said Glen Nager, the lead external counsel for Huawei and Partner at Jones Day.

“Congress may not selectively punish specific persons; Congress may not selectively deprive specific persons of property or liberty; and Congress may not itself exercise executive or judicial powers. But section 889 violates all of these constitutional rules.”

According to the filing, section 889 of the NDAA violates the Bill of Attainder, Due Process, and Vesting Clauses of the US Constitution. Huawei and its lawyers will argue the law should not be allowed to target specific companies and/or persons, while US politicians specifically targeted the firm during the legislative debate process, blatantly proclaiming an objective was to ‘banish’ Huawei from the country.

The Bill of Attainer clause suggests no bill can be passed into law which singles out an individual or group for punishment without a trial. As the US has passed this law without any formal legal proceedings against Huawei, it would appear there is a good case here.

Huawei’s lawyers also claim section 889 violates due process and the separation of powers, in that it is selective legislation targeting Huawei specifically. The filing also argues deprives Huawei of protected property and liberty interests without affording it constitutionally necessary due process. And finally, Congress has assumed the fact-finding and law application functions of the executive and the courts, ignoring the separation of power clause.

Should the courts be in agreement with Huawei’s position, it would appear politicians were in too much of a rush to make a move against China and its telco flagbearer. Another interesting consequence might be the burden of proof.

To date, little, if any, evidence has been offered to back up US propaganda against Huawei, though if the filing proves the NDAA is unconstitutional, the US Government might be forced to table any evidence it has. If the choice is between this law dwindling into non-existence or tabling evidence of collusion, the nuanced conflict between the US and China might be about to become much more substantiated.

US is whispering in South Korea’s ear over Huawei – report

US diplomats are in Seoul and up to their old tricks attempting to convince the South Korean foreign ministry over the dangers of China.

After enduring months of frustration in Europe, the anti-Huawei road trip is back in Asia. The doomsday propaganda might have failed to hit the target in Europe, though the US is now seemingly targeting South Korea according to local sources.

One of the complaints has been directed at LG Uplus, one of the country’s major telcos which has been using Huawei components and products. The US is suggesting LG Uplus should be banned from operating in areas which would be deemed sensitive or critical, while the Huawei threat should be driven back across the borders as soon as possible.

While Huawei has been the centre piece of the US’ anti-China propaganda mission over the last few months, the over-arching conflict is showing the threat of widening. Sources suggest the White House is considering adding an additional five Chinese companies to the ‘Entity List’, the blacklist of companies which cannot do business with US firms. These companies, which include Megvii, are primarily surveillance technology firms.

Although the US has been leaning heavily on its rivals to take action against Huawei and other Chinese vendors in the telco world, South Korea is in a similar tricky position as Europe. South Korea, like Europe, relies heavily on China as an export market, with a quarter of all exports in 2019 heading towards China.

Europe is currently standing firm against White House demands, and it would not surprise us if South Korea took a similar position of defiance. It does appear the country is heavily reliant on the Chinese relationship and siding on with the US could put a severe dent in the economic prosperity of the nation.

Don’t ignore Huawei’s ban on buying US components

While everyone is focusing on the ban on selling in the US, the ban on buying US components is a much more interesting chapter of the Huawei saga.

President Donald Trump has dropped the economic dirty bomb on China and it’s dominating the headlines. Although Huawei, or China, are not mentioned in the text, the Executive Order is clearly a move to stall progress made in the telco arena. China is mounting a challenge to the US dominance in the TMT arena, and this should be viewed as a move to combat that.

There are clearly other reasons for the order, but this should not be ignored. The security argument, albeit an accusation thrown without the burden of concrete evidence, is a factor, but never forget about the capitalist dream which underpins US society.

However, although most are focusing on Huawei’s inability to sell components, products and services in the US market, there might be an argument the ban on purchasing US components, products and services is more important, impactful and influential.

“This action by the Commerce Department’s Bureau of Industry and Security, with the support of the President of the United States, places Huawei, a Chinese owned company that is the largest telecommunications equipment producer in the world, on the Entity List,” said Secretary of Commerce Wilbur Ross. “This will prevent American technology from being used by foreign owned entities in ways that potentially undermine US national security or foreign policy interests.”

While we will focus on the ban on purchasing US components, products and services for this article, it is worth noting the ban on Huawei selling in the US will have an impact.

Rural telcos in the US have mostly been against any ban on Chinese companies. In October 2018, Huawei made a filing with the FCC arguing its support for rural telcos is underpinning the fight against the digital divide and a ban would be disastrous for those subscribers. Michael Beehn, CEO of MobileNation, was one of those who argued against the ban, suggesting the cost-effectiveness of Huawei allowed his firm to operate. Without the advantage of nationwide scale, these organizations will always struggle when the price of networks is forced north.

While the US is a massive market, with huge opportunities to maximise profits, not being able to sell in the US is not going to have a significant impact on Huawei. Its customers are the rural telcos not the national ones. Huawei has not managed to secure any major contracts with the big four, therefore it is missing out on something which it never had. Huawei has still managed to grow sales to $105 billion without the US, therefore we believe this ban is not going to be a gamechanger.

However, it is the ban on purchasing US components, products and services which we want to focus on here.

Huawei is not outrightly banned from using US technologies and services, however, those companies who wish to work with the dominant telco vendor will have to seek permission to do so beforehand. The US can now effectively how strategically it wants to twist the knife already dug deep into Huawei’s metaphorical chest.

Although we’re not too sure how this will play out, Huawei’s business could be severely dented by this move.

Huawei recognises 92 companies around the world as core suppliers to the business. It will have thousands of suppliers for various parts of the business, but these 92 are considered the most important to the success of operations. And 33 of them are US companies.

Some are small, some are niche, some are more generic, and some are technology giants. The likes of Qualcomm, Intel and Broadcom all have interests in keeping the US/Chinese relationship sweet, though more niche companies like Skyworks Solutions, Lumentum and Qorvo have much more skin in the game. Firms like NeoPhotonics, who are reliant on Huawei for 46% of its revenues, might well struggle to survive.

Huawei will be able to survive this move, it has been preparing for such an outcome, but you have to wonder what impact it will have on its products and credibility.

HiSilicon, the Huawei-owned semiconductor business, has been ramping up its capabilities to move more of its chip supply chain in-house, while the firm has reportedly been improving the geographical diversity of its international supply chain. According to the South China Morning Post, not only has Huawei been moving more operations in-house, it has also been stockpiling US components in the event of the procurement doomsday event.

A similar ban on procuring US components, products and services was placed on ZTE last year and it almost crippled the firm. Operations were forced to a standstill due to the reliance on US technology. Huawei has never been as dependent on the US, though it seems the lessons were learned from this incident.

The big question is what impact a ban would have on the quality of its products.

Huawei might preach the promise of its own technology and the new suppliers it will seek/has sought, but there is a reason these 33 US companies were chosen in the first place. Either there is/was a financial benefit to Huawei in these relationships, or they were chosen because they were best in class.

Huawei is a commercial organization after all, it wants to make the best products for the best price. There will certainly have been compromises make during these selections, either paying more for better or sacrificing some quality for commercial benefits, and having to make changes will have an impact. Huawei, and its customers, will have fingers and toes crossed there is no material impact on the business.

The other aspect to consider is disruption to operations. ZTE found out how detrimental dependence on a single country can be, and while Huawei has mitigated some of this impact, it remains to be seen how much pain could be felt should the ban be fully enforced. Might it mean Huawei is unable to scale operations in-line with customer deployment ambitions? Could competitors benefit through these limitations? We don’t know for the moment.

The ban on selling in the US might sound better when reeling off headlines, but don’t forget about Huawei’s supply chain. We think there is much more of a risk here.

A look at how US suppliers have been hit by Huawei news

President Trump’s Executive Order and the decision to place Huawei on the US ‘Entity List’ is going to dominate the headlines over the next couple of days, but what will be the impact on US suppliers?

During the ZTE saga last year, where the firm was banned from using US components in its supply chain, several US firms faced considerable difficulty. With Huawei potentially facing the same fate, the next few days will certainly make for uncomfortable reading for some.

Although the main focus of the news has been on the Executive Order banning any Huawei components or products in US communications infrastructure, the entry onto the ‘Entity List’ should be considered as big. This is effectively the commerce version of a dirty bomb, and some might suggest it is being used to disrupt Huawei’s supply chain and dent its ability to dominate the telco vendor ecosystem.

But what is the impact of losing a major customer? What are the realities these US firms will face if the Secretary of Commerce turns down their application to work with Huawei?

Speaking to members of the financial community, it could be pretty severe.

Losing a customer which accounts for 2-3% of total revenues would be a concern but nothing major. For 5% of revenues, this is a headache, but something the spreadsheets could most likely tolerate. When you start getting to 10% the panic button needs to be hit.

A customer which accounts for 10% of total revenues is a major prize. Losing this revenue would result in a complete rethink in how the business operates, as this could effectively wipe out any profit for the year. If you are in the services industry, it isn’t as much of an issue, but when it comes to manufacturing and components, there are so many different implications.

For example, in the first instance you have to consider how this hits budgets, forecasts, resource allocation and manufacturing strategy.

Sales staff are probably the safest here, as the lost revenues will have to be replaced as soon as possible with new customers, but what about the marketing strategy? Do you want to replace the lost capacity with short-term customers (i.e. quicker) or long-term customers which may offer larger orders?

On the R&D side, does a company have dedicated resource working on projects for that customer? What will these staffers do now? Can those projects be re-orientated for another customer?

Finally, on the manufacturing side, there are all sorts of issues. How will the loss of revenue impact the resource recovery plan? How are the manufacturing facilities configured – do you have to close plants?

Another consideration is on your own supply chain and procurement strategies. When supplying products to said customer, you will have to source your own raw materials. Will the loss of this customer result in contracts with suppliers having to be re-negotiated? Will this mean quantity discounts are now impacted?

These are all the considerations when you are losing a customer worth 10-15% of total revenues. Anything above this and you would have to question whether the company can survive, or at least face a major restructure.

Share price of US suppliers to Huawei
Company Share price
Qualcomm -3.18%
Xilinx -4.1%
Western Digital -1.12%
Marvell Technology +0.5%
Seagate Technology +0.43
Texas Instruments +0.045
Skyworks Solutions -4.56%
ON Semiconductor -0.99%
Qorvo -5%
NeoPhotonics -12.9%
Flex -1.13%
Finisar -2.05%
II-VI -2.86%
Maxim Integrated -0.99%
Analog Devices -2%

All share prices at the time of writing (UK: 16:20) – in comparison to market close on 15 May 2019

Looking at Qorvo, executives at semiconductor supplier might certainly have something to worry about. Huawei is features in the ‘top three’ customers for the firm, while on the most recent earnings call, the team discussed the success of Huawei’s smartphone division and in particular the ‘P’ series as a contributor towards a successful quarter. Some have suggested 11% of Qorvo revenues are dependent on Huawei.

Skyworks Solutions, another semiconductor company, has been suffering in recent years. With large parts of the business reliant on smartphone shipments, the global slowdown has been tough. The team work with Huawei on both the mobile and infrastructure side, and while it does work with many tier one firms in both segments, the market is clearly worried about a competitive field and an inability to work with one of the largest telco vendors worldwide.

Both Qorvo and Skyworks supply radiofrequency chips to Huawei, which might have an effect on the Chinese vendors ability to manufacture devices. That said, the supply chain disruption will not be anywhere near as damaging to Huawei as it was to ZTE as it has HiSilicon which manufacturers many of its components.

Xilinx is another which seems to have worn the news quite negatively. The team work with Huawei’s enterprise business unit, helping with video streaming challenges. This might be the smallest business group at Huawei, though the 5G euphoria is set to offer considerable opportunities. Xilinx share price has been recovering after a 17% drop in April, though this has proved to be another set-back.

NeoPhotonics is a company which should be seriously concerned. As a customer, Huawei accounted for more than 46% of the total revenue across 2018. The executive team is relatively open with investors regarding this fact, and this might have been factored into any decision to invest, though this is a massive loss for the business to absorb.

Lumentum is another business which is somewhat reliant on Huawei. While we were not able to nail down specific numbers, the firm supplies fiber optic components to Network Equipment Manufacturers (NEM) and considering there aren’t many of them to supply to, losing Huawei will be a headache.

At Finisar, Huawei described as one of the company’s major customers, though it has seemingly been diversifying its customer base in recent years. In 2017 and 2016, Huawei accounted for 11% and 12% of the annual total respectively, though the percentage is not listed for 2018. This is because the percentage has dipped below 10%, though we were unable to ascertain what the figure now is.

We might have to wait a few weeks to understand the full extent of the impact, and how stringently the US will enforce Huawei’s entry onto the ‘Entity List’, but we suspect there will be some very stressful meetings taking place in numerous offices throughout the US.

Trump’s hand is hovering over China executive order

President Trump is reportedly on the verge of signing an executive order effectively banning Huawei, and other Chinese companies, from providing any products or services in the US market.

According to Reuters, the signing of the order could happen as soon as this afternoon (Wednesday 15 May) although no companies will be named specifically. It is believed US companies will be banned from purchasing any telco equipment from vendors who are deemed a threat to national security.

The vagueness of the report is perhaps down to the fact the news is not official just yet, although it might well be designed that way in the document. Intelligence agencies will presumably be requesting as much freedom from bureaucratic shackles as possible; vague language in the executive order might be by design.

The White House will allegedly use the power of the International Emergency Economic Powers Act, which offers the President the luxury of regulating commerce in response to national security concerns.

The executive order certainly comes at a sensitive time, with both the US and China on edge as trade talks have stagnated. The toing and froing over trade tariffs look set to escalate once again, with the reprieve from the threat of global trade war looking to be over.

President Trump has been suggesting talks are still on a steady path through Twitter, but many commentators believe the two superpowers are at odds with each other. Following the Chinese decision to impose tariffs on $60 billion worth of US goods starting in June, the White House is supposedly preparing a new list of $300 billion worth of Chinese imports that would be hit with tariffs of up to 25%.

The executive order, should the rumours prove to be true, could be fatal blow to the trade talks. Huawei is the telco champion of China, the poster boy of Chinese dominance in the technology world. Although Huawei will not necessarily be losing any significant business as a result of the order, it is a symbolic gesture.

While this executive order should come as little surprise, the world should ready itself for further escalation of a trade war between the two economic superpowers. Collateral damage could certainly be notable, especially in Europe where governments have been resisting US pressure to act against Huawei specifically.