Battle lines drawn ahead of White House social media summit

US President Trump has invited a number of social media commentators to a discussion about the current digital environment.

This is being largely interpreted as an anecdotal investigation into the nature of social media censorship, with Trump having repeatedly raised his concerns on the matter. The major social media platforms don’t seem to have been invited, however, instead a selection of independent journalists, commentators and activists will be asked about their online experiences.

The White House hasn’t published a list of attendees, so here’s our own, in no particular order, derived from information already in the public domain. We’ve also included the number of Twitter followers each attendee has to provide some measure of their online influence. The summit takes place tomorrow.

  • Tim Pool – YouTube Journalist – 352k
  • James O’Keefe – Independent Journalist – 548k
  • Ben Garrison – Political Cartoonist – 176k
  • Charlie Kirk – Activist – 1.16m
  • Ali Alexander – Activist – 95k
  • Scott Presler – Activist – 226k
  • Bill Mitchell – Broadcaster – 445k
  • Carpe Donctum – Activist – 122k
  • PragerU – YouTube Commentator – 271k
  • Heritage Foundation – Think Tank – 649k
  • Media Research Center – Media Watchdog – 157k
  • Christian Ziegler – Activist – 3k

It has not gone unnoticed that nearly all of those invited are at the conservative end of the US political spectrum and Trump is known to be concerned that online censorship tends to affect conservatives disproportionately. It’s presumably not a coincidence that most of these conservatives also seem to be committed Trump supporters.

The presence of the two journalists at the top of the list indicates this will be more than just a Trump supporter love-in, however. “This event will bring together digital leaders for a robust conversation on the opportunities and challenges of today’s online environment,” a White House spokesperson is widely reported to have advised.

Pool has probably been chosen due to his high-profile grilling of Twitter on the Joe Rogan podcast, in which he argued some of its rules on speech it permits  are demonstrably biased against conservatives. Similarly O’Keefe’s organisation Project Veritas has recently claimed to have exposed similar political bias at Google.

So it seems clear that at least one of the primary purposes of this summit is to enable the US government to gather evidence of bias in social media censorship. Earlier this year the White House opened a web form inviting people to submit such evidence, so it’s possible this will have influenced who was invited too.

While much commentary has focused on the perceived political agenda of this summit, the absence of not only the big tech companies but big media too indicates another angle. There is a growing body of anecdotal evidence that social media censorship is increasingly biased against independent commentators and thus in favour of corporate, institutional, establishment voices.

Leftist independent commentator David Pakman has alleged in the video below that the YouTube recommendation algorithm has been changed in order to favour corporate over independent media. Most of the independents he cites are also leftist, indicating this isn’t a predominantly political move.

 

It is well documented that YouTube has been anxious about the effect of some of its more contentious contributors on revenues for some time and has implemented broad censorship in an apparent attempt to appease big advertisers. If there is bias in the recommendation algorithm in favour of corporate media it’s probably because advertisers also favour them, but every piece of arbitrary censorship seems to create as many problems as it solves.

Meanwhile, Twitter is where Trump spends much of his time and so is probably the platform he scrutinises most closely. A US appeals court recently ruled that it’s unconstitutional for Trump to block people on Twitter, but this precedent had led to other US politicians who have blocked people on Twitter being sued. Elsewhere Twitter’s recent decision to ban any comment that ‘dehumanizes others on the basis of religion’ seems destined to raise questions about selective enforcement.

Not to be out-done Facebook recently updated its policy regarding ‘violence and incitement’ with the guidance shown in the screenshot below.

Facebook policy screen

This seems to say that it’s OK to advocate high-severity violence (un-defined) against anyone Facebook considers to be a ‘dangerous individual’ or anyone said to be a violent criminal or sexual predator. Since Facebook explicitly identified several individuals as dangerous recently, some of those people have understandably interpreted this move as hostile to them.

That there is a growing body of evidence of a deeply flawed approach by social media companies to policing their platforms is undeniable. To what extent this involves political bias remains unclear, but Trump seems to think it does and, with the next US general election imminent, he seems increasingly disposed to bring the full force of the state against any tech companies deemed to be acting against the public, and his, interest. Those companies will doubtless be following this summit with interest.

We’ll leave you with Pool’s take on the whole thing.

 

Trump’s Huawei de-escalation plans face broad domestic opposition

President Donald Trump might be about to find out, once again, that he cannot do whatever he pleases in the Oval Office, especially when it comes to national security.

A few tweets have emerged over the last couple of days which indicate prominent Senators are going to be standing in the way of the Trump grand plan. Republican Senator Marco Rubio and Democrat Senator Chuck Schumer have both voiced opposition to Trump’s plans to let Huawei off the hook to get trade discussions with China back on track.

What Trump has done over the last couple of months is something which might have worked in the world of private business, but it does not seem to be a legitimate strategy from a politician. The President built the hype surrounding Huawei as a national security threat to impose legislation in an attempt to cripple the firm, but now wants to step back.

It seems the demonstration of power has been enough, now Trump wants to offer an olive branch to the Chinese while he seemingly has the upper-hand in the trade talks. Unfortunately, the two prominent Senators are reading from the same playbook.

Rubio and Schumer have seemingly bought into the idea of Huawei as a threat to national security, and do not believe protections of US citizens can be used as a playing card in the international game of poker Trump is attempting to mastermind.

The message from the two Senators seems to be clear here; if Huawei is a national security threat, as the President has made so clear, it remains so. Just because there is an advantage to be claimed in the political game of trade talks doesn’t change the impression of Huawei.

We suspect Trump hasn’t fully grasped the dynamics of politics. This sort of play, a demonstration of power and influence, might have worked in private industry where Trump rules with iron authority, but that is not the way politics operates. There is a separation of power, with Congress holding the White House accountable and preventing abuses of power.

This is of course not the first time this dynamic has been exposed. During the ZTE saga, Trump demonstrated the power of the US economy to the Chinese and then wanted to stand-down. Congress proved to be a difficult compatriot to Trump in this instance, and it seems it wants to do so again.

What this could mean is a return to the status quo of uncertainly and passive aggressive tariffs. If the security conscious Senators get their way, Huawei would still remain an enemy of the state and the world will return to the political purgatory which has dominated the headlines for the last 12 months. If Huawei remains in the US crosshairs, Chinese demands are not being met and we suspect trade talks with stagnate once again.

What we will leave you decide is how much of this saga is political opportunism.

Let’s say Trump doesn’t believe Huawei is a national security threat and this entire incident has been a strategy to gain greater influence in the trade talks with China, we wonder if Rubio and Schumer are simply taking advantage of the situation also. Rubio is an opponent of Trump with ambitions of representing the Republicans in the White House, while Schumer and the Democrats will want to make life as difficult for Trump wherever possible.

Perhaps we are being overly cynical. We’ll let you come to your own conclusions.

Understanding the collateral damage from Trump’s trade aggression

President Donald Trump might be back on friendly terms with China’s President Xi Jinping, but his efforts to kill Huawei’s business produced friendly fire, hitting companies based in allied nations.

This is the unintended and unavoidable consequence of a targeting a single company or country with sanctions and tariffs, the US’ version of an economic dirty-bomb; such are the complexities and wide-spread nature of today’s global supply chains, you are going to cause damage to innocent parties. We suspect Trump does not care, as long as his objectives are achieved, but here we’re going to have a look at the indirect friendly-fire.

The Nikkei Asian Review has broken down Huawei’s latest smartphone, the P30, listing off the individual components of the device and also giving an estimation of cost. Japan supplies the largest proportion of components for the device, 53.2% or 869 parts, while the US supplies 0.9% of the components and South Korea provides 34.4%. Interestingly enough the costs tell a slightly different story.

The financial output from Huawei is an interesting split. It is estimated that a P30 costs $363.83 to manufacture, with 38.1% of the expenditure remaining with Chinese suppliers. The 15 parts supplied by US firms account for $59.36 per device with Micron Technology collecting $40.96 for its DRAM chipset. Japanese suppliers gain $83.71 for every device manufactured, while $28 heads to South Korea and $28.85 to Taiwan.

What is important to consider when you are assessing the friendly-fire is the direct and indirect impact of Trump’s actions. The direct impact is easily measured; by banning US companies from working with Huawei you can see the financial detriment of losing a customer. If you go one stage further, you can see the indirect impact. By taking a shot at Huawei, less devices are being sold, therefore less cash is being paid out to every supplier.

The table below gives an overview of some of the international organizations which have been impacted by Trump aggression towards China:

Company Country Component Supplied Cost
Micron Technology US DRAM $40.96
Samsung South Korea NANDflash memory $28.16
Sony Japan Rear camera $15.15
Sony Japan Front camera $12.16
Skyworks Solutions US Communication semiconductor $8
Sony Japan Rear camera $7.6
Qorvo US Communication semiconductor $3
Alps Electric and Alps Alpine Japan Touch panel $3
Corning US Cover glass $2.7

Estimates courtesy of Nikkei Asian Review

What is worth noting is the aggression towards Huawei is temporarily on hold. At the G20 Summit this weekend, the US and China have made positive statements about getting trade talks back on track, though this would mean Trump would have to stop his campaign of terror against Huawei. Suppliers to the firm will be relieved, but you have to wonder whether the damage has already been done to the smartphone business.

Just like the telcos for networking equipment, consumers will want assurances the devices will continue to work over the lifetime of the product. As Google is a US firm, and therefore subject to the Entity ban, consumers were much less likely to buy a Huawei device when there is no guarantee Android will work as effectively and securely as it should.

The statements from the two Premiers are all well and good, but considering Trump’s opinion seems to change as often as the tides, how can anyone guarantee the effectiveness of the Android operating system over the course of the device’s lifetime? There are other factors to consider here, Huawei’s homegrown OS for example, but this is an unknown factor and consumers rarely trust the unknown en-masse.

This is where we believe the damage has already been dealt; it takes a lot to earn consumers trust but not much to lose it. Huawei has been gathering momentum in the smartphone market for years, and entry onto the Entity List might have set it back to the beginning. Rumours have emerged suggesting the company is preparing for a 40-60% decline in shipments for the remainder of 2019; how long will it take the firm to recapture these customers?

Trump makes minor Huawei concession following pleading from US tech sector

Following talks with the Chinese leader, US President Trump has announced US companies will be able to flog Huawei some gear if they really must.

It looks like Trump got the memo that the collateral damage from his decision to ban US companies from doing business with Huawei was starting to mount up. As part of trade talks with Xi Jinping Trump announced on Twitter, as it his wont, that US companies can resume selling Huawei stuff, so long as it doesn’t cross some arbitrary, unspecified ‘national security’ line.

Here’s Trump making it official.

It doesn’t look like there was significant progress on the underlying trade war that seems to have at least had an amplifying effect on the Huawei situation, but at least the two leaders are talking and making the right public noises. The mutual decision not to impose further tariffs, as had been threatened in advance, is one positive sign, but it looks like the final resolution for Huawei remains closely tied to the broader talks

That said the Trump administration has been keen to counter any perception that this concession amounts to a more general weakening of the Trump position. Speaking to Fox in the clip below, Director of the US National Economic Council Larry Kudlow didn’t really add much on Huawei, but made it clear that the move is part of a general process of horse-trading in which each party makes small, symbolic concessions to show good faith.

 

Silicon Valley rallies against Washington over China tariffs

‘Make America Great Again’ might be the slogan pinned to anti-China aggression from the White House, but Silicon Valley is creating a tsunami of discontent against the short-sighted policies.

The Office of United States Trade Representative (USTR) has opened up for public comment regarding a new wave of tariffs to be placed on Chinese exports. While this will generate additional income for the US Government, anyone who believes these actions will not be reciprocated by the Chinese Government is probably fooling themselves.

For months, President Donald Trump has seemingly held a belief he can do whatever he chooses without repercussion, and the industry has largely stood-by with little action or objection. But no-longer, the list of comment submissions is growing by the hour, and there are some pretty big names to take notice of.

In one statement, Intel, Microsoft, HP and Dell Technologies have jointly submitted an opinion suggesting the laptop industry will be under-threat. The team point to price increases for US consumers and businesses, while also claiming the action would weakening the competitive edge these companies have on the international market.

“At the same time, the imposition of tariffs on such products would not address the underlying Chinese trade practices that USTR’s investigation seeks to remedy,” the submission states. “Instead, the tariffs will harm US technology leaders, hindering their ability to innovate and compete in a global marketplace.”

Price is of course a concern to these businesses, as the consumer electronics segment is one which operates under the cloud of low margins and high costs. With the threat of Chinese retaliation on the horizon, costs could be about to soar. With this in-mind, the team would the proposed tariffs to be amended with a horde of exemptions.

And when there are increased costs, there are fewer profits and therefore less money to spend. The jobs category is one which could be under-threat.

“While we appreciate the Administration’s efforts to address longstanding issues the software and other innovative industries face in China, we are concerned that the proposed modification will significantly and negatively impact economic growth, jobs, and innovation,” said Tommy Ross, Senior Director of Policy for The Software Alliance. “The proposed tariff increases will raise costs and reduce competitiveness across the international software industry and beyond.”

According to Ross, the software industry employs 2.9 million US citizens directly, while supporting a further 10.5 million indirectly. The tariffs threaten profitability and the ability for the firms to hire. This may well have a negative impact on growth as well as innovation.

On the handsets and devices side of things, there are of course numerous comments from a range of different parties. John Shane of Fitbit is requesting the USTR remove HTSUS

subheading 8517.62.0090 from the tariff list, as this would cause economic harm to his firm and its competitors, while also having the perverse effect of advancing primary Chinese

objectives under Made in China 2025.

Roku is another which has objected, suggesting Section 301 could negatively impact its ability to capitalise on the opportunity it has with the Roku Operating System. Roku has emerged as somewhat of a challenger to the traditional TV market, with 54% of Roku users not utilising traditional linear TV. This is an emerging segment, though Jim Lamoureux argues the tariffs would inhibit innovation and impact Roku’s ability to lead globally in this potentially profitable segment.

This is the greatest danger of the USTR actions against China with these tariffs; retaliation from the Chinese Government might ensure the damage inflicted on US firms and the prospects of the wider US economy in the international markets would exceed the benefits.

Then you have to consider the impact the White House’s actions will have on allied nations.

“While the USTR has a vital role vis-àvis China, the proposed tariffs could unwittingly affect products made by American, European, Japanese, South Korean, Taiwanese firms and firms from countries of non-offending origin – the very countries with whom the US wants to strengthen trade going forward,” said Roslyn Layton of the American Enterprise Institute.

In her comment, Layton has voiced support for the actions, though seems to encourage more thought when it comes to the law of unintended consequences. Layton seems to be encouraged by firm position the USTR is taking in opposition to China but questions the effectiveness of its current path.

You have to wonder how much collateral damage the US Government is prepared to stomach in its crusade against China. We strongly suspect it does not care in the slightest that a firm of a couple of hundred people are negatively impacted, NeoPhotonics has been crippled by losing Huawei as a customer, but when the tech giants start to get twitchy politicians might start taking notice.

Layton also pays homage to the international allies of the White House. Trump has not exactly been collecting compliments on his diplomatic strategies over the last couple of years, and should the tariffs directed at China have negative impacts on its trade partners, we can imagine strained relationships would be put under further pressure.

All of these businesses are requesting exemptions from the tariff list, but also question the logic behind the decision. There is going to be collateral damage and friendly-fire, though you also have to question whether the strategy is going to satisfy the desired aims.

What is also worth noting is that we are only focusing on the technology segment here; there are more than 2,000 comments so far on a very wide range of topics, industries and verticals. A large number of these submissions are calling for exemptions on the products, components or services which are deemed critical to their work. We suspect if you go through every comment, every item on the tariff list will be mentioned by someone, somewhere.

There are still a flood of questions and concerns which need to be addressed by the USTR, though one which we are interested in is who the US Government will choose to wear the collateral damage. Some exceptions will be granted, and some requests will be ignored. The USTR has to decide which industries to protect from the trade-war and which are going to sacrificed for ‘the greater good’.

Huawei launches UK charm offensive while US President Trump is in town

Embattled Chinese vendor Huawei has picked the middle of the US President’s visit to launch an ad campaign highlighting how important it is to the UK.

The new Huawei UK corporate ad campaign is themed: ‘A Fully Connected Britain is a Fully United Britain’ (see poster below). While there’s plenty of evidence on the internet and especially social media to call that claim into question, the point Huawei is presumably trying to make is that the country would be worse off without Huawei’s help in building its networks.

Huawei says it has played a pivotal role in helping to shape the UK’s digital future since 2001. The campaign claims Huawei contributes £1.7 billion of value to the UK economy, including 26,000 jobs and £470 million of tax revenues. The two points about the importance of connectivity and Huawei’s contribution to the UK economy are quite distinct, but the purpose of this campaign seems to be to conflate them.

“We have operated in the UK since 2001 and supply all the major telecom operators with our products and solutions,” said Jerry Wang, Huawei’s UK CEO. As long-term investors we are committed to helping create jobs and opportunities, building partnerships and supporting local communities across the UK.”

It surely can’t be a coincidence that this campaign is being launched on the second day of US President Trump’s state visit to the UK. The Prez is expected to pressure UK leaders into taking a harder line against Huawei than they currently seem inclined to and Huawei is sensibly getting its retaliation in first.

Whether a bunch of posters going on about how great it is will do Huawei any good is another matter, however. While Huawei has doubtless been an important contributor to the UK economy, there are plenty of other networking vendors to choose from. More importantly, Trump knows he’s in a strong negotiating position as the UK is desperate to foster closer ties with non-European countries thanks to Brexit.

Trump has been downplaying the prospect of pressuring the UK in his public statements, but it’s hard to see how he would be happy with anything short of an outright ban of Huawei gear in the 5G network. The issue has become symbolic of the strength of the relationship between the US and its allies and UK leaders may well end up concluding the value of staying in Trump’s good books is considerably more than £1.7 billion.

Huawei UK ad small

Trump tweets anti-AT&T tirade

Its often said the pen is mightier than the sword, but President Donald Trump seems to think his twitter account is the literary version of a dirty bomb.

In the latest example of the flurry of tiny hands scampering across the keyboard of an unsecured iPhone, the Commander in Chief has taken aim at AT&T, suggesting US citizens should turn elsewhere for their daily fix of connectivity.

Those expecting some sort of scandal might be disappointed. AT&T hasn’t actually done anything wrong aside from owning CNN, a regular target for the President.

What we are unsure of is how much of an impact these sorts of attacks will actually have on the AT&T brand. Of course, there will be millions who simply disregard the majority of messages which float out of the Oval Office, but there are probably as many who would take the President’s word as gospel.

There have been other attacks from Trump using the virtual highways, with Amazon CEO at the centre of one of these examples.

Back in April 2018, Trump set his eyes on the eCommerce giant. The stream of abuse suggested Amazon was being naughty with its tax returns, was holding the US Postal Service to ransom and Bezos’ purchase of the Washington Post was purely to acquire a lobbyist and a voice which could undermine the White House. Some points were fair, such as the creating accounting techniques, though the Presidential paranoia suggesting political propaganda perhaps showed a measure of the man’s ego.

In the war of words with Amazon, it was largely hot air. The President was flexing his muscles, without actually doing anything. If he wanted to do any real damage, he could have cancelled the AWS multi-billion-dollar contract with the Pentagon. But he didn’t.

Bearing this in mind, AT& shouldn’t have too much to worry about, though it certainly doesn’t have the same brand credibility as Amazon.

According to The Values Institute, a research and consulting practice solely focused on values based corporate culture, Amazon was the most trusted brand in the US in 2018. AT&T was the best scoring telco on the list, though it ranked down in 32nd. This is down from 14th in 2017. 32nd doesn’t sound too bad if you consider all the companies which operate in the US, though the scope of this survey is quite limited, only taking the biggest names into account.

Interestingly enough, AT&T finished below Taco Bell, which is regularly featured in a variety of toilet memes on the social media platforms.

Amazon has the credibility with US consumers to simply ignore any Twitter abuse from Trump, but telcos certainly do not have the same relationship with consumers, especially when you consider the recent race to the bottom. For some, telcos are utilities. It is a tough reputation to shake, while a constant focus on speed and price won’t help at all.

Looking at the potential impact of the President’s social media temper tantrums, it does seem to be short-term in most circumstances. This is not the first time President’s have named and shamed companies, President Kennedy did it in the 70s, but social media is a new beast. Most of the time with Trump’s rants, share price seems to be hit for a short period, though it recovers soon after. There doesn’t really seem to be any notable follow through from the President’s threats.

In the Amazon case, share price dipped by 11% during the exchange. The threat of intervention was enough to spook some. However, it took roughly two weeks for recovery, and since that point share price did increase almost 40% before a heavy fall last month.

Research from Juma’h Ahmad and Yazan Alnsour of University of Illinois also suggest there is limited impact from the President’s social media fury. In a study which looked at Presidential attention on 58 companies, the duo concluded there was no long-term, material consequence for the business, with any impact in the financial markets limited to three to five days.

Interestingly enough, Trump seems to be having less of an impact on the world as his term progresses. According to data from CrowdTangle (covered here by Axios), Trump’s interaction rate has fallen from 0.55% in the month he was first elected, to 0.16% in the month through to May 25 2019

The growth in Trump followers is still staggeringly large, though it appears he is not getting the same cut through as before. This might be down to a couple of different reasons, perhaps more laissez faire followers or maybe there is just too much noise reducing the effectiveness.

While there is a risk, especially considering the sustained nature of Trump’s hatred towards CNN, we’re not convinced whether an attack on AT&T’s reputation from Trump will have too much impact. However, the President has a track record of swaying the masses.

Trump set to raise the stakes over Huawei during UK visit

US President Trump will reportedly threaten to withdraw some intelligence cooperation with the UK unless it bans Huawei, when he visits.

This insight into Trump’s intentions comes courtesy of the FT, which says it has been chatting to people involved in organising the visit. Those people told it that the Prez will definitely raise the matter when he’s over here and he’s not happy about the UK’s current refusal to do what it’s told by the US and ban Huawei outright from its 5G network.

“The president is preparing to repeat the message that Chinese involvement in 5G could pose significant challenges for US-UK intelligence co-operation. He is prepared to go hard on this issue,” an unnamed insider told the FT. Trump has always been a ‘go hard or go home’ kind of guy, so it doesn’t really come as a great surprise that he intends to persist with this approach when he’s over here.

Any awkwardness between Trump and out-going UK PM May will be significantly amplified by the leak, a month ago, that the government was planning to go US advice and let Huawei be involved in UK 5G to some extent. This was so embarrassing to May that she sacked her own Secretary of Defence on suspicion of being the leaker – an allegation he emphatically denied.

No more surprising than the FT story is the revelation from AFP that Huawei has long been the recipient of generous state assistance from China. Huawei has apparently received hundreds of millions of dollar in grants, been given land at a discount and even cheap loans to use as incentives for customers to sign on the dotted line.

Apparently Huawei annual reports reveal $1.6 billion in back-handers from the Chinese government over the past 10 year, at least half of which don’t seem to have come with any strings attached. The export credit side of things is supposed to be regulated under international rules, but we’re told that China has refused to abide by them.

While none of this behaviour comes as a big shock, it does feed into the broader US narrative of China cheating at global trade. Once more Huawei is being used as a proxy in this dispute and it’s hard to see what it can do about it. It’s no secret that China has done a lot to support internal champions, but it’s hardly alone in that respect.

So this particular side of the trade dispute comes down to degree. The US and Europe will claim their protectionism is within international trade rules while China’s isn’t. It could be that even the security concerns that have been the main stick to beat Huawei, and by extension the UK, with are just a proxy for this broader drive to force China to abide by international rules and that they won’t go away until it does.

US influence on Europe failing as France resists Huawei ban

The White House might have felt banning Huawei was an appropriate measure for national security, but France does not agree with the drastic action.

Speaking at a conference in Paris, French President Emmanuel Macron has confirmed the country will not ban Huawei. This is not to say it won’t in the future, but it appears Europe is remaining resolute against the demands of the US. The burden of proof might be a concept easily ignored in the US, but Europe stands for more.

“Our perspective is not to block Huawei or any company,” Macron said. “France and Europe are pragmatic and realistic. We do believe in cooperation and multilateralism. At the same time, we are extremely careful about access to good technology and to preserve our national security and all the safety rules.”

President Donald Trump is most likely a man who is used to getting his own way, and upon assuming office as head of the most powerful government worldwide, he might have thought this position of privilege would continue. However, Europe is being anything but compliant.

In direct contradiction to the Executive Order banning Huawei from supplying any components, products and services to US communications networks, Macron has declared France open is for business. France won’t use the excuse of national security to beat back the progress of China but will presumably introduce mechanisms to mitigate risk.

Germany has taken this approach, increasing the barrier to entry for all companies, not just Huawei. Vendors will have to pass more stringent security tests before any components or products can be introduced to networks, though Chancellor Angela Merkel has also made it clear she intents to steer clear of political ties to the decision.

“There are two things I don’t believe in,” Merkel said in March. “First, to discuss these very sensitive security questions publicly, and second, to exclude a company simply because it’s from a certain country.”

The UK is seemingly heading down a similar route. Alongside the Huawei Cyber Security Evaluation Centre (HCSEC), run by GCHQ with the objective of ensuring security and privacy credentials are maintained, the long-awaited supply chain review is reportedly going to place higher scrutiny but stop short of any sort of ban. The official position will be revealed in a few weeks, but this position would be consistent with the UK political rhetoric.

Over in Eastern Europe, governments also appear to be resisting calls to ban the company, while Italy seems to be taking the risk mitigation approach. Even at the highest bureaucratic level, the European Commission has asked member states to conduct an assessment for security assessments. Unless some drastic opinions come back in October, we suspect the official position of the European Union will be to create higher security mechanisms which offer competitive opportunity for all vendors in the market.

For the moment at least, it appears the Europeans are immune to the huffing and puffing making its way across the Atlantic. That said, the trade war with China is set to escalate once again and it would be fair to assume more US delegations will be attempting to whisper in the ears of influential Europeans. At some point, the US will get tougher on Europe, but it does appear those pesky Europeans are stubborn enough to resist White House propaganda and pressure.

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.