Huawei & Arm – Clearer waters

The muddy situation resolves in Huawei’s favour.

• Its business as normal between Huawei and Arm meaning that Huawei’s silicon roadmap for its in-house modems and processors from HiSilicon will be unaffected for now.
• Arm raised doubts about Huawei’s long-term roadmap using Arm processors in May when it made a statement that it would comply with the restrictions set by the US government and a memo was leaked that instructed all employees (including the Arm China j.v) to cease all engagement with Huawei (see here).
• Why a Japanese company with almost all of its intellectual property development outside of the USA would be bound by a US trade blockade has remained a mystery for the last 4 months.
• I suspect that this was done out of an abundance of caution while Arm looked at it the IP that Huawei is using and determined its country of origin.
• Having determined that almost all, if not all of the IP is created outside of the USA, Arm determined that it could continue its activities with Huawei and did so with no fanfare.
• Furthermore, the USA blockade is not meant to restrict trade to Huawei where the technology or software can be sourced elsewhere.
• Although almost everybody is using Arm processors today, there are alternatives such as RISC-V and MIPS meaning that Arm would have had a case under the same exemption that has allowed the likes of Micron to resume shipments.
• The net result is that Arm is on pretty safe ground resuming its business with Huawei resulted in a round-table meeting in Shenzhen last week and some press interviews.
• I have previously argued that losing Arm would have had an even more detrimental impact than losing Google (see here), as this could impact its business both inside China and overseas.
• Huawei has gained a lot of smartphone market share in the home market over the last quarter which has been able to mitigate most of the overseas impact.
• If this was to be also hit, then it would threaten the existence of the Huawei consumer products division whose sales are almost all Arm-based smartphones.
• Keeping Arm as a supplier will not help to resolve the situation outside of China.
• This is because not being able to install Google Mobile Services on its devices has already triggered a rapid loss of all of its market share in smartphones (see here).
• Hence, I think that the outlook for Huawei outside of China remains very bleak indeed which has already resulted in the curtailment of some overseas operations and I fear that there are many more to follow.
• Samsung remains in pole position to pick-up this share which is why I am very happy to keep it in my portfolio.