Huawei – Nowhere to run pt. XVI.

The West hardens further signalling a terrible 2020 and 2021.

• The combination of a U-turn by the UK, failure to get the extradition case against its CFO thrown-out, the loss of TSMC and a hardening of the EU’s stance personified by Denmark all in the space of 10 days is setting up a really awful year for Huawei.
• Huawei did an exceptional job at mitigating the forces deployed against it in 2019, but in the wake of the pandemic, these forces have expanded and now seriously threaten every aspect of its business.
• Huawei’s position as a major international vendor of critical infrastructure and its close association with the Chinese Government (CCP) make it a target for anyone concerned about foreign espionage as well as anyone who wishes to exert pressure on the CCP.
• Its misfortunes in the last 10 days include:
  • First, UK: The pandemic has hit the UK hard which has led to an increasing number of members of parliament (MPs) blaming the CCP for the suffering of their constituents.
  • This has led to increasing pressure on the Prime Minister (PM) who announced a phasing out of Huawei by 2023.
  • However, MPs have felt that this has not gone far enough and now the UK is seeking to forge an alliance of 10 democracies to find an alternative to Huawei.
  • There are two perfectly viable alternatives to Huawei in Europe (Nokia and Ericsson) but these two are unable to match Huawei’s pricing.
  • This is because Huawei has been using price as a weapon to gain market share which it has done very successfully over the last 10 years.
  • Should this alliance come together, then one could easily see Huawei completely frozen out of its biggest overseas markets; Western Europe and the UK.
  • Second, EU and Denmark: Huawei’s repeated protestations that it is independent of the CCP were called into serious question with the emergence of a recording of a meeting between the Chinese ambassador to Denmark and the leader of the Faroe Islands.
  • The recording substantiates a previous allegation that the Chinese ambassador threatened to pull out of a free trade deal if Huawei was not allocated a 5G contract from Foroya Tele.
  • The Faroe Islands were used as a particular pressure point given its large (for the islands) and growing exports of salmon to China.
  • Denmark has already taken a fairly hard line against Huawei which has now been followed up by the EU in the wake of the pandemic with a set of guidelines that aim to protect critical industries from foreign direct investment (FDI ) which could lead to them being taken over.
  • This EU Investment Screening Framework regulation reads as if it is aimed purely at healthcare, but it can also easily be applied to critical communications infrastructure.
  • Denmark has historically been very open to FDI but is now looking to put a screening process in place for critical investments going forward.
  • In this environment, Nokia and Ericsson will get a much easier ride in Denmark than Huawei as they have been known quantities for many years and have clear and open disclosure as part of being public companies.
  • Huawei obviously sees this as unfair treatment and the end result is likely to be Huawei leaving Denmark and Danish consumers paying a bit more for their data.
  • Third: TSMC: has stopped taking orders from Huawei following the tightening of US regulations on Huawei (see here) which is a real body blow.
  • This is because China does not have the ability to manufacture cutting edge semiconductors leaving it unable to source cutting edge silicon components.
  • I suspect that Korea will also follow suit (given Samsung’s large revenues in the USA) putting Huawei in a very difficult position.
  • A lack of cutting-edge components would leave Huawei unable to compete in its home market against its domestic competitors against whom no such regulation has yet been levied.
  • This will take a long time to have an impact as current orders in production are unaffected and Huawei is thought to have been stockpiling components for some considerable time.
  • This gives Huawei time to rectify the problem, but I suspect that the pain will really come in 2021 if this is not rectified.
  • Fourth, Huawei CFO: Huawei’s CFO is currently stuck in Canada fighting extradition proceedings that would see her extradited to the USA to face allegations that Huawei broke sanctions in trading with Iran.
  • Huawei has been fighting to get the proceedings overturned but the British Columbia court ruled last week that the case met the legal threshold and therefore, that the extradition proceedings will continue.
  • Hence the likelihood that Huawei stands trial both in a court of law and the court of public opinion on fraud charges has an increasingly likely probability of going forward.
  • A public airing of the evidence against Huawei supporting the US charges of fraud would be hugely damaging to its reputation overseas and would most likely result in the loss of further international business.
• The net result is that 2020 and 2021 look like they will be extremely difficult years for Huawei as revenues both at home and overseas are at great risk.
• However, if there is a reconciliation between the USA and China at a high level resulting in the promised (but increasingly unlikely) phase II trade deal then much of this would go away.
• This is an increasingly unlikely outcome meaning that Huawei may quickly become a Chinese company selling Chinese products for Chinese users in China only.
• Nokia and Ericsson are in the front line to benefit.