Huawei – Nowhere to run pt XXIII.

Another reprieve in name only.

• Allowing Huawei to buy non-5G components offers very little reprieve for either the infrastructure business or the handset business and from a security perspective makes no sense.
• It appears that vendors who are not selling components that are related to 5G will soon be able to resume shipments to Huawei as they now expect to be granted licences.
• Huawei’s addition to the entity list in the USA has meant that anyone anywhere in the world making a silicon chip needs a licence to sell to Huawei given the US’s control over key stages of the semiconductor manufacturing process.
• These rules were tightened in September and companies like TSMC and Sony had to cease all sales of products to Huawei.
• Now it seems that as long as the product does not support 5G, then one should be able to receive a licence in a short period of time and resume shipments to Huawei.
• This may benefit Sony which recently cut guidance due to being unable to ship its image sensors to Huawei, but for TSMC, it is not going to make much difference.
• This is because in order to make a cost-effective and power-efficient 5G device, as much of the system as possible needs to be integrated onto a single chip.
• At the mid and lower end of the market, this means that both the modem and the applications processor tend to be integrated.
• At the high end, where the modem and the applications processor or are separate (Apple), all of the radio standards tend to be supported by a single modem chip.
• Having an extra chip for 5G will mean a bigger handset that consumes more power and costs more to make.
• This means that for the majority of system configurations that are used in smartphones, Huawei will still be unable to source the chips required to make these devices.
• Apple’s most recent launch includes a high-quality device that supports 5G at $699 which means that many of its competitors will soon come in at even lower prices.
• This means that 5G devices are going to become available in large volumes in all market segments within a pretty short period of time.
• Following this “reprieve” Huawei will still be unable to sell a phone outside of China due to not being able to offer the Google ecosystem and it will not be able to offer 5G in China.
• China is one of the most quickly emerging markets for 5G given the Chinese governments desire to lead this technology to market, which will now have the effect of limiting Huawei’s ability to compete in its home market.
• In its consumer business, this reprieve will allow Huawei to address the non-5G market in China and nothing more.
• This is nothing like enough to restore Huawei to anything like its former glory and is an opportunity that will probably quickly evaporate in a matter of 12-8 months or so.
• Hence, I do not think that this move helps Huawei in any meaningful way and as a result, it won’t help other suppliers to the consumer business (eg Sony) either given the falling volumes.
• The same is true for its infrastructure business.
• Pretty much anyone who intends to sell a radio access network to a telecom operator will need to be able to support 5G or have a clear upgrade path to it.
• This may make it difficult for Huawei to source the key components that it needs to make its base stations as it is not clear what “supporting 5G” means.
• This could mean silicon where 5G has been implemented or any programable chip or processor that is capable of executing the 5G protocol once it has been programmed with it.
• Furthermore, I suspect that any vendor who cannot offer an upgrade path to 5G with the same equipment will have great difficulty making a sale to a telecom operator.
• Combine this with the increasing hostility towards Chinese manufactured mobile networks due to their potential links with the Chinese government, and I can not see how this reprieve helps Huawei in any way at all.
• Hence, this looks like another reprieve in name only (see here) and will make little change to the current situation.
• Hence, suppliers that rally on the back of a recovery in Huawei’s fortunes are unlikely to hold those rallies for very long offering a profit-taking opportunity.
• The consensus seems to be that Huawei has enough stock of silicon to last it until early 2021 setting up a difficult 2020 in terms of revenues and a catastrophe in 2021.
• I think Nokia stands to be the biggest beneficiary.
• This is because Nokia’s own internal issues have prevented it from enjoying a recovery (like Ericsson) meaning that there is a lot of upside if the new management executes on its promises.
• I like Nokia and I have a position in it.