Huawei – Nowhere to run pt. XXV

Honor is unlikely to escape.

• The last 18months have seen a game of cat and mouse between the US Department of Commerce and Huawei but this is quickly coming to a close and it is unlikely that selling Honor will help very much.
• Huawei has announced its intention to sell its Honor brand to a consortium made up of smartphone distributors and investors with the overall backing of the Shenzhen city government.
• Huawei will have no ownership of involvement in the new company which is a clear signal that it hopes to evade the restrictions which now threaten both the infrastructure and the smartphone business of Huawei.
• The latest tightening of restrictions came into force on September 15^th which substantially tightened the noose around Huawei’s neck as they mean that no supplier anywhere in the world can sell silicon chips to Huawei without a licence from the US Department of Commerce (see here).
• This was subsequently “relaxed” to cover only “components that are related to 5G” but I think that this is yet another reprieve-in-name-only (see here).
• With no Huawei involvement, and as things stand at the moment, the Honor brand under its new owners would be able to source the silicon chips that it needs as well as strike a deal with Google for its services that it needs to sell devices outside of China.
• I suspect that this move is being made on the back of the very likely change of guard in the White House with the expectation that there will be fewer draconian measures taken from January 20^th 2021.
• That being said, this move is not without risk as the new company is backed by the Shenzhen city government that could easily be seen as an arm of the Chinese central government.
• The one area where both sides of the aisle in the USA are in agreement is that China’s rise must be contained and so it is quite possible that further action is taken.
• Consequently, it is quite possible that this is seen as merely a move aimed at dodging sanctions and unfortunately for Honor, the remedy is pretty simple.
• The last few years have shown that the US Department of Commerce can pretty much do what it thinks is best and so it is quite possible that the response to this move will be to add the new company to the Entity List.
• This would be devastating to Honor’s recovery as it would not be able to sell any devices that support 5G.
• The roll-out of 5G is gathering pace and Apple’s decision to support it across its entire range of 2020 iPhones means that it will very quickly migrate down through midrange to the mass market.
• Consequently, a large part of Honor’s target market will quickly become un-addressable leaving the brand in the same pickle that it finds itself in today.
• Huawei appears to have enough stock of silicon to last it until early 2021 setting up 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.
• These involve sorting out the internal mess as well as taking a large piece of Huawei’s market share outside of China.
• I like Nokia and I have a position in it.