Huawei – 5G non-starter.

Huawei is not coming back in 5G.

• Huawei is reportedly planning a 5G comeback in smartphones but while there is no reason why it can’t make 5G devices, they will be so uncompetitive that it might as well not bother.
• Furthermore, its inability to access the Google ecosystem means that even if it could make good 5G phones, it would struggle to sell devices outside of China.
• According to several Chinese industry research firms, Huawei is planning to re-enter the 5G smartphone market using a baseband manufactured in conjunction with Semiconductor Manufacturing International Co. (SMIC) which is the leading foundry in China.
• While I see no reason to disbelieve the conclusions of these firms, I think that Huawei’s return will be so problematic that it will end up deciding not to bother.
• The problem begins when one considers what leading-edge semiconductor chips deliver compared to older versions.
• These chips deliver superior speed and performance compared to older generations and they do so while consuming less power.
• Smartphones are battery-powered devices which need to be thin and light meaning that performance and power consumption are crucial to competitiveness.
• SMIC has been hammered by USA, Dutch and Japanese sanctions which means for all intents and purposes it will be unable to manufacture commercial semiconductors more advanced than 20nm.
• Before the sanctions were put in place, SMIC had managed to establish manufacturing at 14nm, but RFM research concluded that the yields were so poor that it could not be used for commercial purposes.
• There are also reports that SMIC has managed to make commercial semiconductors at 10nm and 7nm, but all of the evidence (including SMICs annual report) suggest that this is wishful thinking.
• Consequently, I think that the best that Huawei could manage in conjunction with SMIC would be 5G baseband chips at 14nm, but I suspect that 28nm is more likely given the problems SMIC has been having.
• This means that Huawei’s 5G will be 6-8 generations behind those of MediaTek and Qualcomm which are widely used in all of Huawei’s domestic and international competitors.
• This means that a Huawei 5G smartphone will be fatter, heavier, more expensive with lower performance and shorter battery life as a result of running 5G on a 14nm or 28nm process.
• Consequently, no consumer in his or her right mind would buy a Huawei device over one from Oppo, Vivo, Honor etc all of whom have access to the most advanced chips.
• This is where Huawei is at a great disadvantage as its placement on the entity list means that it can’t buy chips from MediaTek or Qualcomm while all of its competitors can.
• Deep down Huawei knows the reality of its position and while it can talk a good game, it really has nowhere to run.
• This is why I think that there will be no return by Huawei to the 5G smartphone market.
• The situation in 5G base stations is not as problematic because size and power consumption are somewhat less of an issue.
• However, its competitors Ericsson and Nokia already using 7nm and 5nm silicon in their base stations which Huawei will not be able to do.
• This means that on top of being designed out of a large number of Western networks, Huawei 5G base stations are gradually becoming less and less competitive.
• Hence, I continue to expect Huawei to lose market share in mobile networks as new networks are built or upgraded and its products are not selected for reasons of performance and cost.
• The main beneficiary here is Nokia as the infrastructure market has typically been a duopoly between Ericsson and Huawei and no one wants it to become a monopoly.
• I have a position in Nokia which has bounced around thanks to economic turbulence but remains a solid recovery story where I am looking for €6 per share.
• By contrast, Huawei is not a recovery story but looks like it will continue to decline in the area of mobile networks and terminals although there is no reason why it can’t do well in enterprise in China.