Huawei – Disarmed

A hit potentially worse than Google.

• The loss of arm will take a long time to impact Huawei but if it ever takes effect, it is likely to have the most devastating impact on Huawei’s business.
• The arm processor family has become one of the most central and fundamental pieces of technology in any device that is not either a PC or a data centre.
• Almost every smartphone, feature phone, tablet or wearable uses one or more arm processors and Huawei has been pursuing its own chipset designs.
• The aim is to become more self-sufficient and to rely less on silicon procured from Qualcomm, MediaTek, Broadcom etc.
• As long as Huawei has scale and as long as its own chips perform as well as those from 3^rd parties, this would also help profitability as margin previously paid out would remain in-house.
• However, many, if not all, of these designs use the arm processor and with its relationship with arm on ice, its chip development will grind to a halt.
• There are two ways to interact with arm when using its processor.
• The first is to licence a processor design created by arm and the second is an architecture licence where the licensee does the chip design itself but is based on arm’s intellectual property.
• Most silicon designers like Qualcomm, MediaTek or Apple have architecture licences but whichever one, the companies use, they are still dependent on arm technology.
• This means that Huawei’s in-house silicon effort will now be at a standstill.
• Furthermore, there is no realistic possibility to design a chip that does not use arm because all of the software that is written for mobile devices will no longer run on it.
• This is why the loss of arm is potentially even more damaging than the loss of Google as this will also impact shipments into China.
• The good news is that this is going to take a very long time to manifest itself as this year’s processor, the Kirin 985, is thought to be pretty much complete and so will be unaffected by this stoppage.
• This gives Huawei and the Chinese government a year or more to sort things out so that it can re-engage with arm which I suspect is more than enough.
• I do not think that the USA wants to put Huawei out of business particularly, but instead is much more interested in improving its negotiating position so that it can reach what it deems to be a fair trade deal with China.
• Hence, the focus will remain on the next 90 days which is still the window within which the problem needs to be resolved before Huawei begins running out of stockpiled components.
• These are mostly replaceable with non-US products but new products would need to be released none of which would be able to feature Google services.
• This obviates the point (see here) of selling devices in markets outside of China further reinforcing the urgency to be able to re-engage with Google within 90 days.
• Unfortunately for Huawei, there are plenty of perfectly good alternatives to Huawei smartphones which are available at excellent prices.
• The potential main beneficiary would be Samsung.
• This is because it has the brand, scale and the presence to ramp up supply and distribution to ensure that there are plenty of Samsung products to meet demand should Huawei fall by the wayside.
• This has not been priced into Samsung’s shares in any way making Samsung a very interesting stock to consider when looking for ways to offset the potential negative implications of a protracted trade war.