Huawei – Nowhere to run pt. V.

Reprieve in name only.

• The White House’s apparent U-turn on Huawei is unlikely to give Huawei the products it really needs and even if it did, it is quite possible that fatal damage has already been done to Huawei’s smartphone business.
• As a good-faith gesture in its wider trade dispute with China and to get the trade talks moving again, the White House has given Huawei a temporary reprieve of sorts in that some US products will now be able to be sold to Huawei.
• The situation appears (according to Larry Kudlow (see here)) to be as follows:
  • First, temporary: While the re-started trade talks are on-going Huawei will receive a temporary reprieve and be allowed to buy some products from US companies.
  • If the trade talks stall again, then Huawei will be back to square one.
  • Second, entity list: Huawei will remain on the entity list but some of its suppliers will now be granted licences to sell their products to Huawei.
  • Third: product categories: products which are generally available in other countries and do not pose national security issues can now be sold to Huawei for the temporary period.
  • A good example of this is Micron which sells memory products that are widely available from numerous other companies in other countries (Japan Korea etc).
• For straight forward products like memory, this is simple but whether or not this covers Google Mobile Services (GMS) is unclear.
• This is because it is fairly easy to argue that GMS is unique and only available from the US and potentially could be considered a security threat depending on what data is going over those services.
• A similar issue also exists for Intel (Altera) and Xilinx which between them own the market for FPGA’s which are used in base stations but are not available from any other country.
• Hence, while Qualcomm and Micron will be able to resume sales to Huawei, I don’t think that Google, Intel and Xilinx will qualify, as their products are only available from US companies.
• Consequently, I do not think that this “reprieve” helps Huawei at all and even if it did, there is a good chance that fatal damage has already been done.
• Huawei products are still widely available outside of China and the US with all of the Google services on them but still, operators are already reporting that their networks have massively cut orders.
• This is due to a loss of confidence in Huawei as a going concern when it comes to selling smartphones meaning that network operators and users will increasingly prefer to buy products from companies which have none of these issues like Samsung.
• Huawei has entered the dreaded death spiral where share losses mean poor financial performance, bad press and cost cuts resulting in consumers and distributors losing more confidence.
• This results in further falls in share, confidence falls further and so on.
• This means that unless Huawei gets itself back in business very quickly, this is the end of its smartphone business outside of China.
• 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 as Huawei falls by the wayside.
• This has not been priced into Samsung’s shares in any way making Samsung a very interesting stock to consider.
• My portfolio remains long Samsung Electronics.