Huawei – Nowhere to run pt. XI

Still a reprieve in name only.

• A series of US suppliers are soon to be granted licenses to supply Huawei but picking apart commentary from US officials over the last few weeks, it is clear that this will provide no relief whatsoever to Huawei’s current predicament.
• Bloomberg (see here) has conducted an interview with commerce secretary Wilbur Ross who made the following statements:
  • License applications: The commerce department has received 260 applications which are many more than it expected.
  • This is yet another indication of how intertwined the US and the Chinese economies are which looks to have been underestimated by the White House.
  • Hence, Alastair Newton and I continue to think that there will be economic consequences to a protracted trade and technology war unlike the cold war (see here).
  • Mr. Ross also stressed that there is a presumption of denial to the requests and that only a handful of them will be granted.
  • These licenses will be granted “very soon”.
  • Single source: The USA has stressed on multiple occasions that it has no desire to hamstring USA companies where supplying Huawei would have no meaningful impact on the security situation.
  • In practice, this means that where Huawei can dual-source from companies that are outside of the USA, there is no gain to be had in blocking US suppliers.
  • In fact, the US economy will lose because those sales will have gone to other countries.
• Put these two together and I think it is pretty clear what the commerce department is going to do.
• Companies like Micron where the exact parts can be purchased elsewhere will be granted licenses.
• Companies like Google (whom I am sure has applied) will not be granted a license as its Google Mobile Services software (not Android OS) is unique, not available anywhere else.
• It is Huawei’s loss of this software that is causing its market share outside of China to collapse (see here).
• So far Huawei has done incredibly well at making up these losses in the home market (where Google is irrelevant) where Counterpoint calculates that market share has increased to 40% in Q3 19.
• It is uncertain whether Qualcomm will get a license as, although there are plenty of other places from which Huawei can buy processors and cellular modems, there are significant differences between the parts meaning that Qualcomm’s may be deemed to be unique.
• Without Google Mobile Services, Huawei has no prospect of selling any phones outside of China and so the grim situation for the Consumer Products group looks set to continue.
• Hence, there is no reprieve coming for Huawei when these licenses are granted, meaning that the outlook remains as grim as ever.
• Samsung is the main beneficiary here and certainly more than Xiaomi.
• This is because while Xiaomi (like Samsung) will have taken some of Huawei’s share outside of China, it has, in all likelihood, given a lot back at home.
• Samsung’s smartphone market share in China was decimated some time ago meaning that there is nothing to give back which is why gains made outside of China will be reflected in revenue performance.
• Samsung remains my top choice to play this theme and I remain happy to keep it in my portfolio.