Huawei – Nowhere to run pt. XX

The US Department of Commerce gets serious.

• The US Department of Commerce has announced a tightening of sanctions on Huawei which at face value effectively mean that no one can sell silicon to Huawei without a license.
• The practical upshot of this is that the US can put Huawei out of business by failing to grant licenses thereby rendering Huawei unable to produce almost every single product it sells.
• The new regulation states that any company that uses US equipment or software to manufacture its silicon chips must have a license to sell to Huawei.
• The world of silicon chip manufacturing is a series of mini-monopolies where the supply of equipment for each stage of manufacturing is often controlled by one company.
• These companies are predominantly from Japan, The USA and The Netherlands but because it’s a linear process, no one can make a silicon chip without using a piece of equipment or software from a USA company.
• Furthermore, all of the temporary waivers that were granted over the last 15 months have now expired, meaning that everyone needs a license to supply Huawei with almost anything.
• This is why MediaTek, Sunny Optical and AAC Technologies all had bad days because, although they are not USA companies, they all use US equipment and so now need a license.
• This represents a substantial ratchetting up of the pressure on Huawei as while its smartphone business has already been badly hit outside of China, domestically it has fared extremely well thanks to brilliant execution and a wave of patriotism.
• This new level of restrictions means that almost every product that Huawei makes is at risk and if no licenses are issued, it is not inconceivable that Huawei goes out of business entirely.
• The big question that remains unanswered is how willing will the US Department of Commerce be when it comes to the issuing of licenses to sell to Huawei?
• It has previously stated that applicants should assume that the answer will be no, but that has not really played out in practice and many USA companies have been able to supply Huawei with product.
• The tightening of restrictions suggests that the Commerce Department will be less willing to issue licenses but there is also the political angle to consider.
• My colleague, Alastair Newton at Alavan Independent (see here) can give a much more nuanced view of the political situation but from my layman’s view I suspect that the closeness of the election has also been a factor in the severity of the tightening.
• This raises the possibility that things might relax somewhat after the election, but it is clear that the policy to contain China’s rise will continue regardless of who wins.
• The net result is that is a very serious turn of events for Huawei as China is still a long way from being able to replicate the manufacturing prowess of Japan, USA and The Netherlands.
• Hence, China will remain dependent on foreign technology in semiconductors for the foreseeable future but in other areas such as robotics, AI, Quantum computing the field is much more even.
• I think that the situation is far more severe for Huawei than it is for its suppliers.
• If Huawei goes out of business it is Xiaomi, Oppo and Vivo in smartphones that are likely to benefit most and Nokia in mobile infrastructure.
• While Xiaomi, Oppo and Vivo are more heavily supplied by Qualcomm than MediaTek, I suspect that there will still be opportunities for MediaTek to win a portion of the share that moves over from Huawei.
• Sunny Optical, AAC Technologies and so on are in a better position as they are already preeminent suppliers of their core products meaning that they should not be meaningfully affected at all.
• This turn events makes the outlook for Huawei far more bleak than I had been expecting but the company appears to have inventory into 2021 and so there is time for Huawei and China to sort this problem out.
• I still think that Huawei is being used as a political pawn and so if there is a deal done on a more broad level between the US and China (increasingly unlikely), then it likely to include some relief for Huawei.
• However, for the moment, the trajectory is for a very difficult 2020 and cataclysmic 2021.
• Nokia would be my preferred way to take advantage of this theme.