Huawei – Nowhere to run pt. XXI

India is a blow upon a bruise.

• India’s move to stop Indian operators from using Chinese telecom equipment vendors looks bad for Huawei but it is quite possible that the latest move by the US (see here) has already put the company into its death throes.
• India is a big loss for Huawei.
• Firstly, because it is the world’s no. 2 telecoms market and secondly because Huawei has enjoyed a strong position at 3 of the 4 Indian operators in 4G.
• However, moving away from Huawei and ZTE in the home market will be far more problematic for India than it is for Western Europe.
• This is because it is a very price-sensitive market where tiny changes to the price of a good or service can have a substantial effect on demand.
• Hence, Indians will likely be required to pay more for 5G than was initially hoped and I suspect that this will cause a delay to the roll-out of 5G in India.
• However, India has far greater problems at the moment as the pandemic is raging out of control with India now reporting more than 70,000 new cases a day.
• Consequently, if 5G is delayed for a year or more, this will not be considered a big problem at the moment.
• This will be exacerbated by the indebtedness of many of India’s operators who will need time to sort out their balance sheets before being in a position to but a licence and roll out infrastructure.
• I do not see any reason why this delay should incrementally hurt the Indian economy as there is still no real use case for 5G that can not be economically and commercially supported by using 4G (see here).
• This latest restriction to be placed on Huawei looks bad but it is nothing compared to the latest iteration announced by the US Commerce Department.
• The new US 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.
• This means that everybody needs a licence from the US to sell silicon chips to Huawei putting every single product it sells both inside and outside of China at risk.
• Hence, 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 products.
• In light of this restriction, the move by the Indians may be moot as there soon might be no product to sell.
• The consensus seems to be that Huawei has enough stock of silicon to last it until early 2021 setting up a difficult 2020 in terms of revenues and a catastrophe in 2021.
• The outlook is for Huawei to lose a lot of market share where I think Nokia stands to be the biggest beneficiary.
• This is because Nokia’s own internal issues have prevented it from enjoying a recovery (like Ericsson) meaning that there is a lot of upside if the new management executes on its promises.
• I like Nokia and am inclined to take a position in it.