Huawei – Nowhere to run pt. XXVII

Huawei finally hits the wall.

• After nearly 2 years of ducking and diving combined with superlative execution on the part of Huawei’s management, its dependence on US technology has finally hit home as Huawei is expecting shipments to fall by more than 40% this year.
• Although, The White House has taken a much softer tone towards China in its commentary, its actions (or lack of them) point towards a very hawkish stance that is quite happy to see Huawei go under.
• This is completely in line with Alastair Newton’s analysis (see here) which points to a much harder line being taken by Washington compared to The White House’s commentary.
• Huawei has notified its suppliers that orders for components will be down to 70-80m smartphones this year compared to the 189m that it shipped in 2020.
• However, this number needs to be adjusted for Honor which Huawei sold to a Chinese consortium (see here) and is no longer part of the group going forward.
• Counterpoint Research estimates that Honor shipped 50m devices in 2020 meaning that the real figure for Huawei is 137.7m devices.
• Hence, a decline to 70m – 80m units is a YoY decline of 42 – 49% YoY rather than the 60% being highlighted by the media.
• The main reason for this is that Huawei is unable to buy components from other suppliers is because it is unable to purchase any components that are part of a 5G radio system.
• This was implemented in October with a change in stance by the US Department of Commerce which said that anyone who wanted a licence to sell a non-5G related component would be granted a licence (see here).
• I have long viewed this as a reprieve in name only as 5G is already half of the Chinese smartphone market and also of the high-end elsewhere.
• Furthermore, with Apple rolling it out across its entire range of devices last year everyone else has been galvanised to bring 5G down through the market tiers very quickly.
• Consequently, without access to 5G-related technology, Huawei’s addressable market will have greatly shrunk.
• Huawei can design its own 5G chips relatively easily but it is unable to have them manufactured because it needs access to a cutting edge fab in order to make a competitive chip of its own.
• China is far behind in homegrown semiconductor manufacturing technology and its technology companies that use silicon chips are completely dependent on having their chips manufactured overseas.
• Hence for 2021, Huawei will only be able to ship 5G devices with the components that it had purchased prior to September 15^th 2020 when TSMC stepped selling wafers to Huawei.
• There has been plenty of speculation with regard to how much inventory it had accumulated and my estimate at the time was that it would run out somewhere in H1 2021.
• The fact that Huawei expects to ship 70-80m smartphones this year, implies that it still has a reasonable stock of 5G components left.
• This is because it should still be able to sell non-5G smartphones although the market for these in China is shrinking very quickly.
• Outside of China, the opportunity is bigger but Huawei’s inability to use the Google Ecosystem greatly hinders its appeal in markets where this is critical to the sale.
• There are a few geeks who are able to get the Google Ecosystem working on Huawei phones and the process is surprisingly simple, but I can’t see any member of my family going down this route.
• Hence, I think that for the vast majority of users, not having the ecosystem present on the device at the point of sale is a major turn off.
• The net result is that I would estimate that for 2021, Huawei has approximately enough components to make 40m 5G smartphones, and the rest will be 4G only.
• This is going to have a bigger impact on 2021 revenues because this mix will tilt Huawei more towards the low-end of the market for which it is able to procure components therefore hitting average selling prices and profitability.
• I suspect that a similar story is unfolding in mobile infrastructure although Huawei’s does not have the same requirement for cutting edge semiconductor manufacturing that it does in handsets.
• Hence, the scope for Huawei to work its way through the sanctions here is greater although its customers outside of China are increasingly wary of buying its products.
• 2021 is going to be a very difficult year for Huawei, and unless something changes, 2022 will be catastrophic as there will be no component cushion to lessen the blow of sanctions.
• Alavan Independent and Radio Free Mobile research indicates that there is no immediate intention to lift the sanctions against Huawei and that it will continue to be used as a bargaining chip in the USA’s ongoing trade dispute with China.
• We see little movement in this area and so I expect to see Huawei continue to haemorrhage share to its competitors for the foreseeable future.
• I think that in infrastructure the main beneficiary is Nokia (in which I hold a position) and Xiaomi, Oppo, Vivo and Samsung all of whom still have unfettered access to smartphone components.
• Tough times are about to get much tougher.