Huawei – Rivers of blood pt. VI.

The main beneficiaries are Samsung and Ericsson.

• Just as Huawei is on the edge of casing Samsung real problems, it has a host of troubles that could completely destroy almost all of its business outside of China.
• Huawei’s problems are best understood by splitting them into two pieces.
  • First, Iran: There appears to be some evidence (see here) that Huawei has violated sanctions by selling its equipment to Iran.
  • This is what the case against Huawei CFO Meng Wanzhou is about.
  • The last company that did this (ZTE) ended up not being able to purchase any technology from US-based companies causing problems from which it may never recover.
  • I think that if this were to happen to Huawei, the infrastructure business would survive as Huawei is on track to become self-sufficient in hardware, but the handset business would shrink to a tiny shadow of its former self.
  • This is because Huawei would no longer be able to use Google Android for its handsets and having this software is crucial to selling Android phones outside of China.
  • Consequently, its handset business, the vast majority of which, is outside of China would most likely collapse.
  • This would leave Huawei as a Chinese handset vendor (where Google Android is not needed) and not much more.
  • Second, data security: Fears of Chinese spying are spreading from the US into the EU and beyond.
  • The US has long excluded Huawei from its infrastructure networks for the fear of undetectable back doors being inserted into the software that would allow communications and data to be tapped.
  • This fear is now spreading to Europe where BT has said that it will exclude Huawei from its core network and where both the UK and Germany have expressed concerns.
  • To allay these concerns, Huawei has said that it is willing to be supervised by the EU but a report on a similar arrangement in the UK has found little progress on addressing the issues.
  • If Europe follows the US lead and bans Huawei equipment from its networks, then another large piece of Huawei’s business will be impacted.
  • Huawei has history in this area as Cisco sued Huawei in 2004 for the theft of its firmware and 2017 saw Huawei sued by T-Mobile for stealing its trade secrets with regard to its device testing robot Tappy.
  • Furthermore, analysis of the new Chinese cybersecurity law (see here) indicates that it is now legal for the Chinese government to hack any company with online services in China nominally to look for security flaws and to access all user data while it is doing so.
  • This is why western countries are struggling to trust Huawei creating big problems when it comes to selling network equipment with millions of lines of proprietary Chinese code.
  • It is not inconceivable that these concerns will also spread to emerging markets where Huawei is also very strong.
• Huawei has two real problems on its hands that could substantially damage or destroy its currently excellent business outside of China.
• Hence, I suspect that Huawei will be on a major charm offensive at Mobile World Congress this year and will need to prove that it has really put its chequered history behind it.
• The main beneficiaries from Huawei’s troubles are Samsung which is really starting to feel pressure from Huawei in its handset business and Ericsson which has lost most of its technological lead over Huawei in recent years.
• Ericsson’s share price has already rallied well from its 2017 lows leaving Samsung as the best way to play this theme.