China’s flagship telecom company Huawei has seen its better days. Now in the crosshairs of the U.S. and the U.K., and likely Japan, South Korea, and EU chipmakers, Huawei has been blindsided by its most important suppliers.
On one hand, the company says it doesn’t need American microprocessors like Intel or Qualcomm. On the other, it says that without them they can’t grow some of their core businesses, mainly smartphones.
“Maybe some of our lower-end products on the periphery might easily be hurt,” Huawei’s founder and billionaire Ren Zhengfei told a gathering in China this week. “They will be knocked out sooner or later. We didn’t prepare for this so some of those items might be affected. But our most advanced products will not be affected. And our 5G at least will not be affected. Not only that, I think even after two or three years it will be impossible for anyone to catch up.”
In that sentence alone, Ren gave Washington yet another reason to after Huawei. It’s big. And – to Washington and many others – it’s big because it’s bad. They spy. They may have grown through intellectual property theft, something Huawei denies.
Assuming total innocence, Ren’s hopes to build 5G telecom without the likes of Intel are mere happy talk. Huawei needs foreign made microprocessors and DRAM chips to grow. Without them, Huawei is in limbo and they know it.
See: This Might Be Huawei’s Secret Weapon — Forbes
Ren’s comments on expanding its 5G business without the use of foreign tech came three days before this rope-a-dope by the Brits: chipmaker ARM is no longer selling to Huawei.
The BBC reported that ARM’s designs contain “U.S. origin technology” and is susceptible to the U.S. Department of Commerce’s announcement last week that companies selling hardware to Huawei needed government permissions before doing so. China promised harsh retaliation.
ARM’s decision affects Huawei’s ability to develop its own chips, many of which are currently built with ARM’s underlying technology, for which it pays a license.
“I’m not an expert on technology, but I’ve been looking at this from a big picture perspective. From what I see, Huawei is done. Their growth story has changed dramatically. It’s as simple as that,” says Michael Every, head of financial markets research for Asia Pacific at Rabobank in Hong Kong.
China said today that it will pump more subsidies into its tech sector, the very thing Washington has been trying to get Beijing to avoid during these months-long trade talks. More subsidy talk actually moves China in the opposite direction from the U.S. in trade negotiations.
Bloomberg reported today that Microsoft has removed Huawei Technologies from one of its websites offering cloud gear – called Azure Stack.
Huawei told CNBC in China this week that it plans to roll out its operating system in the fall. Most analysts believe it will be a low-end, China-centric product at the off-set, knocking out Apple and eroding Android’s market share in mainland China.
“Apple and Google will absolutely lose China market share to Huawei, but that was inevitable anyway if you think that Huawei was eventually going to roll out one on their phones running on their own operating system,” says Every. “The restrictions by Washington only extend them in that direction. Huawei can cobble something together by the fall. The same is true for all the key chips they need. China manufacturers might be able to replicate. But there is no easy or quick transition if Trump doesn’t let up on them,” he says.
China tech companies are preparing for the worst.
Semiconductor Manufacturing International Corp (SMI) said on Friday that it notified the NYSE of its plans to delist its American depositary receipts around June 13. The company blamed high costs and low volume.
SMI is up 23% year-to-date with volume of around 275,000 shares traded daily.
Back to Huawei growing without American technology behind it.
Many Huawei devices are built using Intel processors. Is there an Intel equivalent in China?
Worth noting, ARM is now owned by Softbank. Softbank is Japanese. If Japanese are being U.S. compliant with ARM, Japanese companies might be compliant with their computer hardware sales to Huawei. The same goes for South Korea, which is counting on the U.S. to remedy its situation with North Korea.
It’s not good for Huawei.
Last year, China announced that it was going to develop its own Silicon Valley. They want to develop their own computer hardware companies to compete with the U.S. They call it the Greater Bay Area, an American clone for sure.
China can do all of these things, and should. The problem is that China plays by different rules; rules the trade war were supposed to get China to change.
Assuming Chinese companies were not benefiting from IP theft, then state subsidies and closed markets are as big a problem for many foreign firms, including Google which only recently was allowed back into mainland China.
Other companies may be fine with providing services and hardware to China. They are not impacted by subsidies and a closed market. Yet. But when those subsidies and controlled competition mean companies have a new China rival eating their lunch due to those factors, it might be too late to get that market back.
See: Here Is How China Is Really Paying For Tariffs — Forbes
Ren knows that Huawei needs U.S. technology and that technology cannot be easily replaced. Huawei is in a hostage situation in the U.S.-China trade war.
Ren knows that China can only catch up to the U.S. if it opens its doors to the best-and-brightest from similar Asian cultures: think Vietnamese, Taiwanese and South Korean tech workers employed in the Greater Bay Area on something similar to the U.S. H-1B visa. That would bring China up the value chain faster.
Huawei will likely release its own operating system within a year. It will be a test for China’s ability to go it alone in a market dominated by U.S. operating systems. Huawei’s OS will pose a direct challenge to Android in China and Africa. It will shrink Apple’s market share even further in China, a share taken over by Huawei this year.
But for now, it looks like Huawei needs us, more than the world needs Huawei.