This article is part of AspenCore Media’s Special Project on Huawei, dissecting the global impact if China’s telecom equipment giant is sanctioned by the United States and its allies.
Huawei Technologies Co. — the controversial Chinese vendor of networking gear and smartphones — faces the real possibility that its telecom equipment will be banned from U.S. and European markets. If Huawei’s sales suffer, its supply chain will feel the pain. Huawei became the world’s third-largest semiconductor buyer in 2018, according to Gartner, and almost half its $100 billion revenue is derived from foreign markets.
Huawei's ascension on the top buyers’ list underscores a dilemma facing the global supply chain. As governments in the U.S. and Europe ramp up their rhetoric against Huawei's perceived threats to security and intellectual property (IP), the firm is at the same time becoming a more important customer. Huawei spent $26 billion on chips in 2018, according to Gartner; and 70 companies — including AMD, Intel, Microsoft and Qualcomm — have exposure to Huawei, Goldman Sachs reports.
A U.S.-EU Huawei ban would whack component makers with both ends of the stick. U.S. vendors would be cut off from a massive — and growing — global OEM. A boycott of Huawei’s smartphones and telecom equipment would put a considerable dent in its component demand.
“[Huawei] is still a major smartphone maker with major share in Asia and Europe and that’s not changing,” one analyst told EPSNews. “There are many semiconductor, component and PCB suppliers that sell into Huawei’s smartphone business. [It] doesn’t look like any of this would change; but if there is backlash against U.S.-based suppliers selling to them — or if China retaliates with tariffs — then it could hurt suppliers.”
Problems and Prominence
As a Chinese electronics manufacturer, Huawei is already dealing with U.S. tariffs on its products. In December 2018 its CFO, Meng Wanzhou, was arrested in Canada on suspicion of violating sanctions. In January, the U.S. Department of Justice rolled out a set of indictments charging Huawei and Meng with IP theft, corporate espionage and wire fraud.
Huawei is also fighting accusations that its equipment for 5G, the next generation of wireless technology, will not be secure.
Still, Huawei holds considerable share in the smartphone and networking markets. Huawei accounts for 14.6% of the 1.42 billion smartphones shipped in 2018; Apple’s share was 13.2%, according to IDC. The Chinese manufacturer secured 28% of the global mobile infrastructure market in 2017 and Ericsson AB, 27%, according to IHS Markit.
“With respect to the smartphones that Huawei produces, the Chinese brand does use a fair bit of Qualcomm chipsets — specifically the mid to low end chipsets — for their products,” said Wayne Lam, principal analyst for mobile devices and networks technology at IHS Markit.
“However,” Lam added, “like Samsung, they have their own in-house silicon design. The HiSilicon Kirin SoC has been powering much of their high-end flagships for a while now. This internal capability provides supply chain diversity and potentially a fallback plan if the U.S. were to ever ban them from U.S. components like Qualcomm mobile SoC.”
U.S. chip makers Broadcom, Intel and Qualcomm qualify as small-to-midsized suppliers to Huawei. Of the 52.4 billion Chinese Renminbi (Rmb) Huawei spent in Q3 2018, Broadcom accounted for 2.1 billion; Qualcomm, 1.6 billion; and Intel 0.6 billion, according to Goldman Sachs. Foxconn Industrial Internet Co. sold Rmb 9.1 billion worth of products and services to Huawei during that period and TSMC, 3.8 billion.
When a much smaller Chinese telecom company, ZTE, was prohibited from buying American components early in 2018 it was forced to cease major operations for several months. One supplier’s shipments to ZTE declined from 60 million units to 15 million, according to the Financial Times.
Conventional supply chain wisdom warns suppliers against concentrating too much of their business in a single market or customer. OEMs patronize a handful of key suppliers to become their most important client. They then use that leverage to secure volume discounts; be first in line during allocation; and build flexibility into their purchasing contracts.
When relationships sour, OEMs are rarely hurt. In 2012, Audience Inc., a mobile audio processor maker, saw its stock dive from $22 a share to about $8.50 when Apple decided not to use its chips in the iPhone 5. According to Reuters, Audience warned investors in its 2012 IPO prospectus it was dependent – as in 75% of its sales—on one large OEM and its contract manufacturers. Apple’s decision was announced right before Audience’s IPO – which ranked among the worst public offerings in 2012.
At least two of Huawei’s suppliers rely heavily on its success. Chinese camera lens and fingerprint reader manufacture O-Film Tech made nearly one quarter of its sales, roughly $444 million, to Huawei in Q3 2018, according to the Financial Times. California’s NeoPhotonics, a circuit maker, derived 47% of its revenue from Huawei in Q3 2018. A Huawei boycott could be devastating.
Clash of the Titans
Huawei itself may only be dinged if its U.S. suppliers are cut off. In addition to its in-house chip operations, Huawei’s domestic sourcing options are expanding. China’s BOE Technology Group and China Star are rising in global LCD rankings, IHS Markit reports. Huawei buys 200 million units of display panels a year from Japan Display, LG Display and BOE.
If China decides to retaliate against the West’s treatment Huawei, the ripple effect will overtake more U.S. manufacturers. U.S. companies are heavily reliant on China’s products and services. Apple’s devices are assembled there; and Cisco routers, Dell computers, and Ford Motor Co. wiring harnesses all are sourced from China. The East and West supply chains are deeply entangled.
Telecom suppliers will likely follow demand where ever it goes. But Huawei is already heavily ensconced in Asia’s 5G rollout and suppliers want a piece of that action. It will be hard, according to Nikkei’s Asian Review, for those countries to bypass Huawei’s technologies entirely while trying to catch up on development. This is especially true for Japan, where the Chinese company has grown increasingly prominent in recent years as both a supplier and a customer.
Telecom competitors will seize the opportunity from Huawei’s absence in developed countries, Stephane Teral, IHS Markit executive director and a telecom industry analyst, told Nikkei’s Asian Review. A Huawei-sized boycott is unprecedented, he added. “The equipment supply chain is already strained and banning Huawei in many more countries is going to create a vacuum that no one can fill in a timely fashion.”
Additionally, embargos will not solve fundamental problems between the East and West. For example, China’s offer to buy more goods form the U.S. — including $200 billion worth semiconductors — is a red herring, said Tom Derry, CEO of the Institute for Supply Management. The deal might temporarily adjust the balance of trade, but it doesn’t address U.S. concerns on network security, IP theft, and fair market access. “The balance-of-payments deficit needs to be addressed structurally and not by transaction,” Derry explained. “It doesn’t address the underlying issues.”
Suppliers will inevitably be drawn to big markets and customers, which concentrates purchasing leverage in only a few hands. Gartner’s top 10 buyers accounted for 40.2% of the global semiconductor market in 2018; up from 39.4% the prior year. As the saying goes, if any one of those customers sneezes, the supply chain will catch a cold.