The US-China Trade War Hits Huawei

I got a number of emails asking my take on this over the weekend from readers so I thought it would be good to share a few specific thoughts on the news that broke about Google revoking Huawei’s Android license. If you missed the news, the fallout is due to Huawei being blacklisted by the current Trump administration, and as a part of that blacklist, all US-based technology providers are pulling back from offing components or technology to Huawei.

While the ban on Huawei was much more focused about their infrastructure business, meaning the business that sells networking gear to telecom, and was less about their smartphones but this move will impact their smartphone business unless a resolution is brought in the next few months. Beyond Google, now Intel, Broadcom, Xilinx, Qualcomm, basically all US-based component companies, are cutting off supply to Huawei.

The political game being played makes sense when you also understand Huawei as a source of Chinese national pride. Chinese tech companies have tried and failed for years to have a local company grow, and be seen as an innovator outside of China. Huawei is the first one who has truly grown a global footprint and be seen as innovative and competitive from a global standpoint. The US ban on Huawei and the implications for US companies to stop providing technology to Huawei is certainly designed to cripple China’s tech jewel.

What’s the Immediate Impact to Huawei?
Google clarified that current Huawei devices in the hands of consumers will still be supported with Android. Google revoking Huawei’s Android license applies to future smartphones. That being said, the sheer news that Google is not providing Huawei the official Android platform and Google services will immediately impact sales of current devices (outside of China) as it will create some uncertainty in the mind of consumers. The typical Huawei customer in parts of Europe where their share is strong is a much more value conscious customer and the uncertainty around Android support could make buying a Huawei device a bit risky to an average consumer. Especially when there is ample competition in the value segment in all global markets.

Huawei will not be impacted in China because Google’s official version of Android does not exist in China as the OEMs there use their own custom Android implementations. Huawei has the know how to take the version of the open source of Android and customize it to their needs as their own OS, but that is only a viable option in China. To compete in markets outside of China, Huawei absolutely needs Google’s official Android version, the Play Store, and Google’s services. Not having this is a huge hit to their global competitiveness, and I have no doubt this will impact Huawei’s smartphone sales in all markets other than China until this is resolved.

Impact to US Companies
In some areas of Huawei’s businesses, they were fairly large purchasers of US-based components. While they make a number of their own silicon for smartphones and their networking business, the still purchase components from Intel and Qualcomm in some cases. While these are not huge volumes, they will still impact these companies to a degree. Should this move by the US impact their networking business in other parts of the world, then companies like Broadcom and others who supply components for Huawei’s networking business could get hit harder than US companies who provide components to them for smartphones and PCs.

It’s worth emphasizing, here again, the political chess match that is at play here, as well as the real concern with Huawei being the telecom infrastructure business, not the smartphone or PC business. This is important to understand because the US is not imposing such sanctions on other Chinese companies who compete here. While OnePlus is not viewed as Chinese, they are owned by BBK who also ones Vivo and Oppo and is a Chinese based company. TCL is growing thanks to their TV business success and HiSense, another TV company, is no getting picked up by US retailers. The US move is not yet, a sanction on all Chinese companies competing in the US but is targeting Huawei specifically because they are China’s crown jewel.

That being said, if things escalate with China a worry is that the US adds all Chinese tech companies to the ban list and that would dramatically hurt a number of US companies just due to the sheer volume that China hardware is for many US-based component companies. While this still feels like a stretch, it is a worry if we make no strides negotiating with China and this trade war continues to escalate.

The other question is, what is the risk to Apple. Many have speculated it is just a matter of time before China’s retaliation hits Apple. While Apple is the only target for China if they wanted to really hit a US company hard, I continually struggle with China actually coming down hard on Apple because of how much revenue to China Apple brings. China’s communist party only has the economy in their favor. Maintaining a healthy economy is essential for the communist party and given in some of the key cities in China, Apple manufacturing is a big chunk of that regions GDP, China would not just be hurting Apple but also their own economy if they came down hard on Apple.

But, it is worth keeping in the back of our mind that Apple is the only target option China has if they wanted to inflict pain on a US tech company. Let’s hope it does not come to this, or for the US to place a ban on all companies from China who compete in the US. I worry this is a more delicate situation than many realize, and based on what we can tell from the Trump administration, they are not going to back down.

Until this is resolved, expect this to be a regular area of our analysis given how much we chat with the Chinese and Taiwanese supply chain as well as the US tech giants who are worrying about the different scenarios that can play out.