The battle between the Trump administration and Chinese tech company Huawei has escalated materially this week—and while the implications have not yet been fully assessed, this looks like it could be the game-changer. It has taken Trump’s team almost 18 months to find its mark, to find a knot tight enough that Huawei can’t wriggle free, but that objective may well have been achieved.
Last Monday (August 17), U.S. Commerce Secretary Wilbur Ross ambushed Huawei with the announcement that any company seeking to sell chipsets to Huawei, designed or fabricated with any U.S. tech, will need to obtain a license first. These are the chips that power Huawei’s flagship products—its 5G equipment and, most acutely, its smartphones.
The new rules extend the restriction on Huawei using its own custom-made chipsets, designed or fabricated using U.S. tech. That restriction was only announced in May, on the first anniversary of Huawei’s blacklisting. Whether or not this latest move was on the drawing board back then, it has now cut off Huawei’s Plan B—to turn to standard third-party chipsets. Trump’s team noted the drastic impact on Huawei from the initial silicon sanctions, and it has now targeted that same wound with a much heavier caliber weapon.
The timing of the latest U.S. move is also notable. Headlines the preceding weekend had covered the expiration of the so-called Temporary General License (TGL), the mechanism by which (among other things) Huawei phones that shipped with Google could continue to receive updates from the U.S. company, despite it being prohibited from licensing newer smartphones. Huawei assured that phones that shipped with Google would continue to operate as normal—Google didn’t comment.
Prior to the U.S. moving against Huawei’s silicon supply chain, Google had been the most significant blow the administration had scored against Huawei’s consumer business—the fastest growing and most profitable part of the business. Huawei has continued to pump out new flagships post the blacklist—the Mate 30, P40 and imminent Mate 40, albeit these have only sold well in China.
Driven by those sales in China, though, plus multi-billion-dollar 5G equipment contracts also secured at home, Huawei has continued to grow revenues and profits, fuelling its R&D machine. This has frustrated the U.S., which has continued to campaign—increasingly successfully—for countries around the world to eject Huawei from 5G plans. The consumer business, though, appeared bulletproof.
Well, not any more. Just two weeks ago, Huawei consumer boss Richard Yu confirmed that this fall’s Mate 40 will be the last flagship to carry one of the company’s custom Kirin chipsets. Until the new U.S. hammer-blow, it had seemed clear that the company would simply swap out the Kirin chipset for a third-party option—MediaTek for example. That no longer appears to be an option.
In the immediate aftermath of these new sanctions, it soon became apparent just how serious this could be. A Bloomberg opinion piece described the move as “more than just an incremental measure… It threatens to kill the company, which invites retaliation from Beijing.”
This was echoed in the Financial Times, with one industry analyst saying that “the U.S. government has passed a death sentence on Huawei—[it] is probably finished as a maker of 5G network equipment and smartphones once its inventories run out early next year.” While another analyst told the newspaper that “the U.S. government is completely locking down Huawei and leaving it no alternatives.” The analyst singled out the loss of access to MediaTek as the strike against Huawei, endangering its mobile business.
MediaTek has confirmed it will abide by new U.S. restrictions as they apply: “We have always followed global trade-related laws,” the company said in a statement. “We will obtain the latest regulations and conduct legal analysis to ensure compliance with relevant rules.
Back in May, the key question was how large a stockpile of chips Huawei had built up to secure itself against the new U.S. sanctions. The consensus appeared to be enough to last somewhere between 12 and 24 months. But on the smartphone front, we now know Huawei only has enough Kirin chips to support the Mate 40 launch—maybe not even enough for that. Taking third-party chips into the mix, it’s sensible to assume the company can manage until early next year at least. On the 5G equipment side, perhaps much longer than that.
For 18 months, Huawei has pumped messaging into the market around its HMS alternative to the Google software and services it has lost. As the company’s U.K. consumer head told me last week—just ahead of these latest U.S. sanctions, making HMS work is critical. If it cannot convince users hooked on Google to switch, then it cannot rebuild. Again, all those plans assumed a Huawei hardware base that could compete with Apple and Samsung, and also Xiaomi, Vivo and Oppo, that’s now up in the air, undermined by the new U.S. action.
Huawei’s entire consumer strategy is built around its smartphones—the glue that holds together its forays into smart TVs, PCs, autos, wearables, tablets. If it cannot keep its smartphone users, it cannot sell the rest of its strategy. And it’s the consumer business that currently drives Huawei’s success overall. The company cannot survive in its current form if its consumer business is materially hit. Layoffs are already reportedly on the cards, albeit one company insider reportedly told a Chinese tech site on Friday “last night we had another meeting until midnight. The boss’s attitude is to step forward and die rather than take a step back.”
Short of the U.S. electing Biden who then reverses these latest sanctions, or China throwing everything at a recut of its domestic silicon industry to either swap out U.S. tech or mandate state-sponsored violations of the new regulations, there’s no immediate “business as usual” option for Huawei this time around. We can likely expect some intel out of the company next week, once it has evaluated options. No easy options, though. As the FT succinctly put in on August 21, “Industry experts say it is hard to envision how the company could continue running its business in its current form under Washington’s seemingly watertight sanctions.”
A “death sentence” for Huawei’s consumer business also spells serious trouble for the hundreds of business and telco customers around the world using its enterprise and 5G technology. If the U.S. action has the impact it desires, governments and networks around the world will need to manage the fallout from a sharp shock to the 5G equipment supply chain from Huawei retrenching.
Back in March, on the announcement of its 2019 results, Huawei warned publicly that if the U.S. took action such as this, “the Chinese government will not just stand by and watch Huawei be slaughtered on the chopping board.” We don’t yet know what China will or won’t do beyond state media threats and rhetoric—it has much to lose from reciprocal action against U.S. companies sourcing its components and using its manufacturing base as it seeks to recover from the impact of the coronavirus.
When Richard Yu confirmed that the Mate 40 would be the last Huawei phone to carry a custom Kirin chip, I commented that the phone may become a collectors’ item—the last of its kind. Right now, it seems the Mate 40 might be an even more significant “end of an era” milestone. In the fickle world of consumer products, Huawei may well need a political or technical miracle this time around.