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Huawei

Huawei is in better shape to withstand US pressure, thanks to industry’s largest research budget

PUBLISHED : Thursday, 26 April, 2018, 9:01pm
UPDATED : Thursday, 26 April, 2018, 11:26pm

Huawei Technologies, China’s largest telecommunications equipment and smartphone maker, has tried for many years to break into the US market, to little avail.

With a trade spat escalating between the US and China, and fresh from American phone networks AT&T and Verizon withdrawing their support of the Chinese brand – most handsets sold in the US are subsidised by carriers – that dream appears further out of Huawei’s reach.

Just how important is the US for Huawei, which is already the world’s third-largest smartphone maker by sales? 

“Realistically, Huawei doesn’t need the US, given its strong market in China, and its increasing market share in Asia, Europe and Africa,” said Paul Haswell, a partner at the global law firm Pinsent Masons. 

The world’s largest economy may be important for Huawei for a different reason: hardware components and software.

One in four of Huawei’s 263 suppliers last year were American, making up the second-largest group of vendors to the Chinese company, according to Bloomberg’s data. Mainland Chinese companies were the biggest group of suppliers, making up 41 per cent of Huawei’s supply chain, followed by Taiwan companies in third place at 9 per cent and South Korean firms in fourth place at 6.8 per cent.

Hon Hai Precision Industry, the world’s largest contract manufacturer for consumer electronics, also known as Foxconn, is Huawei’s largest supplier. Chinese battery and electric carmaker BYD, chip maker Taiwan Semiconductor Manufacturing Corp. (TSMC) as well as Foxconn’s unit FIH Mobile round up the next three largest vendors.

The Chinese brand, which had hired Wonder Woman star Gal Gadot as its US brand ambassador, count several US companies among its suppliers, including chip makers Qualcomm and Micron Technology.

Huawei has one of the largest research budgets in technology, spending US$14.2 billion last year on research and development, or 14.9 per cent of its revenue, second only to Amazon in dollar terms and more than what Google’s parent Alphabet spent.

Chinese tech company Huawei probed ‘for violating US sanctions on Iran’

As a result of that spending, Huawei’s HiSilicon unit, a Shenzhen-based fabless semiconductor company, was able to develop the Kirin chip, which has increasingly been used in its namesake handsets.

That is in stark contrast with ZTE, the Shenzhen-based telecommunications equipment maker that is both Huawei’s competitor and comrade in the global technology race. 

ZTE was slapped with a seven-year export ban last week by the US Department of Commerce for breaching the settlement terms of violating US sanctions on selling telecoms equipment to Iran and North Korea.

The exports ban is choking ZTE, as US suppliers make up three in every 10 of the Chinese company’s supply chain. Intel Corp, the largest maker of semiconductor chips, is ZTE’s largest supplier, followed by Micron in third place and Broadcom in fifth place.

ZTE may be too big to fail, given China’s global technology ambition

The US Justice Department is investigating whether Huawei violated Iran sanctions, The Wall Street Journal reported, citing unnamed sources. Neither the Justice Department nor Huawei have confirmed that the investigations are taking place.

Huawei “complies with all applicable laws and regulations where it operates, including the applicable export control and sanction laws and regulations of UN, US and EU”, according to a statement by the company.

Similar penalties will be unlikely on Huawei even if the Chinese company were indeed being investigated, analysts said. An outright export ban is also improbable, and any punitive measure will have less of an impact on Huawei than on ZTE, said Shaun Rein, managing director of China Market Research Group.

“A ban on Huawei could hurt them, but it won’t kill the company, whereas ZTE is in survival mode [following the US ban],” he said.

Huawei was originally set to launch its Mate 10 Pro handset in the US through major US carrier AT&T earlier this year, although the latter later backed out of the agreement following cybersecurity concerns raised by members of the US Senate and House intelligence committees. Verizon later followed in AT&T’s footsteps and dropped plans to sell Huawei phones, according to a Bloomberg report.

While there is likely to be suspicion that any investigation is an attack on Huawei because it is a Chinese company, it should be noted that many companies, be they from the US or overseas, suffer serious penalties for breach of US Trade Sanctions, said Haswell of Pinsent Masons.

“Every business with an international ambition must ensure it gives sufficient resource and focus to being aware of trade sanctions globally and ensuring compliance with them,” he said.

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