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Huawei’s stockpiling of US components shows that the company has prepared for restrictions from Washington and could effectively meet its needs up for a year. Photo: Reuters

Huawei’s day of reckoning arrives – but it has been preparing for almost a year

  • US Commerce Department added Huawei and 70 affiliates to its Entity List, saying the company was engaged in activities ‘contrary to US national security’
  • Of Huawei’s hundreds of global suppliers, it considers 92 as core suppliers, including 33 from the US
Huawei

Huawei has been saving for a rainy day, and that day has come.

The Shenzhen-based company, which claims to be the “unparalleled leader in 5G” and recently overtook Apple in global smartphone sales, has been stockpiling critical US components for almost a year, according to separate reports by research houses Haitong and Canalys. The move was to ensure it can continue making its products that rely on core technology from US suppliers such as Intel and Qualcomm.

On Wednesday, the US Commerce Department added Huawei and 70 affiliates to its Entity List after it concluded that the Chinese company was engaged in activities “contrary to US national security or foreign policy interests”.

On the same day, US President Donald Trump signed an executive order barring the use of telecommunications equipment from companies that are deemed a threat to national security, clearing the way for an outright US ban on products made by Huawei, though the order did not name China or Chinese companies specifically.

Inclusion on the Entity List means that a US company, person or government agency selling US technology to Huawei requires a license from the Bureau of Industry and Security (BIS).

Huawei declined to comment on its inclusion on the Entity List or whether it has been stockpiling, but a spokesperson said: “All companies have business continuity plans … [it is the] only responsible way to do business.”

Huawei’s chip unit says it prepared years ago for doomsday scenario of US tech ban

Huawei’s stockpiling of US components shows that the company has prepared for restrictions from Washington and could effectively meet its needs up for a year, according to a Haitong Securities report on Thursday. “If the ban lingers longer than one year, it all depends on Huawei’s progress on building its own supply chain,” the report said.

Huawei has been developing its own chipsets for use in its smartphone and networking products, which are considered Intel and Qualcomm alternatives, while the company confirmed in March that it has developed its own operating systems (OS) for smartphones and computers in case those provided by US technology firms are no longer available.

US chip maker Intel and NXP Semiconductors of The Netherlands have both been recognised as a Huawei “Golden Supplier” for 10 consecutive years, the highest recognition from the telecoms maker.

Intel declined to comment on how it may be affected by Huawei’s inclusion on the Entity List. Qualcomm did not immediately reply to a request for comment.

A Goldman Sachs report revealed that three of Huawei’s top 10 suppliers in terms of sales were US companies. Contract manufacturer Flex derives 7 per cent of its revenue from the Chinese company, Broadcom counts on Huawei for 6 per cent of sales and Qualcomm for 5 per cent.

Huawei’s crosstown competitor ZTE Corp was added to the Entity List in March 2016, though the BIS suspended the restrictions just over two weeks later after ZTE agreed to cooperate with a US government investigation into the company’s alleged violations of US sanctions and export control laws. In March 2017, ZTE reached a US$1.19 billion civil and criminal settlement with the US government, which lifted an earlier denial order that prevented it from buying US products.

Chinese Ministry of Commerce spokesman Gao Feng said in a briefing on Thursday that Beijing has always required Chinese firms to comply with foreign rules and laws.

“We oppose any countries unilateral action and abuse of export restrictions. We ask the US to stop making these mistakes to avoid causing damage to US China trade relations. China will continue to push for transparent and open policy for foreign companies.”

Since mid-2018, Huawei has been cutting its reliance on US suppliers like Qualcomm, shifting its focus to non-US sources like Taiwan chip maker MediaTek, said Jia Mo, a Shanghai-based analyst at research firm Canalys. At the same time, the company has been placing more orders for US parts to ensure uninterrupted production for six months even if it faces a complete ban from the US side, Jia added.

“For the mid-to-long term, it really depends whether Huawei can outsource all of its suppliers to other countries,” Jia said.

In a statement on Thursday Huawei said: “We are ready and willing to engage with the US government and come up with effective measures to ensure product security. Restricting Huawei from doing business in the US will not make the US more secure or stronger; instead, this will only serve to limit the US to inferior yet more expensive alternatives, leaving the US lagging behind in 5G deployment, and eventually harming the interests of US companies and consumers.”

The statement added that unreasonable restrictions would infringe upon Huawei's rights and raise other serious legal issues.

In November 2018, Huawei released a list of its key suppliers, which showed that the Chinese technology giant remains dependent on technology and components from overseas suppliers, in particular those in the US and Japan, despite having stepped up its investment in research and development and diversifying key component suppliers.

Of the company’s hundreds of global suppliers, Huawei considers 92 as core suppliers, including 33 US companies, 25 from mainland China, 11 from Japan and 10 from Taiwan. The remaining companies are from countries and regions including Germany, South Korea and Hong Kong.

If Huawei is banned completely by Washington, China is likely to retaliate by slapping tariffs on US products, putting US tech companies like Apple, Qualcomm and Broadcom “in vulnerable positions” as all three depend heavily on the Chinese market, according to Jia of Canalys. Greater China is Apple’s third largest market, contributing about 20 per cent of revenue in 2018, while China including Hong Kong accounted for 67 per cent of Qualcomm's sales last year and 17 per cent for Broadcom.

In late April Intel cut its full-year revenue forecast and missed analysts’ estimates for the first-quarter amid the slowdown of its China business.

Jia noted that retaliation would be a double-edge sword because Chinese smartphone makers such as Xiaomi, Vivo and Oppo largely depend on US chips and are expanding their sales overseas.

In December, Huawei assured its network of global suppliers that US accusations in the wake of the detention of its chief financial offer Sabrina Meng Wanzhou would not harm their business partnerships.

This article appeared in the South China Morning Post print edition as: the day of reckoning arrives for huawei
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