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Supply ban would hurt Huawei's global ambition

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Supply ban would hurt Huawei's global ambition

The global ramifications of the U.S. placing Huawei Technologies Co. Ltd. on an "Entity List" effectively requiring U.S. companies to obtain a special license to do business with the Chinese firm are still being felt, despite the government later scaling back the restrictions for 90 days.

The ban is a supply chain disruptor for Huawei and cuts the company's access to large mobile ecosystems like Android, hurting the company's global expansion plans, analysts said.

Fitch Solutions analyst Dexter Thillien said Huawei will find it tricky to shed its reliance on U.S. suppliers, while U.S. companies themselves will benefit from the three-month grace period, allowing them room to find alternative buyers. Thillien estimates that Huawei spends $11 billion a year with U.S. suppliers, adding that 33 out of its top 92 suppliers are American.

"As a result, the ban is a supply chain disruptor and will impact multiple U.S. companies," Thillien said. Although Huawei claims to be self-sufficient and that a ban will not impact them strongly, their current high usage of U.S. companies suggests that those firms are "the best in their field and therefore not easy to replace," Thillien added.

China remains Huawei's largest market, followed by Europe, the Middle East and Africa, Asia-Pacific and the Americas. During 2018, Huawei's revenue in China totaled $56.08 billion, and revenue in the EMEA region came to $30.82 billion.

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Huawei CEO speaks out

In a press briefing May 21, Huawei founder and CEO Ren Zhengfei said the company has "prepared ourselves for the coming ban," indicating that Huawei had been stockpiling semiconductors in case it was cut off from U.S. suppliers. While Ren said he does not expect any long-term ban to negatively impact Huawei's 5G technology ambitions, he admitted that the company's revenue growth could suffer as a result.

"We can continue to provide services to customers and will have a massive production capacity," Ren said. "But our revenue growth rate will drop. It dropped from Q1's 39% to April's 25%. We expect the growth rate to further drop by the end of this year."

Huawei remains on good terms with U.S. companies and would continue to buy their chipsets for its smartphones and laptops, the executive said. "We will always need U.S. chips."

Impact of Google ban

Following the ban, Alphabet Inc.'s Google LLC cut some ties with Huawei, though it later reversed course after the U.S. Commerce Department announced it was temporarily easing restrictions.

The initial ban jeopardized Huawei's ability to access to certain Android updates and features, except those available through open source listing. It also raised doubt about Huawei's access to popular services and applications such as the Google Play Store and the Gmail and YouTube LLC apps for its next generation of smartphones.

A Google ban would be a "blow" to Huawei's international ambitions given that smartphone owners outside of China have largely consolidated around two main platforms: Google's Android and Apple Inc.'s iOS, said Roger Kay, founder and analyst at Endpoint Technologies Associates.

"From Google's point of view, it doesn't have a lot to lose in China since it doesn't have much exposure there," Kay said in an interview. "But from Huawei's point of view, it will be quite negative internationally. Everyone outside of China kind of wants a universality to their platform and there's really only two options."

Several U.S. chipmakers, including Intel Corp., QUALCOMM Inc. and Broadcom Inc., were also reportedly impacted by the U.S. ban and subsequent temporary easing of restrictions on U.S. companies' ability to work with Huawei. Qualcomm and Broadcom did not immediately respond to requests for comment, and Intel declined to comment.

Kay noted that the growing number of U.S. companies cutting ties with Huawei highlights the interdependency between the U.S. and China, and any further disruption in that relationship will not be "a good thing for anyone."

In a May 20 statement, a Google spokesperson said the company was complying with the recent order from the U.S. government, adding that many Android features would continue to function normally, including access to the Google Play app store and security protections from Google Play Protect. Google later shared a second statement with media following the 90-day special license announcement that said providing key software and security updates on all phones "is in everyone's best interest."

European chipmakers react

European semiconductor companies said they are beholden to legal requirements in the U.S. and any region in which they operate. But they stopped short of clarifying whether the new U.S. rules had any immediate impact on their ties with Huawei.

German chipmaker Infineon Technologies AG said in a statement that the "great majority" of the products it delivers to Huawei are not bound by U.S. restrictions. It added that it can make "adaptions" to its international supply chain to meet any potential legal requirements in the markets in which it operates.

However, Infineon said it could not confirm recent reports claiming it had stopped certain shipments to Huawei, which is listed as a key customer of its power management and multimarket division in its annual report.

Dutch firm NXP Semiconductors NV, meanwhile, said its policy is to ensure compliance with global legal and trade regulations. "This also applies for supplies to Huawei insofar [as] supplies are covered by the U.S. order against Huawei."

French-Italian semiconductor company STMicroelectronics NV and British chipmaker ARM Holdings PLC did not respond to requests for comment.