Huawei’s $105 billion business at stake after U.S. broadside

HONG KONG/BEIJING (Reuters) – The latest U.S. broadside against Huawei that puts the Chinese firm on an exports blacklist threatens to rattle the global tech supply chain, linked closely to the $105 billion business of the worldÔÇÖs top supplier of telecoms network equipment.

The Trump administration has said it would add Huawei Technologies and 70 affiliates to its ÔÇ£Entity ListÔÇØ – a move that will likely ban the firm from acquiring U.S. components and technology without government approval, adding another incendiary element to the U.S.-China trade war.

The ban is not yet effective.

A similar U.S. ban on ChinaÔÇÖs ZTE Corp had almost crippled business for the smaller Huawei rival early last year before the curb was lifted.

Such sanctions on Huawei are, however, likely to have ramifications beyond the company itself, analysts said.

It would disrupt HuaweiÔÇÖs business at a minimum and all but put it out of business in an extreme, while its U.S. suppliers would also be hit, they said.

Out of $70 billion Huawei spent for component procurement in 2018, some $11 billion went to U.S. firms including Qualcomm, Intel Corp and Micron Technology Inc, and they could see that revenue disappear.

On the other hand, U.S. companies like Apple face the risk of severe retaliation from China, a key market.

ÔÇ£This is going to be very messy,ÔÇØ a China-based source at a U.S. tech company said.

It will be tough for Huawei too, the person said, noting none of its U.S. suppliers ÔÇ£can be replaced by Chinese ones, not within a few years, at least. By then, they are already deadÔÇØ.

Revenue for the company, also the worldÔÇÖs second-biggest maker of smartphones, touched 721 billion yuan ($105 billion) last year, eight times ZTEÔÇÖs and half the annual sales of South KoreaÔÇÖs Samsung Electronics Co.

But its business has come under pressure over the past year given mounting international scrutiny, led by U.S. allegations that its equipment could be used by Beijing for spying, a concern the company has said is unfounded.

Huawei’s American suppliers: tmsnrt.rs/2LO1Kxp

STOCKPILING

A range of Asian and European suppliers would also be hurt if Huawei was forced to curb production, while telecom carriers that rely on Huawei, and have largely resisted U.S. calls to bar the company, would be left scrambling just as countries race to roll out next-generation 5G mobile networks.

ÔÇ£Huawei being unable to manufacture network servers, for example, because they canÔÇÖt get key U.S. components would mean they also stop buying parts from other countries altogether,ÔÇØ said an executive at a Huawei chip supplier.

ÔÇ£They can relatively better manage component sourcing for mobile phones because they have their own component businesses for smartphones. But server and network, itÔÇÖs a different story,ÔÇØ the executive said.

According to brokerage Jefferies, the sanctions would mean a ÔÇ£nightmare for ChinaÔÇÖs 5GÔÇØ too. The country, which is targeting a nationwide rollout next year, will very likely slow down its 5G push as a result, it added.

However, industry participants pointed out that Huawei had been stockpiling components such as chips to ease disruptions.

Its initial target was to build inventories of six to nine months, and it has recently been raised to 12 and, in some cases, 24 months, Jefferies said.

Shares in Huawei suppliers fell across in Asia on the news of the U.S. blacklist.

South KoreaÔÇÖs Samsung dropped 2.4%, SK Hynix fell 3.5%, while ChinaÔÇÖs Luxshare Precision Industry fell as much as 6.1%. Shares in ZTE also tumbled.

Huawei has said it is ÔÇ£ready and willing to engage with the U.S. government and come up with effective measures to ensure product securityÔÇØ.

Its rotating Chairman Eric Xu also told Reuters in a recent interview that ÔÇ£in case of unforeseen events … we definitely have our contingency plan. What we have prepared has already been used in some of our products in the Chinese marketÔÇØ.

Huawei has spearheaded ChinaÔÇÖs campaign to develop its own high-end technologies to reduce reliance on imports and such efforts have taken on urgency after U.S. sanctions on ZTE.

The ZTE case led to some ÔÇ£benefitsÔÇØ and ÔÇ£external pressures have developed into internal driversÔÇØ in China, said Wan Gang, vice chairman of ChinaÔÇÖs parliamentary advisory body.

TRADE TALKS

The pain for HuaweiÔÇÖs supply chain would be redoubled if the trade war put a damper on the Chinese technology industry.

ÔÇ£The bigger concern would be U.S. allies that used to buy HuaweiÔÇÖs components may not continue businesses with Huawei, because of fear of possibly upsetting the United States,ÔÇØ said Doh Hyun-woo, an analyst at NH Investment & Securities in Seoul.

The Trump administrationÔÇÖs rhetoric toward China had cooled in recent days after another round of tariffs between the worldÔÇÖs top two economies and a selloff on global stock markets.

Tensions escalated on Wednesday after U.S. President Donald Trump signed an executive order barring American companies from using telecommunications equipment made by firms deemed to pose a national security risk.

While the presidentÔÇÖs order did not specifically name any country or company, U.S. officials have previously labeled Huawei a ÔÇ£threatÔÇØ.

ÔÇ£The U.S. seems to have already decided to nail Huawei down,ÔÇØ said the China-based U.S. tech company source.

ÔÇ£The problem is that because there doesnÔÇÖt seem to be a prospect for a trade deal in the near future, the U.S. has expedited the process of killing Huawei.ÔÇØ

(Story refiled to amend headline)

Reporting by Sijia Jiang in Hong Kong, Josh Horwitz in Shanghai, Ju-min Park and Heekyong Yang in Seoul, Michael Martina and Cate Cadell in Beijing, Makiko Yamazaki in Tokyo; Writing Miyoung Kim; Editing by Himani Sarkar

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