At the end of June, a Swedish court upheld a ban established by Sweden’s Post & Telecom Authority that was put in place last year against both Huawei (pvt) and ZTE (000063.CH).  This was the 2nd appeal made by Huawei after losing its 1st appeal late last year.  While Huawei has always competed with Sweden’s own 5G supplier Ericsson (ERIC), the ban, which was not supported by Ericsson, has had an effect on Ericsson’s prospects for selling 5G equipment in China, the globe’s largest 5G market.  It seems that China has decided that it will be buying less 5G equipment from Ericsson, now that the Swedish government has reinforced the ban, and Ericsson has indicated that it will be closing one of its R&D centers in Nanjing, offering to transfer all employees to another Swedish firm who has offices in Nanjing.  Roughly 600 employees are involved.
Ericsson will still have 4 other R&D centers in China and is expected to hold a 23% share of the global 5G equipment market this year (down from 26% last year) but saw a big drop in its Chinese business in 2Q and noted in July that it was no longer counting on a number of 5G tenders that it had expected to win before the tension between the two countries escalated.  While the company’s president and CEO still believes it can generate business in China, it will likely be facing far greater nationalistic challenges than last year.  According to Trendforce, the global mobile base station market will look like this at the end of this year.

Huawei has been under pressure as the US has continued trade sanctions against the company, extending them from what were direct sales exclusions to considering any component produced using US equipment a violation last year.  The impact on Huawei’s smartphone business has been quite pronounced and caused the company to sell its Honor (pvt) brand, which was developed by Huawei to appeal to a young and less affluent segment of the global population, and in November of last year Huawei sold the brand to a consortium of over 30 agents and dealers, including a division of China Telecom (728.HK) and the Shenzhen government.
As part of the trade sanctions imposed by the US, Huawei lost the ability to access the Google (GOOG) Play store and the ability to access and update the Android operating system in all of its existing phones, and would therefore be unable to release new phones that would allow users to access Android services.  While China is less dependent on Android than the global community, it severely limited Huawei’s global smartphone business, and pushed Huawei to step up development of its own Hongmeng (Harmony) OS to replace Android.
As we have noted recently, Huawei has officially released the Harmony OS and is actively promoting the OS to smartphone and CE brands in order to lessen product dependencies on Android and bypass some of the US restrictions, however the CEO of Honor recently announced that it new flagship phone the Honor 50 5G will continue to use Android across the Honor 50 line and not adopt its former parent’s OS, although he stated that they will keep an eye on future Harmony OS ecosystem developments.  In this case, it seems obvious that Honor, which is totally independent of Huawei and is therefore outside of the US restrictions, is looking to appeal to a more global customer base that requires the ability to access Google services and likely has little or no allegiance to Huawei, as some on the Mainland do.  While it is a tangible blow to Huawei, it goes to show how difficult it will be for Huawei to establish a new OS in the global smartphone market.  If you have every had your kids ask to be dropped off a block from school, you know what that feels like…

In 2004 Huawei’s chip design department became HiSilicon (pvt), an affiliate of its parent, and one of the top fabless design shops globally.  In fact, in 1Q 2019 HiSilicon moved from #25 to #14 in ranking among all semiconductor companies, based on sales, including foundries, and by 1Q of last year it made it into the top ten in both 1Q and 2Q.  That said, by the end of 2020, it had fallen out of the top 15 and in the first quarter of this year, reported only $385m in sales, down 87% y/y.
US trade sanctions against parent Huawei that have restricted foundries from producing semiconductors for HiSilicon have left the company with a very large operation and little revenue to offset such an operation, and the burden of a staff of over 7,000 does not make things any easier, however, despite the fact that HiSilicon’s major customer is struggling to find semiconductor production capacity for many of its CE products, Huawei has indicated that they are a private company and therefore ‘will not be affected by external forces’ and will not give up HiSilicon.  HiSilicon continues to develop 3nm application processor chips (Kirin 9010), despite the fact that they cannot be produced, along with developing new 5G silicon, even though its share in 5G is expected to decline from 23% (2020) to 5% this year, and is forced to use Mainland foundries such as SMIC (688981.CH) and HuaHong (1347.HK) that do not have capacity at nodes below 28nm. 
While this allows the production of a number of needed semiconductor products, application processors, a necessary item for smartphones and other CE devices, are competing at the 5nm node, which is unavailable to HiSilicon.  While Huawei can continue to fund HiSilicon for what we expect would be another year without outside help, unless the US lowers the barriers it has placed in front of China’s semiconductor development plans, HiSilicon will have to change, and that will not be easy for Huawei or the Chinese government to accept.  With that in mind, we struggle to find a way that a fiercely private company like Huawei will accept what would likely have to be subsidies and partial ownership by the Chinese central or local government, but the key word is survival and the US does not seem to be easing any restrictions thus far.