Huawei Deal…?
Huawei, formerly China’s largest smartphone brand, has faced serious sales declines due to the restrictions placed on the global supply chain by the US government. Originally limiting access to the Google (GOOG) Store, ending the company’s ability to provide Android OS updates, and then limiting any global supplier that used US components or software in their product development, essentially removing Huawei’s ability to access foundry capacity outside of China.
Huawei not only struggles with the impact of these limitations in its smartphone business, but has faced strong US opposition to its telecommunications products, which the US government alleges such products allow for call surveillance by the Chinese government. Huawei sold part of its smartphone business (Honor brand) last year, allowing it to survive outside of US restrictions, but is no longer associated financially with the brand. While Huawei’s management remains optimistic about the company’s future and has been developing businesses that are not constrained by US trade issues, the mobile phone business continues to suffer, especially outside of China where the necessity for the Android OS is paramount, and despite a recent pep rally where the company predicted that “…the king will return in 2023…” unless something changes on the US trade front, they will remain constrained outside of the Mainland.
That said, there is some talk that Huawei is considering licensing its smartphone technology to PTAC (China Postal & Telecommunications Appliance Company), a state-owned distribution network, which will then produce an independent brand of smartphones based on Huawei’s design. PTAC has sold Huawei product on its network in the past but under the Huawei brand. While this would certainly help Huawei to regain at least some of the revenue it has lost in the smartphone business, it remains unclear whether such a step would remove Huawei far enough from the final product that it would not be part of the US restrictions, and while it might take some time for the US DOC to follow the path to such a transaction and maintain a lid on any Huawei ‘inspired’ product, it would likely catch the eye of those China Hawks that continue to maintain pressure on the current administration to keep Huawei from competing in the smartphone market.
While it is a tenuous concept that the Chinese government has, is, or will use intentional backdoors in Huawei’s telecommunication equipment, we believe the real basis for the secondary restrictions that limit Huawei’s smartphone business, were based in the egoistic machinations of individuals in the Trump administration, who wanted to make sure that China would not be able to ‘out 5G’ the US, nor gain traction in the semiconductor business, the shining star of the US technology effort. Given that Huawei is now ‘the face of China’, we doubt any transaction that Huawei might accomplish to generate revenue will garner detailed inspection by the US and likely fall quickly under the current restrictions. China is too easy a political target to let even a once or twice removed participant bypass restrictions, especially one that involves a state-owned entity.
Huawei not only struggles with the impact of these limitations in its smartphone business, but has faced strong US opposition to its telecommunications products, which the US government alleges such products allow for call surveillance by the Chinese government. Huawei sold part of its smartphone business (Honor brand) last year, allowing it to survive outside of US restrictions, but is no longer associated financially with the brand. While Huawei’s management remains optimistic about the company’s future and has been developing businesses that are not constrained by US trade issues, the mobile phone business continues to suffer, especially outside of China where the necessity for the Android OS is paramount, and despite a recent pep rally where the company predicted that “…the king will return in 2023…” unless something changes on the US trade front, they will remain constrained outside of the Mainland.
That said, there is some talk that Huawei is considering licensing its smartphone technology to PTAC (China Postal & Telecommunications Appliance Company), a state-owned distribution network, which will then produce an independent brand of smartphones based on Huawei’s design. PTAC has sold Huawei product on its network in the past but under the Huawei brand. While this would certainly help Huawei to regain at least some of the revenue it has lost in the smartphone business, it remains unclear whether such a step would remove Huawei far enough from the final product that it would not be part of the US restrictions, and while it might take some time for the US DOC to follow the path to such a transaction and maintain a lid on any Huawei ‘inspired’ product, it would likely catch the eye of those China Hawks that continue to maintain pressure on the current administration to keep Huawei from competing in the smartphone market.
While it is a tenuous concept that the Chinese government has, is, or will use intentional backdoors in Huawei’s telecommunication equipment, we believe the real basis for the secondary restrictions that limit Huawei’s smartphone business, were based in the egoistic machinations of individuals in the Trump administration, who wanted to make sure that China would not be able to ‘out 5G’ the US, nor gain traction in the semiconductor business, the shining star of the US technology effort. Given that Huawei is now ‘the face of China’, we doubt any transaction that Huawei might accomplish to generate revenue will garner detailed inspection by the US and likely fall quickly under the current restrictions. China is too easy a political target to let even a once or twice removed participant bypass restrictions, especially one that involves a state-owned entity.
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