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US moves against Huawei could be a tech nightmare

The US is now trying to kill Huawei completely but if Washington succeeds in destroying one of China’s leading tech groups, Beijing will be forced to retaliate against US groups such as Apple.

The US is now trying to kill Huawei completely. But if Washington succeeds in destroying one of the China’s leading tech groups, Beijing will be forced to retaliate against US groups such as Apple.
Garry white employee

by
Garry White

in Features Fiduciary news

25.08.2020

New sanctions unveiled last week against Huawei aim to completely cut off supplies of western microchips to the technology group, a move that is certain to provoke retaliation from Beijing. Are US technology giants with large Chinese operations such as Apple now in the firing line?

In a move described as a ‘lethal blow’ to Chinese 5G technology champion Huawei, the US Commerce Department announced fresh sanctions on Monday last week that restrict any foreign semiconductor company from selling chips developed or produced using US software or technology to Huawei – unless Washington grants them a licence.

This was, in effect, closing a loophole from its previous set of sanctions introduced in May, that aimed to stop contract chipmakers manufacturing chips for Huawei. Under the new rules, companies will need licences to supply the Chinese company with all components, not just specially designed pieces of equipment. It also adds 38 names linked to Huawei to a trade blacklist. "Huawei has continuously tried to evade" restrictions imposed in May, Secretary of State Mike Pompeo said.

Industry ripples turning into waves

The global semiconductor supply chain is long and complex. Huawei relies on foreign-made semiconductors to power its 5G telecoms gear – much of these American. This means that US semiconductor companies could see a significant hit to their top line. The US is arguably the world leader in the production of equipment to produce mobile phone chips, so the move will severely curtail Huawei as a major producer of smartphone handsets and 5G technology – its two core businesses.

The move, obviously, caused Beijing to bristle. "China firmly opposes the deliberate smear and suppression of Huawei and other Chinese companies by the United States," Zhao Lijian, a spokesperson for China's Foreign Ministry said. America has “generalized the concept of national security, abused national power, imposed various restrictive measures on Chinese companies such as Huawei, and bully without providing any evidence," Mr Zhao added.

The move follows recent moves introduced by Washington to deal with "untrusted Chinese apps" that Mr Pompeo argues "significant threats to the personal data of American citizens", including WeChat. On its recent earnings call, WeChat owner Tencent said it believed the ban applied only to WeChat in the US and did not affect its Chinese app Weixin. But company executives noted they were still seeking clarity on the scope of the ban. If Apple can’t install Weixin in China, it is likely to lead to a significant slump in demand.

This week’s move is also likely to have a significant impact on the global semiconductor supply chains and hurt American companies too. “These broad restrictions on commercial chip sales will bring significant disruption to the US semiconductor industry," according to John Neuffer, head of the Semiconductor Industry Association, a trade body representing American chipmakers. He said the sales of US-developed microchips to China help to “drive semiconductor research and innovation here in the US, which is critical to America's economic strength and national security.”

Samsung quandry

One country that will certainly be hit by the move is South Korea’s economy, where Samsung Electronics makes up more than a third of its Kospi blue-chip index. Samsung uses US-made equipment and nearly 20% of its revenue is from China in the latest quarter. Chips make up 17% of South Korea’s total exports and is its largest single export category. However, it will also provide the country’s smartphone makers with an opportunity to take business from Huawei.

So, this dispute appears to be getting serious, but Huawei has bought itself – and possibly the global chip industry – some time. The company has been building vast stockpiles of the chips it needs that could be impacted by the US ban.  Reports earlier this year suggested Huawei spent more than $23bn on essential components, including chips. It could now have as much as a three-year supply warehoused to keep its company going.

US actions are reshaping the global technology industry into a bifurcated industry – and as the UK did with Huawei gear in 5G networks, countries are being forced to take a side because of the reach of US sanctions and its influence on the global financial system.

Tactics or ideology?

Of course, the Trump government is unpredictable and could be using the squeeze on Huawei as leverage. A review of the Phase One trade deal between Washington and Beijing, signed in January, was scheduled for last weekend, but this has not occurred. On Tuesday, the White House confirmed that no new high-level trade talks had been scheduled between the two protagonists.

Donald Trump said the talks had been cancelled because of the two countries disagreements over Covid-19. “I postponed talks with China. You know why? I don’t want to deal with them now,” Mr Trump said. “What China did to the world was not even thinkable. They could have stopped [the virus].”

The news called several Asian chipmakers to fall – particularly Taiwan’s MediaTek – and European companies such as Dialog and STMicroelectronics also fell. However, investors are more subdued on the impact to US tech, betting that China won’t retaliate too severely as it needs to innovation that US businesses bring to China. As pointed out by the SIA, each side learns from the other. Indeed, Apple became the first $2 trillion market cap company after the announcement was made, which doesn’t suggest too much immediate concern.

However, the clock is now ticking for Huawei – what will it do when its stockpiles run out? China may be subdued in its retaliation right now, but if the US does not grant licences to US chip groups it will hit their revenues. If Washington forces Huawei into dire straits – Beijing is likely to act.

A version of the article first appeared in The Daily Telegraph.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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