Green Book . Industry

Can Huawei weather the US trade storm?

The US trade war with China has targeted communications giant Huawei. Concerns are being raised about whether the company can survive the restrictions the current administration is placing not only on the company, but also those who supply it.

This strong US position has echoed around the globe. The EU and Australia have joined in expressing concerns or banning the company from sensitive contracts. In the UK, leaked security briefings led to the downfall of a minister.

Although Huawei is more than a supplier of mobile phone handsets, our briefing is focused on this part of their business.

Huawei’s mobile market share is growing

Huawei has developed from a small operation cloning Cisco routers into a major player in the mobile market. It’s products have evolved from simple, inexpensive mobile handsets into sophisticated smartphones with industry leading features.

Huawei Market Share
Huawei Market Share

Although the global mobile market is experiencing a downturn, Huawei has bucked the trend. In Q1 2019, the company shipped 20 million more units than it did in the same period 12 months before, contributing to a growth in its market share. It’s passed Apple, the largest handset manufacturer headquartered in the US.

The Americas’ contribution to revenue is less than 10 percent

Huawei Revenue Sources 2018
Huawei Revenue Sources 2018

Very little of Huawei’s revenue comes from the Americas, not even reaching double digits yet. There is strong growth in the market, although starting from so far back suggests it may not be a significant contributor for some time to come. A ban on sales in the US may be inconvenient, but is unlikely to cause significant harm on its own.

R&D investment could be Huawei’s saving grace

The greater concern comes from the extra-territorial restrictions the US is imposing. This has led to Google and ARM both withdrawing their support for a company they’ve worked closely with in the past. It faces the prospect of losing key pillars of its technology.

Although this may be a short-term problem, longer term the company may ride out the storm. Huawei invests substantial amounts of its revenues in R&D and allocates a large proportion of its staff to the task. It holds over 80,000 patents worldwide and has stated publicly it’s been working on its own operating system and chipsets. Losing technology from Google or ARM may simply accelerate plans it already had to become less dependent on external players.

Research and Development Investment
Research and Development Investment

More than mobile handsets

A little over half of Huawei’s revenues and profits come from non-consumer markets. With 5G networks being rolled out, the company had anticipated increasing sales as it deployed infrastructure to carriers. While losing access to lucrative US and EU markets may limit growth, there are other “non-Western” markets where Huawei is likely to find favour.

China will save Huawei from short-term misery

The Chinese state’s involvement in Huawei is the origin of many of the concerns coming from the US. Although it claims to be a form of co-operative where the business is ultimately owned by its employees, a lack of full transparency has left room for doubt.

Whether the Chinese government does or does not hold a controlling stake in the business is irrelevant. Although there has been market liberalisation, the country is ruled under a system of “Socialism with Chinese Characteristics”. With five year plans, long tenures in leadership and investment that spans more than the typical US two-year election cycle, there is a culture of making decisions that are less about short-term reactions to events and more about long-term, even inter-generational strategy.

It is unlikely the Chinese leadership will allow a flagship company to suffer substantial damage from a relatively short-term blip. While the West’s media is distracted with a trade war, China continues to court new and emerging markets, particularly with investments in the Belt and Road initiative.

Conclusion: short-term pain may be overplayed

In the short-term there will be damage to Huawei, although suggestions the sanctions have killed the business are overstated. Losing access to technology such as Google’s Android ecosystem and the ARM chipset will hurt sales and cost marketshare. However, the high levels of investment in research and development, together with a relatively low exposure to unfriendly markets, could help it to weather the storm.

Longer-term, the break with technologies sourced from a West-Centric industry could stimulate innovation. It may even lead to a new Asia-Centric technology ecosystem that unlocks US dominance.

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Can Huawei weather the US trade storm?

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