Huawei: gloves are off

23 May, 2019

There may be a method to this madness. But Donald J. Trump is taking Richard Nixon’s Madman Theory to a whole new level, effectively banning Chinese companies from doing business in the US. Declaring a national emergency to keep “foreign adversaries” from compromising American digital networks comes right after a major escalation in the US-China trade war that is fast running out of goods to slap tariffs on.

This economic warfare is running the spiral of one side raising the stakes and the other having to respond, setting the table for a lose-lose outcome. Huawei, the crown jewel of Chinese tech, is caught in the crossfire. This column has previously discussed how Huawei’s leading position in 5G networks has alarmed the US and some of its allies on national security grounds. (Read: “Race to 5G,” published May 6, 2019).

It’s now getting worse for the Shenzhen giant. Latest US measures mean that Huawei will find it difficult to access American software and hardware for its consumer business (smart devices, e.g. smartphones, tablets, wearables, etc.) as well as carrier business (network devices, e.g. switches, routers, storage devices). The company’s emerging cloud business will also feel the heat.

Not being able to sell its 5G equipment in the US would have been one thing, and not particularly harmful, as Huawei scores less than ten percent of its $100 billion+ revenues from all of Americas (US, Canada, Mexico, Brazil and others). But losing access to American software (e.g. Google’s Android mobile OS) and hardware (e.g. chipsets made by Intel and other majors) that its consumer business critically depends on would be particularly devastating. Consumer business provides about half of Huawei top-line.

Going down the point of no return doesn’t make much sense for the US economy either. In the short to medium term, American technology companies will lose precious B2B revenues from Huawei and other Chinese tech firms. Huawei alone is said to source from nearly three dozen US hardware suppliers. Some of those suppliers have a major share of their revenues coming from sales to Huawei.

In the long term, US could also lose its leverage over Chinese tech. Faced with bans or limits on buying US hardware and software, Chinese firms will turn to South Korean, European and Taiwanese companies to keep assembly lines going for the time being. Tech analysts are not ruling out Chinese firms to ride out this storm and emerge a few years later self-sufficient in meeting their hardware and software needs.

Meanwhile, there is considerable uncertainty at home and abroad over the functionality of Huawei smartphones. Thanks to its line of mid-range and low-range smartphones, Huawei has grown its market share in Pakistan in recent years. About a fifth of all new smartphone sales locally are said to belong to Huawei. The recent up tick in sales is supported not only by competitive pricing and better design features, but also by growth in Huawei’s sales channels across major cities in recent months. More than existing users, it is Huawei franchisees that have more reason to worry about fate of their business.

Current users will still be able to access Android’s app updates and security fixes. Same cannot be said about future users. Sans Android, Huawei phones won’t be able to compete with Samsung no matter how sleek the hardware gets. This will hurt Huawei sales especially in the lucrative EMEA region, where Samsung and Apple will happily recover their market share in the wake of a main rival blocked out from Android and its app ecosystem.

Given the practical limits of the Madman Theory and considering Trump’s own predilection for retreating from the brink, the best the Chinese tech bosses can hope for is a US-China trade agreement to take shape before the year is out. That can help undo some of the recent harsh measures taken against them. But that still leaves Huawei, its business partners and users with many months of agonizing uncertainty.

Copyright Business Recorder, 2019

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