We're a plane riddled with bullet holes, says senior executive, after US authorities prepared to slap new restrictions on the company.

Iain Morris, International Editor

May 18, 2020

5 Min Read
Huawei seeking survival after US escalates offensive

Huawei's current priority is to "seek survival," said a top executive at the Chinese equipment maker, after the US government announced tough new measures that will block its access to critical suppliers of components for consumer and network products.

Guo Ping, one of the equipment vendor's rotating chairmen, said his business was not self-reliant despite the huge increase it made in research and development spending last year. "Huawei is capable of designing some products and ICs [integrated circuits] but is not capable of doing a lot of things. Therefore, currently the priority for Huawei is to seek survival," he told an audience of analysts and reporters during a briefing from China today.

The remarks came just days after the US government said it would close loopholes in its export controls by restricting Huawei's ability to buy any components made with US technology.

That marks an apparent escalation of the campaign against the Chinese vendor by the Trump government, which has so far sought to restrict Huawei's access to US products.

Under the new rules, Huawei would be unable to buy components from non-US firms that rely on US technology in their manufacturing processes, including Taiwanese semiconductor giant TSMC.

"We must amend our rules exploited by Huawei and HiSilicon [Huawei's chipmaking subsidiary] and prevent US technologies from enabling malign activities contrary to US national security and foreign policy interests," said US Commerce Secretary Wilbur Ross in a statement.

The blockade against shipments from TSMC, which makes semiconductors at the behest of other firms, could be devastating to Huawei, according to several industry analysts.

In a recent article for Seeking Alpha, Robert Castellano, the president of market research firm The Information Network, estimated that Huawei was responsible for about 15% of TSMC's $34.6 billion in annual revenues, making it the Taiwanese company's biggest customer after Apple.

In a lengthy statement issued today, Huawei said its business would "inevitably be affected" by the changes to US regulations, while also warning of the impact on networks that use Huawei equipment and the consequences for US interests.

"This new rule will impact the expansion, maintenance and continuous operations of networks worth hundreds of billions of dollars that we have rolled out in more than 170 countries," said Huawei's statement. "In the long run, this will damage the trust and collaboration within the global semiconductor industry which many industries depend on, increasing conflict and loss within these industries … Ultimately, this will harm US interests."

Guo said US sanctions so far had wiped about $12 billion off Huawei's sales last year, when it reported about $123 billion in revenues, and that securing contracts had become more difficult as a result of the US campaign.

Year-on-year sales growth at the Chinese vendor, described as a security threat and trade cheat by US opponents, slowed to just 1.4% for the first three months of 2020, to about 182.2 billion Chinese yuan ($25.6 billion), after growing 39% in the year-earlier quarter. Net profit was down about RMB1.1 billion ($150 million), to RMB13.3 billion ($1.9 billion).

The company has responded by investing an even bigger sum in research and development spending, which soared 30% last year, to RMB131.7 billion ($18.5 billion). To amass inventory, it also spent a whopping $18.7 billion on US components, 70% more than in 2019, as it took advantage of loopholes in US regulations to continue trading.

Using the sort of colorful metaphors that have become a feature of Huawei's public statements, Guo said Huawei was currently like a plane riddled with bullet holes. "Patching up the holes has been the priority over the past year. We are confident in continuing to fly with the plane."

Want to know more about 5G? Check out our dedicated 5G content channel here on Light Reading.

US moves have sparked fears of retaliation by China's government, whose Ministry of Commerce was today reported to have said it is ready to set up its own "unreliable entity list," restricting US companies such as Apple, Cisco and Qualcomm.

That report comes a few weeks after Eric Xu, another of Huawei's rotating chairmen, warned that China's government would respond if the US tried cutting Huawei off from TSMC.

"The Chinese government will not stand by and watch Huawei get slaughtered on the chopping board and they may also take some counter measures," he said, suggesting that authorities might seek to ban the use in China of 5G chips and smart devices provided by US firms. "This type of destructive ripple effect on the global industry would be astonishing."

Earlier today, TSMC was said to have halted all new orders from Huawei in response to the latest US measures.

On Friday, the Taiwanese semiconductor firm announced plans for a $12 billion manufacturing plant in Arizona following talks with the US government.

Earl Lum, an analyst with EJL Wireless Research, previously told Light Reading that blocking Huawei's access to TSMC would turn the current trade war into a far worse conflict. "If you start messing with TSMC, whatever trade war is going on right now will escalate substantially," he said. "I don't see a positive outcome of that at all."

China's government could retaliate by targeting companies outside the technology sector. One option would be to make further cutbacks to the purchase of US agricultural products, hurting US farmers in the Trump heartlands of the Midwest.

As a long-term strategy, it could also devalue the yuan in an attempt to boost Chinese exports and cripple rival producers.

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— Iain Morris, International Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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