Furious China Has Just 12-Months To Save Huawei After ‘Crushing’ Trump Attack – Forbes

U.S. President Donald Trump has just dealt Huawei a brutal reality check. After a yearlong game of cat and mouse following its blacklisting last May, the U.S. has tired of the company wriggling off various hooks and has opted for brute force. Huawei will be denied the advanced chips it needs to power most of what it does—all of which rely on some U.S. tech. Huawei has a 12-month stockpile, maybe a little more. By the time that depletes, it needs China to have solved its problem.

Huawei has been talking “survival” on and off since the initial blacklist hit—but it has never meant it. Before now, the greatest issue has been U.S. lobbying foreign governments to ban the company’s 5G networking equipment and the loss of Google from the new flagship phones it has launched. Huawei CEO Ren Zhengfei has likened the last year to patching the wings on a damaged aircraft. Well, the latest U.S. salvo just repo’d that aircraft’s engine. Once it lands, it won’t take off again, not unless China can come to the rescue.

With perfect timing, Huawei faced the press on Monday, May 18, during a pre-planned albeit hastily reduced analyst conference. Chairman Guo Ping managed to say very little about Trump’s latest attack. There was a prepared statement instead, a response to an “arbitrary and pernicious” U.S. move that “threatens to undermine the entire industry worldwide.”

Huawei can’t play this down—it’s too serious. The new ruling “will impact the expansion, maintenance, and continuous operations of networks worth hundreds of billions of dollars… in more than 170 countries.” It will materially damage a global industry and U.S. interests. “The U.S. is leveraging its own technological strengths to crush companies outside its own borders… We expect our business will inevitably be affected. We will try all we can to seek a solution.”

It was the prospect of this particular U.S. ramp-up of sanctions, a threatened crackdown on Huawei’s silicon supply chain, that prompted the company’s leadership to warn back in March that “the Chinese government will not just stand by and watch as Huawei is slaughtered on the chopping board.” But as reported by my colleague David Phelan, that is now being put to the test.

Huawei didn’t believe it would happen—it still assumes something will be done to water down the reversal of two decades of supply chain globalisation driving big tech. But the rhetoric from the U.S. is deadly serious. “We must amend our rules exploited by Huawei and HiSilicon and prevent U.S. technologies from enabling malign activities contrary to U.S. national security and foreign policy interests,” Commerce Secretary Wilbur Ross warned on Friday.

Huawei’s “chopping board” comments were made in March, but China’s state-controlled media has brought the brinksmanship right up to date, warning on May 17 that “China is prepared to put certain U.S. companies on its ‘unreliable entity list’, imposing restrictions on or launching investigations into U.S. companies like Qualcomm, Cisco and Apple in accordance with Chinese laws.”

Huawei isn’t the only blacklisted Chinese tech giant—camera manufacturers HikVision and Dahua, as well as AI unicorns SenseTime and Megvii are also on a restricted entity list. The focus of the new ruling is Taiwan Semiconductor Manufacturing Co., TSMC, which supplies Huawei from Taiwan, but which also used American technology in its development and manufacturing processes.

China first threatened to blacklist U.S. firms shortly after U.S. sanctions were put into effect 12-months ago. Nothing came of the threats, but at the time, Beijing warned that “foreign enterprises, organizations or individuals that do not comply with market rules, deviate from a contract’s spirit or impose blockades or stop supplies to Chinese enterprises for non-commercial purposes, and seriously damage the legitimate rights and interests of Chinese enterprises, will be included on a list of ‘unreliable entities’.”

What that meant, in effect, is that any U.S. entities using U.S. sanctions as a reason not to meet contractual obligations to Huawei would be fair game for Chinese retaliation. This may now go further, a threat against U.S. firms using Chinese suppliers or its vast manufacturing base, even where there are no contractual commitments between them and Huawei. In short, it threatens a catastrophic impact on the global tech supply chain in the short to medium term. If TSMC falls foul of the restrictions and finds itself limited, that would impact a large number of U.S. tech giants, including its biggest customer Apple.

On the surface, the U.S. move could decimate Huawei revenues. TSMC is the sole supplier to the company of the advanced silicon it needs for its flagship products, including phones and 5G radio equipment. Huawei is TSMC’s second largest customer—only Apple buys more. After the U.S. ruling was announced, TSMC said it will review its legal room to manoeuvre. Since then, reports have confirmed that it has stopped taking Huawei’s orders.

China immediately pumped billions into SMIC, the nearest domestic rival to TSMC, but its tech is nowhere close to TSMC’s advanced offerings and there is no certainty it won’t also respect new U.S. rules. Huawei can shift from its custom-made chips, opting instead for off-the-shelf offerings from the likes of MediaTek, but that would represent a huge change in its technology strategy.

Huawei does have a vast domestic market that will accept lower-spec’d phones and devices if the company needs to retrench, it has a balance sheet to sustain itself for some time. But once existing customers have to turn elsewhere for their 5G networking equipment, once Huawei’s cross-platform AI strategy, which relies on custom chips, is forced into a moratorium, the business will change fundamentally and will be hard to recover to its current scale.

Realistically, there are two likely outcomes from this. Either there is some kind of compromise brokered between Beijing and Washington, with U.S. tech giants lobbying hard against this level of disruption, and while Huawei will be hit, it will be a manageable hit—rather like the loss of Google. Or, alternatively, this accelerates the east/west technology split and fires a starting pistol for China to replicate any missing areas of tech required to make its domestic champions self-sufficient. This will take time, but China likes to invest in the long-game.

If China is forced into the long-game, there will be a wide range of significant repercussions: Retaliation against U.S. firms sourcing from or operating inside China; investments to replace U.S. tech, soliciting large Asian and European buyers to switch from U.S. to new Chinese tech, with greater surety of supply; and a global backlash as vast investments in 5G networks and other programs are undermined by Huawei’s inability to support and maintain.

The fact that Huawei has 12-months is significant for another key reason—the U.S. election in November. America’s relationship with China, the tech split and the likely backlash over coronavirus disinformation will be a material election issue. The outcome will influence Sino-American relationships for a generation.

Assuming no quick-fix or reversal, China needs an answer for Huawei on phones and 5G kit sales for when those stockpiles deplete. The company is a huge beast to feed, and is its biggest spender on R&D. As I’ve said in the past, Huawei is too big and too critical to China for it to fail, but Beijing now needs to pay a heavy price for that. Quite how that looks in practice, we’re about to find out.

Source: https://news.google.com/__i/rss/rd/articles/CBMif2h0dHBzOi8vd3d3LmZvcmJlcy5jb20vc2l0ZXMvemFrZG9mZm1hbi8yMDIwLzA1LzE5L2Z1cmlvdXMtY2hpbmEtaGFzLWp1c3QtMTItbW9udGhzLXRvLXNhdmUtaHVhd2VpLWFmdGVyLWNydXNoaW5nLXRydW1wLWF0dGFjay_SAYMBaHR0cHM6Ly93d3cuZm9yYmVzLmNvbS9zaXRlcy96YWtkb2ZmbWFuLzIwMjAvMDUvMTkvZnVyaW91cy1jaGluYS1oYXMtanVzdC0xMi1tb250aHMtdG8tc2F2ZS1odWF3ZWktYWZ0ZXItY3J1c2hpbmctdHJ1bXAtYXR0YWNrL2FtcC8?oc=5

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