Huawei – Nowhere to run pt. XV

The USA further hardens its position. Others may follow.

• The US has moved to harden its stance against Huawei by closing a significant loophole revealing once again that Huawei is merely a pawn in a game in which the pandemic has greatly raised the stakes.
• The US has announced the closing of a loophole that allowed US companies to supply Huawei without a licence by manufacturing those products in overseas factories.
• This loophole is nowhere clearer than in the Huawei P40 where the Rf front end (electronics that turn digital signals into radio waves and vice versa) have been supplied by Qualcomm, Qorvo and Skyworks.
• The amendment stipulates that any company selling to Huawei must obtain a licence if the product being sold has been designed or made using US-produced technology or hardware.
• Seeing as every silicon chip in the world touches a piece of US hardware somewhere in its manufacturing process, this encompasses every supplier headquartered in the United States.
• This will impact the semiconductor industry to a much larger degree because a large proportion of its products are manufactured in Asia by 3^rd parties and shipped straight to customers.
• The commerce department has issued more licenses than I expected it to which I suspect is tied to the delicate negotiations that resulted in a tentative first stage agreement in January.
• However, the pandemic has had the effect of substantially hardening distrust of the Chinese Communist Party (CCP) as greater transparency quicker action could have greatly reduced the impact of the pandemic on other countries.
• Virus models indicate that had the CCP closed all of its airports and borders and informed the world of the issue it was facing several weeks earlier, the outbreak could have been not much more serious than SARS in 2002-2003.
• Hence, it is not just the USA that has seen a hardening of viewpoint but many other countries as well.
• This could lead to Huawei’s all-important infrastructure business taking a big hit as politicians will be quick to blame the CCP for the damage to their economies once the citizens start to really feel the effects.
• This could result in a significant loss of market share in Huawei’s infrastructure business sending more business in Nokia and Ericsson’s direction.
• A similar trend could also play out in the enterprise with the biggest beneficiary likely to be Cisco.
• However, at the same time Nokia, Ericsson and Cisco would be very likely to lose all of their Chinese business making a prediction of the manifestation of this trend very difficult.
• Regardless, the net benefit to these three would likely be much more positive than negative.
• Huawei did a superb job at mitigating the impact of US sanctions in 2019, but 2020 is likely to be very challenging and there is potential for a significant shift in market share to the badly beaten up European and US telecom equipment sector.
• I am not rushing to buy these stocks because of the overall dreadful macroeconomic outlook, but there is a potential trend here to keep a very close eye on.