Visitors pass in front of the Huawei’s stand on the first day of the Mobile World Congress in Barcelonaon on February 27, 2017 in Barcelona.
Lluis Gene | AFP | Getty Images
Huawei claimed Thursday that attempts to restrict the Chinese tech giant from doing business stateside will cause the U.S. to fall behind in the development of next-generation mobile networks — and could raise “other serious legal issues.”
On Wednesday, President Donald Trump signed an executive order that gives the government authority to block transactions that involve information or communications technology that “poses an unacceptable risk to the national security of the United States.”
According to the executive order, the technology that could be blocked will be that which is “designed, developed, manufactured, or supplied, by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary.”
Battle for 5G
While Huawei isn’t named in the policy, the U.S. has long-accused the Chinese telecoms equipment maker of being closely-linked to China’s ruling Communist Party. Washington has also alleged that Huawei’s telecom equipment poses a national security risk because it could be used by Beijing for espionage. Huawei has denied these claims.
In a statement to CNBC on Thursday, Huawei said that further moves to block it from the U.S. market could have a damaging impact on America’s 5G development.
“Huawei is the unparalleled leader in 5G. We are ready and willing to engage with the US government and come up with effective measures to ensure product security,” a spokesperson for the company told CNBC.
“Restricting Huawei from doing business in the US will not make the US more secure or stronger; instead, this will only serve to limit the US to inferior yet more expensive alternatives, leaving the US lagging behind in 5G deployment, and eventually harming the interests of US companies and consumers,” the statement said. “In addition, unreasonable restrictions will infringe upon Huawei’s rights and raise other serious legal issues.”
5G refers to the next-generation of mobile networks that promise super-fast download speeds and the ability to underpin new technologies like driverless cars, which require huge amounts of data to be transmitted.
The U.S. and China are battling to dominate in 5G as the technology is seen as crucial for the future of both countries’ infrastructure. Washington wants to ensure China has as little influence as possible globally, and trying to block Huawei and its rival ZTE is a key part of that strategy.
Huawei has often made the argument that banning it from providing telecom equipment to any country would reduce competition there. Experts have told CNBC that the U.S. would be able to find alternatives, namely Nokia and Ericsson, but other countries, including in Europe, could get hit.
US ‘abusing’ power
Both Huawei and the Chinese government have issued strong statements against the U.S. over the past few months.
“For some time, the US has been abusing its national power to tarnish the image of and suppress specific Chinese companies, which is disgraceful and unjust,” said a Chinese foreign ministry spokesperson on Wednesday, before Trump’s impending executive order was officially announced.
“The world knows clearly what its intentions are,” said the spokesperson Geng Shuang during a regular media briefing. “We urge the US side to stop oppressing Chinese companies under the pretext of security concerns and provide a fair, just and non-discriminatory environment for their normal investment and operation.”
Huawei’s founder and CEO Ren Zhengfei told CNBC earlier this year that the U.S. was “scared” of his company.
It’s unclear as yet what the fallout will be for Huawei. The company has been relatively absent from the U.S. market for several years.
In 2018, just 6.6% of its revenues came from the Americas, with most of that coming from Latin America, according to the company’s latest financial results.
It also appears to have made a strong start to the year with revenue up 39% year-on-year for the first quarter of 2019, according to Huawei, which released quarterly earnings for the first time this year.
Reliance on other firms
A bigger concern, however, could be the move by the U.S. to add Huawei to the Bureau of Industry and Security’s so-called Entity List. That means U.S. firms will need to get a license from the bureau to sell or transfer technology to Huawei. The Chinese company relies on some components from U.S. companies like Intel and Qualcomm for smartphones and laptops.
Some analysts said this could have a large impact on Huawei.
“If fully implemented, the Entity List would immediately deny Huawei access to key hardware and software suppliers for its mobile infrastructure and handset businesses,” Eurasia Group said in a note on Wednesday.
“This would also quickly put at risk both the company itself and the networks of Huawei customers around the world, as the firm would be unable to upgrade software and conduct routine maintenance and hardware replacement,” analysts at the political risk consultancy said.
Eurasia Group warned it would “hit virtually all of Huawei’s products, including high-end smart phones, mobile infrastructure, data centers and cloud services, and have immediate global implications for any company utilizing Huawei’s products or services. European carriers, in particular, are likely to be affected quickly.”
In addition, Huawei’s consumer business is now its biggest division by revenues and is seen as a key growth driver for the company. Any disruption to the consumer group could impact its overall business.
But over the past few years, Huawei has been designing its own chips for its smartphones to reduce reliance on other firms. It has a series of processors, known as Kirin, and a modem, called Balong 5000, that will allow devices to connect to 5G networks.
In 2018, 73% of Huawei’s smartphones contained the company’s own chips, according to IDC data. Another 10% were from Taiwanese firm MediaTek, and the remaining 17% were from Qualcomm — but these were mainly for lower-end sub-$200 phones.
“Even if — for whatever reason — Qualcomm can’t supply to Huawei, I’m sure MediaTek would be more than happy to pick up their business just given their expertise in low-end devices,” Bryan Ma, vice president of devices research at IDC, told CNBC.
However, Huawei relies on American components for its networking equipment and that could be the bigger concern, Ma added.
Last year, a list showing what Huawei deemed as “core suppliers,” reportedly released by the company, circulated around Chinese media. Of the 92 suppliers listed, 33 were American.
A Huawei spokesperson told CNBC it does not have an official list to provide and declined to offer comments.
Europe to follow?
Another key risk for Huawei is that Trump’s executive order could potentially push other countries to effectively block Huawei from 5G.
The Trump administration has been on a campaign to pressure allies to ban Huawei but it has thrown up mixed results. Countries including Japan and Australia have barred Huawei, but other nations, particularly in Europe, have been open to letting Huawei in.
Experts said that for now, it appears the ban is contained in the U.S.
“I think the really serious issue would be whether it spreads to Europe. So at the moment I would expect it stays just in the U.S. as a ban in the U.S.,” Sean Taylor, chief investment officer for Asia Pacific at Deutsche Asset Management told CNBC’s “Capital Connection” on Thursday.