Trump move to stamp out Huawei will hurt US tech
American semiconductor firms could face a major hit to their top line, with Apple and other Silicon Valley giants also in the crosshairs
The US is now trying to kill Huawei once and for all. New sanctions introduced this week aim to completely cut off supplies of Western microchips to the Chinese technology group, a move that is certain to provoke retaliation from Beijing. Are US technology giants with large Chinese operations such as Apple now in the firing line?
In a move described as a “lethal blow” to the Chinese 5G technology champion, the US commerce department announced fresh sanctions on Monday that restrict any foreign semiconductor company from selling chips developed or produced using US software or technology to Huawei – unless Washington grants them a licence.
This was, in effect, closing a loophole from its previous set of sanctions introduced in May, that aimed to stop contract chip makers manufacturing chips for Huawei. Under the new rules, companies will need licences to supply the Chinese company with all components, not just specially designed pieces of equipment. It also adds 38 names linked to Huawei to a trade blacklist. “Huawei has continuously tried to evade” restrictions imposed in May, Mike Pompeo, the US secretary of state, said.
The global semiconductor supply chain is long and complex. Huawei relies on foreign-made semiconductors to power its 5G telecoms gear – much of these American. This means that US semiconductor companies could see a significant hit to their top line. The US is arguably the world leader in the production of equipment to produce mobile phone chips, so the move will severely curtail Huawei as a major producer of smartphone handsets and 5G tech – its two core businesses.
The move, obviously, caused Beijing to bristle. “China firmly opposes the deliberate smear and suppression of Huawei and other Chinese companies by the United States,” Zhao Lijian, a spokesman for China’s foreign ministry, said.
The move follows recent measures introduced by Washington to deal with “untrusted Chinese apps” that Mr Pompeo argues are “significant threats to the personal data of American citizens”, including WeChat. On its recent earnings call, WeChat owner Tencent said it believed the ban applied only to WeChat in the US and did not affect its Chinese app Weixin. But company executives noted they were still seeking clarity on the scope of the ban. If Apple can’t install Weixin in China, it is likely to lead to a major slump in demand.
This week’s move is also likely to have a significant impact on the global semiconductor supply chains and hurt American companies too. “These broad restrictions on commercial chip sales will bring significant disruption to the US semiconductor industry,” according to John Neuffer, head of the Semiconductor Industry Association, a trade body representing American chipmakers.
One economy that will certainly be hit by the move is that of South Korea, where Samsung Electronics makes up more than one third of its Kospi blue-chip index. Samsung uses US-made equipment and nearly 20pc of its revenue is from China in the latest quarter. Chips make up 17pc of South Korea’s total exports and is its largest single export category. However, it will also provide the country’s smartphone makers with an opportunity to take business from Huawei.
So, this dispute appears to be getting serious – but Huawei has bought itself some time. The company has been building vast stockpiles of the chips it needs. Reports earlier this year suggested Huawei spent more than $23bn (£18bn) on essential components, including chips. It could now have as much as a three-year supply warehoused to keep its company going.
US actions are reshaping the global technology sector into a bifurcated industry – and as the UK did with Huawei gear in 5G networks, countries are being forced to take a side because of the reach of US sanctions and its global influence.
Of course, the Trump government is unpredictable and could be using the squeeze on Huawei as leverage. A review of the phase one trade deal between Washington and Beijing, signed in January, was scheduled for last weekend, but this has not occurred.
Donald Trump said the talks had been cancelled because of the two countries’ disagreements over Covid-19. “I postponed talks with China. You know why? I don’t want to deal with them now,” Mr Trump said. “What China did to the world was not even thinkable. They could have stopped [the virus].”
The news caused the shares of several Asian chip makers to fall – Taiwan’s MediaTek and European companies such as Dialog and STMicroelectronics. However, investors are more subdued on the impact to US tech, betting that China won’t retaliate too severely as it needs the innovation that US businesses bring to China. Indeed, Apple became the first $2trillion company after the announcement was made, which doesn’t suggest too much concern.
However, the clock is now ticking for Huawei – what will it do when its stockpiles run out? China may be subdued in its retaliation now, but if the US does not grant licences to US chip groups it will hit their revenues. If Washington forces Huawei into dire straits – Beijing is likely to act.
‘If Washington forces Huawei into dire straits – Beijing is likely to act’