The Huawei Ban

By Alex Nnamchi, 31 May 2019

After the UK and Japan became the latest countries to postpone the release of new Huawei phones in their respective markets, uncertainty within the tech industry continues to loom. On 15 May, the U.S. President Trump issued an executive order against Chinese tech companies, and restrictions on Huawei to do business with any American companies was imposed. On the same day, the U.S Department of Commerce added Huawei along with 70 other affiliates to its blacklist under the Export Administration Regulations.

Huawei’s restriction in the U.S market has escalated at a time when the trade war between China and the U.S has resulted in diplomatic tensions. The main concern with Huawei centers around its contentment with the Chinese government and a sense of fear that its equipment could be used to spy on other countries and companies.

The executive order meant that Google had to rescind Huawei’s Android license and halt its access to Google Play Services and Play Store. This would effectively dump Huawei out of the Android smartphone market and force the Chinese tech giant to develop its own version – the barebone open-sourced edition of Android. Recently, Huawei got leverage after Google’s statement mentioning that user access to Google Play on existing Huawei devices would not yet be disrupted. For the moment, Google can still work with Huawei while the latter is searching for alternative providers after the U.S Department of Commerce granted Huawei a temporary 90-day reprieve to continue doing business with the U.S.

Nonetheless, a three-month window is not enough for Huawei to fill the potential void left by the U.S. Out of the USD $70 billion Huawei spent on the purchase of components in 2018, some USD $11 billion went to the U.S. firms including Qualcomm, Intel, and Micron Technology. As of 19 May, these leading chip designers and suppliers have cut off their dealings with Huawei in order to comply with the U.S. government’s edict.

Not to mention, Huawei will also face challenges on a global scale. Just over 49% of Huawei’s smartphone shipments went to international markets outside mainland China in the first quarter of 2019. Huawei has also signed numerous commercial 5G contracts around the world, including 25 in Europe and 10 in the Middle East. It could be harder to fulfill such contracts if foreign companies can no longer sell products containing U.S. parts and components to Huawei. For instance, international partners including Toshiba, Arm holdings and Vodafone have either parted ways or postponed 5G projects with Huawei.

Having anticipated current restrictions, Huawei had allegedly built a 3-month stockpile for all parts they wished to use ahead of the ban. Even then, this is a temporary solution to a more long-term problem. Even if Huawei finds a solution within 90 days, the question regarding its software still remains: How will Huawei make a phone without the android license or Google’s software? Although Huawei can still use the open source bone-stock Android software, this version is still very far from the one Google uses. Huawei has also reportedly been working on a backup OS that supports Android apps to address its problems. Nonetheless, it will be an immense and costly challenge for them to persuade consumers to use their alternative OS product. For example, Amazon, another multibillion-dollar tech giant, had attempted to create its own Appstore which hasn’t been able to scale. In this vein, the American popular apps such as Facebook, Google Drive, and Whatsapp are likely to be banned from Huawei’s phones.

Huawei’s ban can also prove to be problematic for U.S. domestic stakeholders. As previously mentioned, American suppliers from Huawei made USD $11 billion in 2019. Since the announcement of the ban, shares of Qualcomm, whose sales to Huawei account for less than 10% of its revenue, have dropped by 4%. Huawei sales make up 15% of the optical maker Lumentum’s revenue, stock of which also plummeted nearly 12%.

Overall, the ban will be a major setback for the entire development and implementation of 5G networks around the world. With one less company in the North American region, there will be less competition, and hence less incentive for competitors like Apple and Samsung to work as hard and perform better. Furthermore, Huawei’s ban could adversely affect telecom and internet service providers in the rural areas in the U.S., that depend almost entirely on Huawei which is known for producing inexpensive wireless communications equipment. The ban will cost these telecom companies billions of dollars after potentially being forced to turn to expensive European technology, as there are few American alternatives. With the U.S. pushing for a ban in Europe, and the companies such as Nike and Apple bracing with uncertainty, the conflict is likely to continue.