Not so long ago, the idea that China was in any way challenging the US in the technology stakes would have belonged to a parallel universe. And if Donald Trump has his way, it will do so again in the race to commercialise 5G.
This week Trump turned up on CNBC to claim that the US would be “leading very shortly” in 5G. China doesn’t have “the capability of our geniuses in Silicon Valley that walk around in undershirts and are worth $2 billion,” he crowed.
In mid-May, the American president signed an executive order that put Huawei on an “entity list”, preventing a large portion of the world’s technology companies from doing business with it (see WiC453). The ban applies to goods that have 25% or more US-originated technology or materials, which means that it is also affecting a number of non-American firms.
But just how stymied is Huawei by the restrictions on its supply chain? A key question is how much inventory it was able to stockpile before sales restrictions were announced. Another is how quickly domestic companies can replace the affected suppliers in the company’s supply chain.
On the first question, analysts believe Huawei has anything from three months to a year’s worth of components in reserve. That buys it some time. Stephane Teral, an analyst from IHS Markit, told the Nikkei Asian Review that Huawei has “been preparing for this catastrophic event for a long time” and that it will be able to navigate its way through the worst of the ban. Other analysts agree that Huawei will survive in the short term on stockpiles of key components (perhaps nine to 12 months of 5G base station inventory, for instance). But if no deal has been done with Washington by the end of the year, could Huawei’s production lines be paralysed?
The bring us to the second question where analysts think finding an alternate supply chain solution will be tough. The general consensus is that Chinese suppliers could be as much as eight years behind the US in the production of some of the key components that Huawei needs.
Take field programmable gate array (FPGA) chips, which can handle the heavier workloads central to 5G’s success, i.e. the vast scaling up in communications required by the Internet of Things. One of Huawei’s main suppliers is Nasdaq-listed Xilinx, the world’s largest independent FPGA manufacturer after rival Altera was taken over by Intel. Xilinx’s technology is key to supporting the networks that interact with the 50 billion IoT devices that it expects to be active by 2020 alone. However, Xilinx stopped shipping to Huawei in the middle of May. China’s best chance of a substitute is Tsinghua Unigroup’s Guoxin Micro, but analysts reckon the Shenzhen-listed company is about five years behind Intel and Xilinx in know-how.
Then there are analog chip suppliers, Qorvo and Marvell Technology. Their technology is about six years ahead of another Shenzhen-listed rival, SG Micro.
Over the past month, one Nasdaq-listed tech firm after another has been forced to revise its earnings guidance over the loss of a customer (Huawei) that was generally accounting for about a fifth of their sales. Unsurprisingly, the shares prices of the affected firms, which include Lumentum Holdings and Skyworth Solutions, have also fallen.
The suppliers will be hoping that the two governments can reach some kind of ceasefire in their tech cold war when Trump and Xi Jinping meet at the G20 summit at the end of June. To date, Trump is talking tough, saying that the Chinese will have to give ground.
Meanwhile the Wall Street Journal reported on Thursday on what it described as “the first tangible setback [for Huawei] from the US Commerce Department’s move to ban American companies from selling supplies to the company”. It said Huawei had “cancelled the launch of a new laptop and paused production at its personal computer business because of restrictions on buying US components”.
The head of Huawei’s consumer business Richard Yu said that the Commerce Department had caused it to cancel its new laptop launch and that the product may never be released if the company remains on the department’s blacklist. Separately the chief strategy officer in Yu’s division told a conference that smartphone sales are also being hit. “If we had not encountered anything unexpected, we would have been number one by the fourth quarter,” lamented Shao Yang.
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