Tech

Huawei: Chinese government won't stand idle as US introduces more sanctions

Chinese government will have no choice but to impose counter measures should the US continue to restrict Huawei's access to the global supply chain, says rotating chairman Eric Xu, who reveals the vendor's international consumer business has lost at least $10 billion as a result of the US trade ban.

Written by Eileen Yu, Senior Contributing Editor March 31, 2020 at 6:49 a.m. PT

The Chinese government likely will roll out countermeasures if the US continues to impose trade sanctions on Huawei Technologies. The networking equipment vendor revealed that its international consumer business already has taken a substantial hit as a result of the restrictions, losing in excess of $10 billion in revenue last year.

The business unit last year had been growing exponentially outside of its domestic market before May 16, until the US government added Huawei to its 'Entity List', prohibiting US companies from transferring technology to companies on the list unless they have a licence from the US government. This led to Google suspending the use of parts of the Android OS on Huawei devices, including key apps such as Play Store and Maps.

This has significantly impacted Huawei's handset sales and consumer revenue outside of China, said its rotating chairman Eric Xu during a virtual media conference to discuss the vendor's 2019 earnings. Held via Zoom, the online briefing was attended by 90 local and international media, including ZDNet.

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Xu noted that the US sanctions have meant a large number of suppliers could not continue to work with Huawei, forcing the company to invest more in research and development (R&D) to "fix the holes" and rebuild its supply chain. It was "impossible" to continue targeting a high net profit as business survival became a top priority, he said.

Huawei saw its 2019 global revenue grow 19.1% year on year to 858.8 billion yuan ($97.59 billion), while net profit climbed 5.6% to 62.7 billion yuan ($7.12 billion), compared to a 25% growth in 2018. It spent 131.7 billion yuan ($15 billion) on R&D, which accounted for 15.3% of its 2019 revenue.

Despite the US trade ban, its consumer business still saw a 34% year-on-year growth to hit 467.3 billion ($53.1 billion) and clocked 240 million units in smartphone shipments. This business unit accounted for 54.4% of its overall revenue, while its carrier business generated 34.5% to provide 296.7 billion yuan ($33.71 billion) in revenue, up 3.8% year on year. Its enterprise business grew 8.6% to churn 89.7 billion yuan ($10.19 billion) in revenue.

Revenue from its domestic Chinese market grew 36.2% to hit 506.7 billion yuan ($57.58 billion) and accounted for 59% of its overall figure. Its Asia-Pacific revenue saw a 13.9% dip to 70.5 billion yuan ($8.01 billion), with the region contributing 8.2% of its total revenue. The Americas revenue increased 9.6% to 52.5 billion yuan ($5.97 billion), accounting for 6.1% of total revenue, while EMEA revenue grew just 0.7% to 206 billion yuan ($23.41 billion) and contributed 24% of the overall figure.

Describing 2019 as a difficult year, Xu said 2020 would prove more challenging since Huawei would be subject to the US Entity List for the entire year. He noted that the vendor currently has a substantial stockpile in its inventory to respond to needs, but the remainder of 2020 will be a crucial test on whether its supply continuity efforts can work effectively.

The coronavirus outbreak also was unexpected and could bring about new challenges such as economic decline, financial turmoil, and shrinking market demand, he noted, adding that it was difficult to provide any 2020 growth forecasts as the global landscape continues to evolve.

To address the gap created by the lack of Google Mobile Services on its new handsets, Xu said Huawei had introduced its HMS (Huawei Mobile Services) platform and will continue to grow this ecosystem to facilitate the sale of its handsets in international markets. The vendor has also included Google apps on its own app store, making them available to its mobile customers and ensuring that 5G users still have access to Google apps.

Huawei earlier this year said it would set aside $26 million as an incentive for developers to work on apps for HMS. The investment went towards rewarding teams that successfully downloaded an app to the platform. It has also launched 24 developer open-access kits covering various functions such as location-tracking, health, and language services.

China will be forced to counter US sanctions

While it was making efforts to cope with the US government's trade restrictions, he cautioned that if the Trump administration persisted in adding new sanctions, Beijing would be forced to act.

US Attorney General William Barr last month said the US and its allies should invest in Huawei competitors to slow the Chinese company's growing 5G market share, pointing to Finnish vendor Nokia and Sweden's Ericsson as potential candidates. The US government previously had accused Chinese networking vendors, namely Huawei, of sharing sensitive information with their government and providing access to private US business communications. The Trump administration had called for countries to boycott Huawei's telecommunications systems, specifically its 5G equipment, and has since pressured its allies, including Europe, New Zealand, Australia, and the UK, to ban Huawei products, threatening that it would be "difficult" for the US to do business in countries that deployed Huawei equipment.

Recent media reports have also suggested the US could introduce measures to limit the global supply of semiconductors to Huawei, forcing foreign companies that use US chipmaking equipment to acquire a US license before supplying certain chips to the Chinese vendor. These new restrictions are aimed at curbing the sale of chips sold by Taiwan Semiconductor Manufacturing to Huawei, which relies on the manufacturer for its HiSilicon unit, according to a Reuters report.

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If these new US restrictions are rolled out, China would have no choice but to impose similar measures, Xu said.

"I think the Chinese government will not stand by and watch Huawei be slaughtered on the chopping board. I believe the Chinese government may also take countermeasures," he said.

He noted that, should the US government proceed with its semiconductor trade restrictions, Huawei and other Chinese vendors could still choose to buy chipsets from other manufacturers such as Korea's Samsung, Taiwan's MTK (MediaTek), and manufacturers from China to produce its smartphones. Huawei and other Chinese companies also could start developing their own chipsets, he added.

However, he said such tit-for-tat moves would be dismal for the overall industry.

Xu said: "If the US government can arbitrarily change foreign [manufacturing] rule, that would be a destructive to the global tech ecosystem. And if the Chinese government also follows up with countermeasures, we can imagine what kind of impact that would have on the industry.

"This destructive ripple effect on the global ecosystem will be astonishing. If Pandora's Box were to be opened, we will likely see a catastrophic impact on the global supply chain and, by then, it will not only [impact] Huawei's supply chain...and not a single player in the global value chain can stay immune," he said.

He urged the global industry to collaborate and collectively focus on the challenges it faced and to develop trustworthy products.

Commenting on the European Union, he said he had yet to see any EU member label Huawei as a "high risk" vendor.

The EU last month released a set regulatory guidelines for its member states, describing it as a "toolbox of mitigation measures" for addressing 5G security threats. It said it would leave its members to decide whether Huawei or any other vendor met those guidelines and to "avoid or limit any major dependency on a single supplier and avoid dependency on suppliers considered to be high risk".

Noting that the UK now was out of the EU, Xu said: "I believe EU members are still basing their decisions on facts and clearly know what cybersecurity actually means. We also have been engaging and communicating with various EU governments."