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updated: 5/17/2019 10:16 AM

Analysis: Proposed Huawei sanctions underscore US dependency on China tech

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  • Shoppers browse smartphones at a Huawei retail store in Hangzhou in eastern China's Zhejiang province, Thursday, May 16, 2019. In a fateful swipe at telecommunications giant Huawei, the Trump administration issued an executive order Wednesday apparently aimed at banning its equipment from U.S. networks and said it was subjecting the Chinese company to strict export controls.

    Shoppers browse smartphones at a Huawei retail store in Hangzhou in eastern China's Zhejiang province, Thursday, May 16, 2019. In a fateful swipe at telecommunications giant Huawei, the Trump administration issued an executive order Wednesday apparently aimed at banning its equipment from U.S. networks and said it was subjecting the Chinese company to strict export controls.
    (Chinatopix via AP)

 
 

U.S. suppliers to China-based Huawei would be affected quickly if a ban on exporting hardware and services proposed by the U.S. Commerce Department on Wednesday goes into effect.

The telecommunications company said Thursday that it spends more than $1 out of every $7 of its annual $70 billion procurement budget buying components from U.S. firms. Huawei is dependent on U.S. suppliers for components -- including wireless chips, antennas and handset operating software -- meaning the ban could also cripple its ability to continue producing the latest equipment.

Huawei immediately pushed back against the directive, which has not taken effect, saying it threatens U.S. jobs.

"This decision is in no one's interest," said spokesman Chasen Skinner in an email. "It will do significant economic harm to the American companies with which Huawei does business, affect tens of thousands of jobs, and disrupt the current collaboration and mutual trust that exist on the global supply chain." He didn't respond to a request for further comment.

Highlighting the risk to American companies, investors punished several Huawei suppliers Thursday by selling shares. Little-known network gear manufacturer NeoPhotonics' stock price closed down 20%, while semiconductor firm Qorvo was off 7.1%. Qualcomm fell 4%.

Those stock prices fell following the Trump administration's decision Wednesday to add Huawei and about 70 affiliates to its "Entity List," which precludes the company from acquiring equipment from U.S. firms without government approval. It's the latest broadside to the Shenzen-based company, which U.S. officials have said represents a security threat because of its ties to the Chinese government. Huawei has denied those allegations.

The company has been in U.S. crosshairs for years over claims that it could use its network equipment to spy on foreign nations, prompting network providers AT&T and Verizon to ban the sale of their handsets. In its statement Thursday, Huawei said it would "seek remedies immediately" and "endeavor to mitigate the impacts of this incident."

Such trade bans can be crippling. Trump last year restricted ZTE, another Chinese telecommunications company, from doing business with American firms over violating U.S. sanctions with Iran and North Korea. That effectively prevented the firm from manufacturing new equipment. The administration ultimately lifted its limits on ZTE, which agreed to pay a fine and restructure its management.

Representatives for U.S. suppliers, who did not want to be identified, said they were unsure about the lasting impact of the Huawei ban on their operations.

Those companies and potentially dozens of others would have to apply to the government for special consideration to continue supplying Huawei, said Center for Strategic and International Studies adviser William Reinsch, a former Commerce Department official in the Clinton administration.

"That doesn't mean every license would be denied, but it would be on a case-by-case basis," he said. "It also gives the government an intelligence bonanza" in the form of a list of every U.S. supplier to Huawei.

Foreign companies who rely on U.S. firms for 25% or more of their components would also likely be subject to the disclosure requirements, said Reinsch.

Customers using Huawei's mobile handsets could also face disruptions in their operating software, said industry observers. The company relies on Google's Android software and licenses certain Google apps, like those for mapping, in its markets outside of China, said Chetan Sharma, a wireless industry consultant.

Huawei may not be able to get updates to those apps, or allow customers to access the Play app store, if Google is not granted a reprieve from the Commerce Department order, said Sharma. "It would start to impact new handset sales very quickly," he said. "Huawei would essentially be a sitting duck."

In-app purchases could be rendered impossible if transactions routed through Google's servers aren't permitted.

Google spokesman Colin Smith said he didn't have an immediate comment.

Attempts by other firms to create a third operating system to compete with Android's or Apple's iOS have largely fallen flat in the Western world, meaning Huawei would have few options to make its mobile phones relevant to customers.

There was broad confusion, though, on exactly how the restrictions on Huawei might work. One supplier representative, who asked not to be named, said U.S. chips made in Taiwan could still be sold to Huawei, even though they were designed by U.S. companies. That would spell good news for U.S. chipmakers that supply Huawei. It would also be a relief to Huawei, because chip design is one of area where Chinese companies still lag behind the U.S.

Nelson Dong, a partner at law firm Dorsey and Whitney, disagreed with that assessment. A chip designed mostly within the U.S. would make it a U.S. product, even if the chip itself were manufactured elsewhere. "It's a product made from U.S. technology," he said, and therefore would be prohibited to companies on the entity list. Even so, he said, some companies decline to sell to customers who are on the restricted list, even if the sale could be defended legally.

Most U.S. technology companies have compliance departments that maintain lists of customers restricted by U.S. export sales. Before selling technology products, it's common to run the customer through a database to ensure that the sale doesn't violate U.S. restrictions. As of Thursday, Huawei had not been added to the list of restricted companies. Companies may have already started scaling back production in anticipation, experts said.

The Chinese company and its top executive are also being prosecuted for allegedly violating the U.S. sanctions on Iran and for stealing trade secrets from competitors and partners. The ban on exports to Huawei could be used as leverage in settlement talks over Huawei's criminal case, the supplier representatives said.