Market Beats

Huawei's Shackles on its Supply Chain

MioTech Team 2019-05-27

In this article, we look into the hard times the Chinese smartphone giant has fallen into, analyze its entire supply chain, to find out if Huawei’s able to hold it together amidst this hellish trade-war.

It’s been hell for Huawei and it’s series of unfortunate events isn’t looking to end anytime soon.

 

The straw that broke Huawei’s back - when Donald Trump, on the 15th of May, signed an executive order barring the use of telecommunications equipment made by companies that are deemed a threat to national security. Soon after, the U.S. Commerce Department blacklisted the smartphone giant and 70 other affiliates. Huawei had a target on it’s back.

 

The ban on Huawei sparked a punishing chain reaction, with a slew of big companies severing ties with the Chinese phone maker. Just 4 days after the sanction, Google cuts Huawei’s phones from future Android updates, reducing it to just the Android Open Source Project. This dashes any of Huawei’s hopes of selling their smartphones outside of China. Big U.S. chipmakers like Qualcomm and Intel followed suit, discontinuing supply to Huawei until further notice. On May 22nd, Huawei faced yet another setback, with ARM, a UK chip designer owned by Japanese SoftBank group halting “all active contracts, support entitlements, and any pending engagements”. Simultaneously, British mobile operators, Vodafone and EE dropped Huawei phones from their 5G launch plans. Panasonic followed suit a day later, halting shipments of some components to Huawei. The latest blow - Microsoft, who has now stopped accepting new orders from Huawei.

 

This broad and rather blatant ban on Huawei while isolating and crippling, brings about greater repercussions to global supply chains, especially over the backdrop of a re-intensifying trade war. According to Saxo Bank’s head of equity strategy, Peter Garnry, “What we are witnessing is a potential reconfiguration of global trade as it has stood since World War II ... investors should begin thinking about how sensitive their portfolios are to global supply chain-exposed shocks,” as stated in a note titled, “Are you ready for a cold war in tech?”.

 

This week, MioTech’s virtual data scientist, AMI, maps and visualises Huawei’s entire value chain, to showcase the industry’s supply chain landscape and geographical distribution to help you decide if Huawei can ride out the tech storm.

 

Huawei’s Core Subsidiaries

 

Huawei has mentioned that it’s well prepared for today’s doomsday scenario, with its total purchases expenditure in 2018 reaching US$70 billion. But the stock-piled chips and components are only good enough to ride out the next 3 months to a year. What happens when that runs out?
 

According to AMI, Huawei’s parent company, Huawei Investment Holdings Co. Ltd. has 41 subsidiaries, with Huawei Technologies Co. Ltd. and HiSilicon Technologies playing key roles and are exposed to a greater number of suppliers.

HiSilicon is Huawei’s chip division and they’ve publicly put on a brave front, announcing that they’ve been anticipating the current “extreme scenario”. In a letter attentioned to staff, President He Tingbo stated that the division had been secretly developing back-up products for years. So while HiSilicon’s chips are built using underlying technology created by ARM, it’s still free to continue using and manufacturing existing chips. Huawei has already been using homegrown chipsets called Kirin, which are manufactured in Taiwan by TSMC (Taiwan Semiconductor Manufacturing Company Limited) and is considered to be able to compete with Qualcomm’s high-end chips. So while long term, the move by Arm to end ties with Huawei might mean losing out on some valuable development time, it will tie Huawei over for all it’s current projects.

Huawei’s Supply Chain

Taking a look at the total 251 suppliers to Huawei's subsidiaries using AMI’s cluster analysis, Intel, Qualcomm, Eastern Communications, BYD, Archer Technology, and STMicroelectronics are among it’s larger suppliers. Intel, the major supplier of Huawei's server chips and Qualcomm, Huawei’s mobile phone chips and modems provider, have both suspended further relationships with Huawei. According to a list of major suppliers issued by Huawei at the end of 2018, U.S. ranked the largest, accounting for more than 30 companies. The Mainland came second, citing Lixun Precision, BYD, BOE, AAC, and SF. Japanese suppliers ranked third with a total of 11 and Taiwan ranked fourth, totaling 10. There are 4 in Germany, 2 in Switzerland, South Korea and Hong Kong in China, and 1 in the Netherlands, France and Singapore.

But according to the latest information on the market, including the statistics on social media, there is now a 70-strong list of major suppliers that are largely based in China, with 43 listed companies from the United States. This can be due to Huawei’s worst-case-scenario contingency measures to stock-up but also to source elsewhere (ie. Murata, Samsung). In order for Huawei to safeguard itself from trade war impacts, it will need to reconstruct it’s supply chain to grow less reliant on American firms.

 

Financial Analysis

 

Despite Huawei having expanded its capacity with alternative suppliers, when looking at operating income, the revenue of chip suppliers from the United States is still far greater than that from Chinese suppliers. Intel’s operating income rose from US$2.6 billion to US$4.5 billion over the past four quarters. Even in the case of Asia, the operating income of suppliers in Japan and South Korea is still higher than that in China. While Samsung’s operating profit dropped 60% in Q1 2019 to US$533 billion, the entire operating income of the country beats China’s numbers by almost two fold. But as China looks inward for alternatives, on top of government backed tax breaks, the ban could fuel Chinese chipmakers’, while nascent, to grow.

 

Operating revenue of Huawei’s Chinese suppliers is about 1/4 than that of US suppliers

 

If we look at Huawei’s 251 suppliers and where they’re investing in, U.S. and China are their main markets. But investment interest has declined year on year, especially in 2015 during the wake of the recession. But while investments have waned in more mature countries, the numbers seem to indicate that suppliers are implementing a more diversified investment strategy.

 

 

It’s interesting to note that Israel ranked 5th when it came to investment from Huawei’s suppliers.

 

To conclude, Huawei’s surely not going to sink overnight like ZTE did. But cutting off access to key components from major manufacturers is more than enough to hurt any company. But can homegrown chipmakers, in at most a year’s time, start supplying technology comparable to that of the U.S? Can Huawei’s in-house designs make up for the loss of key U.S components? From the looks of it, Huawei could be looking at a drop in quality and function until the company builds itself back up again. But as they say, if you’ve hit rock bottom, the only way to go is up.

 

Download MioTech’s full Huawei supply chain report below. 

Download the Huawei's Supply Chain Report

Get a free deep dive into Chinese smartphone giant's entire supply chain

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