Bloomberg Businessweek - USA (2019-05-27)

◼ POLITICS Bloomberg Businessweek May27, 2019

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DATA: BLOOMBERG SUPPLY CHAIN

“Long-heldrelationshipsbetweensuppliernet-

worksandglobalecosystemswillfallapart,”he

says.“Marketswillfragment,andtherewillbea

decouplingofChinaandtheU.S.intotwodistinct

techsupplychains.”

It’sunclearhowlongtheblacklistwilllast.When

PresidentTrumppulleda similarstuntduringlast

year’stradetalks—banningtheotherbigChinese

telecom,ZTECorp.,fromdoingbusiness with

Americancompanies—therestrictionwaseffec-

tivelyreversedlessthanthreemonthslaterafter

ZTEagreedtopaya $1.4billionpenalty.There’s

alreadybeena 90-dayreprievegrantedtosome

broadbandandwirelesscompaniesusingHuawei

equipment,allowingGoogletocontinueupdating

existingmobileappsonHuaweiphones.However,

theadministrationis alsoworkingona broaderstrat-

egytocurtailChina’saccesstoU.S.technologyand

consideringaddingfivemoreChinesetechcompa-

niestotheCommerceDepartmentlist.

RegardlessofthelengthofHuawei’stenureon

theblacklist,theupheavalisalreadyprompting

AppleInc.,CiscoSystemsInc.,andotherbigU.S.

companiestoreassesstheiroffshorecontractfac-

tories.America’swaronHuaweihasalsohastened

China’sresolvetocontrolitsowndestinybyreduc-

ingitsdependenceonU.S.technology,spendingto

developsectorssuchassemiconductorsandarti-

ficialintelligence,andaskingcompaniessuchas

Huaweitomanufacturemoreoftheirowncompo-

nentsorsourcethemfromChinesesuppliersinstead

ofrelyingonU.S.companies.

Thiswillbecrucialif Huaweiwantstomaintain

its dominance in the global rollout of next-

generation5Gmobiletechnology.DeputyChairman

KenHutolda WorldEconomicForumpanelin

DavosinJanuarythatHuaweihelpedbuild5G

networksinmorethan 10 countriesandexpectsto

dosoinanadditional 20 overthenext 12 months.

Thecompany’sroleinsettingglobal5Gtechnol-

ogyandequipmentstandardshasreignitedthefears

ofU.S.officialswho’veaccusedit ofspyingforthe

Chinesegovernment.Whiletheupdatedtechnology

isn’tnecessarilysimplertohackthanthe4Gnet-

work,it connectsmanymoredevicesthatcreate bil-

lions of entry points for bad actors. The U.S. and

some of its allies worry that 5G equipment, software,

and chips supplied by Huawei could be outfitted to

collect information on customers in other countries

or disrupt sensitive infrastructure such as the electri-

cal grid or national highway network. Huawei denies

claims that it’s spied on other countries for Beijing

and that its 5G infrastructure is insecure.

Citing security threats, the U.S. has urged allies

to block Huawei from their telecommunications

networks. The campaign has had mixed success:

Australia and New Zealand have sided with the

U.S., while France has decried the administration’s

efforts. Canada, Germany, and the U.K. are conduct-

ing reviews. All this deliberation will likely result in a

slowdown in global 5G adoption, which could cause

other countries to rethink their ties with Huawei and

open up the field to more competitors.

The Commerce Department structured the ban

to require American companies—and international

ones whose products rely substantially on U.S.-made

parts—to apply for special licenses to do business

with Huawei. That ensures the fate of the Chinese

companyliesdirectlywiththeTrumpadminis-

tration.CommerceSecretaryWilburRosssaidon

BloombergTelevisiononMay17 that the depart-

ment’s actions against Huawei aren’t tied to the

trade war—but he also said the Chinese equipment

maker’s record of alleged espionage “is the kind of

behavior the trade negotiations are hopefully going

to mitigate.”

Huawei’s 5G plan won’t be affected by the U.S.

ban, and “others will definitely not be able to catch

upwithHuaweiinhigh-endproductsand5Gtech-

nologiesfortwotothreeyears,”ChiefExecutive

OfficerRenZhengfeitoldChinesemediaonMay21.

Determined not to get caught flat-footed like its rival

ZTE, the company started stockpiling components

as early as the middle of last year. It could operate

as usual for at least three months, people famil-

iar with the matter told Bloomberg, or longer if it

behaves conservatively. U.S. government officials

also warned Huawei executives privately last year

to explore supply chain alternatives that skirted U.S.

businesses, the people said, asking not to be identi-

fied discussing internal company affairs.

In the meantime, Huawei has accelerated plans

to design its own chips. HiSilicon, its semiconduc-

tor subsidiary, is on track to become one of the larg-

estmakersofcoreprocessingchips,accordingto

BernsteinanalystMarkLi.It’sgrowingfast:HiSilicon

broughtinalmost$8billioninrevenuelastyear,

upfrom$2.4billionfouryearsago,Bernsteinesti-

mates.Still,Huaweispentabout$11billion on com-

ponents from American suppliers. That can’t be

easily replaced in a few months.

Half of Huawei’s chips come from U.S. suppliers,

CEO Ren said. It has a backup plan to sustain itself

througha supplyshortage,hetoldlocalmedia,but

heprefersif companiesinChinaandtheU.S.instead

“growtogether.”Headded:“Wecannot be isolated

fromtheworld.”�ShellyBanjoandGaoYuan

THE BOTTOM LINE Being cut off from U.S. suppliers will hurt

Huawei, but the company is confident it can recover—and even go

on without them if necessary.

● Share of U.S.

suppliers’ revenue

from Huawei

NeoPhotonics

Lumentum Holdings

Inphi

Qorvo

Micron Technology

II-VI

Finisar

Knowles

Broadcom

49%

18

14

13

13

9

8

5

5