Huawei’s U.S. Trade Blacklisting Presents Possible Lasting Ramifications for the Smartphone Industry

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By David McQueen | 3Q 2019 | IN-5554

Owing to a threat to national security, a U.S. executive order has been put in place that bans any U.S. company from working with Huawei and supplying it with hardware or software, most notably Google services, which will have wide ranging implications for the Chinese vendor’s smartphone business. Huawei will continue to have access to the version of the Android operating system available through open source, known as the Android Open Source Project (AOSP), but it will immediately lose access to updates to the Android operating system. Google Play and apps such as Gmail and YouTube will also disappear from future Huawei handsets.

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Google Services Banned from Future Huawei Discourse

NEWS


Owing to a threat to national security, a U.S. executive order has been put in place that bans any U.S. company from working with Huawei and supplying it with hardware or software, most notably Google services, which will have wide ranging implications for the Chinese vendor’s smartphone business. Huawei will continue to have access to the version of the Android operating system available through open source, known as the Android Open Source Project (AOSP), but it will immediately lose access to updates to the Android operating system. Google Play and apps such as Gmail and YouTube will also disappear from future Huawei handsets.

Huawei's Ban Imposes Wide-Ranging Impacts on the Smartphone Industry

IMPACT


With Google revoking Huawei’s future access to Android services, there is likely to be a sustained chain reaction to the remaining vendors in the smartphone market, putting the industry in a state of flux. A look at Huawei’s immediate competitors, however, suggests that there will probably be very little impact on Apple in the short term, as the two companies have limited overlap in terms of smartphone addressable market; Huawei and Apple each use different Operating System (OS) platforms and app stores, and brand loyalty also plays a part in users’ purchase decision processes.

In fact, the ruling may be of greater benefit to Samsung outside of China, due to the fact that its devices span a wide range of price points, overlapping more readily with Huawei’s offerings, and Samsung also relies heavily on the Android OS and Google services. Inside China, the Google decision will have little to no impact on Huawei’s business; Google services are already banned (and alternatives offered by domestic competitors such as Tencent and Baidu), and many Chinese consumers are loyal to the Huawei brand. Moreover, Huawei could ditch Android OS and use AOSP, even for its high-end products.

Huawei has already established success with its own app services in China across the majority of its product portfolio, but they have not been properly tested outside of China. Indeed, there is a long list of vendors that have tried and failed to develop their own apps ecosystem and operating systems, such as Mozilla with its Firefox OS and even Samsung with its Tizen OS, so it would be surprising if Huawei were to be successful beyond China. Outside of the Chinese market, it is Europe, where the company has grown rapidly and which has become its second-biggest market, that could prove to be most detrimental to Huawei. Without access to Google services, a crucial attribute of the smartphone market in Europe (outside of Apple), Huawei’s offerings will not be as competitive and will have far less appeal to consumers, who will then look for alternatives.

Generally, smartphone growth has dwindled substantially over the past 12 months, with replacement cycles for existing users lengthening as current features have matured. With Samsung going through a tough time in the smartphone market at present, any hampering of sales to a key competitor in the Android space will be welcome news, as consumers will be forced to choose an alternative vendor. Other companies that stand to gain from Huawei's loss are lesser-known Chinese brands such as Oppo, Xiaomi, and OnePlus, all of which have made aggressive moves to court consumers outside of China. However, it should not go unnoticed that Huawei’s stellar growth over the past few years made Apple and Samsung both more honest in their approaches to innovation in the smartphone market and more competitive, which can only be good for consumers.

What Next for Huawei?

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For Huawei, the problems do not end with its inability to provide Google services and the impact that will have on its smartphone business, as there are expected to be a number of other wide-ranging consequences as well. Under the ban, U.S. components suppliers were also initially barred from selling their chipsets to Huawei. While Huawei does have its own app processor and modem business (called Kirin), it still relies on Qualcomm chipsets for some of its mid- to lower-end smartphone models. Therefore, the U.S. companies Huawei heavily relies on for Radio Frequency (RF) and connectivity components—notably Broadcom, Qorvo, and Skyworks—will also suffer as a consequence of the ban. However, in a recent major concession to the Chinese government and after lobbying by some of those U.S. companies, the Trump administration has agreed to allow these types of companies to sell their “complex things” to Huawei. The belief that the provision of commonly available parts for products such as smartphones and smartwatches would be unlikely to present the same security concerns as 5G networking equipment led to the easing of the ban.However, further repercussions have also affected Huawei’s notebooks business, which has asked supply chain partners to suspend deliveries and has even halted all new notebook projects.

Despite ongoing negotiations and the potential for a resolution that would ease the ban, Huawei has cut orders for not only its flagship smartphones, but also its entry-level and low-end smartphones that use non-Kirin processors. Indeed, its international smartphone sales are estimated to have already dropped 40% in the months since the ban began, and it is expected they will fall by 40 million to reach 60 million units by year end, way below its expected growth target. In context, in 2018 Huawei shipped around 206 million smartphones, over a third of which were in China and about 40% outside the Asia-Pacific region. Such a drop in expected sales for 2019 has led to predicted revenues remaining flat through to 2020, ruining any chance of Huawei’s aspiration to become the number one smartphone manufacturer by 2021. Even if a resolution is met to ease the ban, it may be too little too late within the European market, with consumers likely to be wary of purchasing a Huawei smartphone in case of any future conflicts.

In the long term, Huawei could retrench and focus on its own Chinese market, creating new component supply lines for its product range or else redeveloping by designing and building all of its own hardware and software. This could potentially lead to the company offering its 5G and 4G chips to competitors, including Apple, although this currently seems like a risky approach considering the adverse perception many companies currently have about dealing with Huawei in any capacity. Furthermore, such an approach could take many years to resolve and execute.

However, while the trade ban may have halted Huawei's expansions overseas, it has prompted China to accelerate the pace of 5G deployments. The company has reacted by turning to lower-specification components in local network deployments, which has been achieved through the redesign of its base stations. This approach may help the company refocus and grow revenues in the short term, but as the global market moves on apace to 5G, it will remain difficult for Huawei to keep a healthy supply chain and maintain buoyant smartphone shipments outside of China when faced with such stringent trade restrictions.

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