Who benefits from Huawei’s predicament?

Last week we examined the very limited number of options Huawei has now. We then started to write about who are the winners and losers from a diminished Huawei. And this turned out to be a very complicated topic. Huawei does a lot of things in a lot of different markets.

The US government has clearly set its sites on Huawei, for a variety of reasons. So ostensibly, the biggest beneficiary of any decline in Huawei’s fortune is the National Security of the United States and its allies. We have no way to gauge this, but we are fairly certain that these benefits are not entirely straightforward nor quite as large as some would have us believe. Nonetheless, we will save that discussion for another post. Here we are going to focus on the commercial impacts only.

A quick overview of Huawei. They have a products in almost every category of electronics. They are best known for the telecom infrastructure equipment and they are the largest mobile phone vendor, but they make a lot of other things. The list includes home networking gear and enterprise electronics, and their HiSilicon semiconductor subsidiary makes chips for internal consumption but also in a growing array of other devices including TVs. That’s is probably a $1 trillion of TAM, so yeah, a lot of markets.

The other thing to keep in mind is that there are direct and indirect impacts here. For example, if they exit the smartphone market, their competitors gain but their suppliers lose out. Let’s untangle this market by market.

Smartphones

By many estimates, Huawei is the largest smartphone vendor in the world, not a small feat given that they have been excluded from the US market for years. Huawei has said they will run out of parts for their flagship smartphone line in two weeks, which means they will probably be out of the market entirely by the end of the year.

The biggest beneficiaries of this are other smartphone makers especially Apple, Samsung, BBK (Vivo, Oppo, etc.) and Xiaomi. While Apple stands to pick up some share, the removal of Huawei is an especially big boost to the other Chinese vendors. Huawei has hammered their share in China in recent years and was poised to overtake them in other major markets like India. Apple and Samsung may be able to pick up share in the rest of the world, but patriotic buying may limit their share gains within China, and Samsung seems to have largely abandoned the China market anyway.

For the supply chain, this change is largely a wash. Suppliers like Mediatek, Skyworks and Broadcom are losing their Huawei revenue but will pick up volume from other customers replacing Huawei’s share.

There are likely some near term shake-ups in store. For instance, Murata has done a lot of Huawei business over the past year as the US sanctions made it harder for US suppliers to sell to Huawei. So a likely one-time shift for Skyworks and Qorvo is probably in the cards for Q1. The biggest variable here will be Qualcomm. Qualcomm and Huawei have been negotiating a license for years. And in some bitter irony, they finally settled on terms a few days ahead of the US government fully tightening up their restrictions. As part of that settlement, Qualcomm was supposed to collect a big payment from Huawei, our guess is that Huawei will not be in a hurry to close out that tab. Netting this out Qualcomm probably gains on a strictly numbers basis, but their attempt to get a waiver hints that they may have preferred to have Huawei in business. Part of that settlement covered IP licensing, and Qualcomm would probably feel better about the world if they had that major validation. So a net gain for Qualcomm, but a decidedly mixed one.

The biggest losers are likely emerging domestic Chinese semiconductor suppliers. These companies still have a long way to go before emerging on the global scene, but Huawei, more than anyone in China, has been helping them get established.

Telecom Equipment

Huawei has emerged over the past 20 years to become the leading supplier of telecom gear. Again, set aside how they achieved that position for some future post, they are the leaders here. Much has been written about how the telecom operators will suffer from Huawei’s absence, driving up the cost of 5G on the back of less competition. This assumes Huawei gear really is all that much cheaper, and there is plenty of evidence that on a “Total Cost of Ownership” basis Huawei is not that much cheaper. Instead, the bigger factor is the withdrawal of Huawei’s very generous credit terms, supplied indirectly via Chinese banks. There are a lot of operators, especially in emerging markets, who will now delay their 5G rollouts in the absence of cheap funding for gear.

This is one of those very tangled areas. Delaying 5G is generally bad for the industry. But given that Nokia and Ericsson are still a bit behind schedule for their 5G roadmaps, the impact is minimal. On the other hand, the handset vendors, and their suppliers, benefit considerably from 5G rollouts, and this delay will likely put further pressure on their revenue mix and gross margins, as much of the world stays on 4G longer.

Among other potential beneficiaries of all this are China’s domestic telco equipment vendors, notably ZTE. Someday, some business school will be able to teach an entire course on a comparison between these two firms. Once close rivals, Huawei over the past decade has largely eclipsed ZTE. To the point today, that one rumor holds that ZTE may be supplying Huawei with parts, albeit tentatively given that company’s own problems with the US government. Huawei’s troubles probably help ZTE, but likely not enough to really catapult them into the top tier in the sector.

Another potential winner in all this is Samsung who is distant fifth in the infrastructure market. Huawei’s absence may open a few more slots for them to garner network wins, but as with ZTE, they likely lack the resources to really catapult into the top tier.

Ironically, among the beneficiaries here are China’s mobile operators. Although poorly understood outside of China, we believe the likes of China Mobile and China Telecom do not have the warmest feelings towards Huawei. In the past, they have been ‘encouraged’ to buy Huawei gear, leaving them no room to negotiate. As such, the removal of Huawei from bidding likely means the price they pay for 5G gear probably goes down.

It is also interesting to consider the very indirect impact this will have on China’s banks. Huawei has gotten tens of billions of dollars worth of credit facilities from China’s state-run banks, who help operators finance purchase of Huawei gear. We have very little insight into the terms of these deals, to the extent that they are done on commercial terms, this is a loss for them. On the other hand, they may not be on commercial terms, and if anything, it looks like China’s banks would rather keep that hard currency on their books for the time being, so maybe they are not too sad to lose the requirement for this policy support.

In this category, the biggest winners are Nokia and Ericsson, Huawei’s direct competitors, who get some much needed breathing room. The telecom operators lose a vendor, which is not good but not the end of the world. But then the wider industry takes some pain as the pace of 5G slows a bit.

Enterprise Electronics and the Cloud

The enterprise electronics space is a complicated segment today (or maybe we are just so deep in at the moment that it feels that way). Companies, large and small, are moving their IT systems to the Cloud, the underlying demand is through the roof with the transition to Work From Home, and so we have converging secular and cyclical trends which means a lot is happening.

Huawei is a large player in this space, although it is hard to tell exactly how big. They have multiple initiatives under way: they have their own cloud service, they help enterprises move to the cloud, and they help other companies, notably telcos, build their own cloud service offerings.

Their ability to become a cloud service provider in their own right, competing with AWS and Azure et al, is not viable under the new restrictions. But this business has not fared that well, as it put Huawei in competition with many of their customers, so it is not nearly as existential a threat as the loss of their other businesses. Nonetheless, they buy a lot of components.

The biggest beneficiary of Huawei’s loss is Cisco. Cisco has been fighting it out with Huawei for a long time. Huawei is probably one of the largest vendors of enterprise switches globally, and is a big part of the commoditization of this sector, which has pressured what was once Cisco’s core product lines. Cisco has changed a lot over this time, so this segment matters far less to them today, but unquestionably a future without Huawei is a preferred outcome for Cisco.

This is also a boost for China’s domestic cloud service providers like Alibaba, removing a serious potential competitor. From what we can tell, Ali, Baidu and Tencent do not buy a lot of gear from Huawei, and they provided a lot of potential competition through their various cloud initaitives.

The biggest foreign loser in this is probably Intel. Huawei has long been one of their largest non-PC customers, and they can probably not sell them much now. However, as with handsets, the loss here is likely offset by sales to other customers. As with smartphones, likely the biggest losers is again China’s domestic semis complex. Huawei could have been a great source of local demand and support for them, but this is likely to evaporate.

Another indirect loser in this is Arm, especially Arm in the data center. Huawei has emerged as one of the pioneers of Arm-based server CPUs. It is unclear how much Arm really cares about this market, and in China they have bigger problems, but along with Ampere and Amazon, Huawei has been one of the clear beachheads for Arm in the data center.

Ironically, one of Huawei’s best paths to survival probably rests in this arena. They cannot access foreign hardware, but they still have a world class-ish software team, an effort they have been greatly expanding in recent years. We have long maintained that China’s electronics future will look very different from the PC-based world we are now accustomed to. The future will likely see a shift in value from hardware to cloud-based software solutions in places like airport border control checkpoints and schools and government offices.

Huawei is now reportedly pushing strongly ahead in developing cloud software, and they will likely get the full support of the Chinese State with all those checkpoints, bureaucrats and schoolchildren getting introduced to domestically-produced Huawei-software running cloud terminals. This will take a few years to materialize, but seems all the more likely now.

Beyond

Huawei makes a lot of other things. The product list on their website and on HiSilicon’s is pretty comprehensive. The companies play in home networking, storage, cameras, fitness, TVs and more. Most of these will face curtailment to varying degrees. They can probably eke out a living supplying the domestic market, but it is highly unclear if they have ever made profits in any of these. Nonetheless, this will be an opportunity for their competitors.

For many years, HiSilicon was decidedly not in the global tier of chip companies, but over the past decade this has altered dramatically. Take Televisions as an example. HiSilicon is now probably one of the top two or three suppliers of semis for TVs. Their exit from the market will remove a supplier, pressuring the margins of the TV makers, especially the Chinese OEMs. It is also a boon for competitors, notably Meidatek who have been feeling the pressure from HiSilicon in China for years.

The list of examples goes on, further than we can catalog, but there is a clear pattern. Foreign and domestic competitors benefit most from Huawei’s troubles. Foreign suppliers may see a bumpy transition, but mostly end up with no change, as end demand shifts to other customers. Foreign customers lose a supplier which is not good, but not catastrophic. But by far the biggest losers are domestic suppliers to Huawei. Regardless of the emotions around this, Huawei is one of China’s great modern success stories, and its diminishment will set back China’s industry to some degree. Again, not catastrophic, but definitely a big problem.

We believe that one of the biggest consequences of Huawei’s current position, regardless of ultimate outcome, is pain for China’s electronics industry. Our sense is that no one in the US really understands this, but our contacts in China are fully aware of it, and it will likely leave a bad taste. To be fair, there are many in China who will benefit from Huawei’s woes, but they will not bear the ultimate cost of the trade war. The broad hit to China’s electronics complex is likely to be seen as a US effort to hurt China’s economic prospects. And while the US government may view this as a national security issue with a narrow intended impact, the broader impact and more importantly, the perception of these moves, will be viewed as a much broader pressure on China by people in China.

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