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A move to ban exports of US technology to Huawei is by far the most serious blow against the company yet. Key suppliers, including Google and ARM, have announced plans to suspend business with the company, and experts are speculating about the company’s survival. As the TechNode community gathered in Shanghai for our first Emerge conference, I had the chance to ask the $105 billion (in 2018 revenue) question: Can the company survive without US technology?

Bottom line: The consensus view is that losing access to US technology would mean Huawei is living on borrowed time. While the company can continue to produce present-day products indefinitely, it cannot design new microchips without access to critical architectures. This will leave the company’s products stuck with today’s designs, making the company increasingly uncompetitive if the ban lasts. The key unknown is whether it will last.

What’s banned: Huawei has been placed on the US “entity list,” declaring it to be “involved in activities contrary to the national security or foreign policy interests of the United States” and requiring companies to seek special licenses to sell it US technology.

  • Speaking at Emerge, the New York Times’ Paul Mozur compared the list to “a death star that can destroy any company it is pointed at.”
  • Key non-US companies, most significantly the UK’s ARM, have also announced plans to suspend business with Huawei because their use of US intellectual property and/or US-based R&D meets the enforcement standard of 25% US content.
  • Germany’s Infineon, however, says that it will be able to continue supplying Huawei with most of its products.
  • A March 15 executive order also clears the way for Huawei to be banned from supplying telecoms equipment in the United States, but its relatively small market share limits the effect of an imports ban.

Achilles’ semiconductors: What makes substitution impossible, Emerge attendees said, is semiconductors. Two key types of microchip architecture licenses are needed for all of Huawei’s main business lines.

  • ARM’s CPU architectures are dominant in mobile devices and used in all HiSilicon CPU designs.
  • Attendees told me that ARM is irreplaceable for high-end mobile devices
  • Huawei’s semiconductor subsidiary HiSilicon holds a license from ARM for existing products and will be able to continue to use it. But Stewart Randall, head of electronics and embedded software at Shanghai-based consultancy Intralink, told TechNode that ARM is not enough to keep HiSilicon going: “For arm, yeh, but not for other bits of IP. Hundreds of different suppliers for an SoC [system on a chip].”
  • Mozur predicted that under a protracted ban, smuggling and dummy purchasers will be used to evade controls.
  • Some speculated that Huawei could reposition from high-end to mid- and low-end devices.
  • Intel’s x86 architecture is similarly critical to servers and telecoms infrastructure.
  • In an extreme case, some noted, the US could demand that foundries—mostly Taiwanese companies—stop manufacturing HiSilicon chips, citing US-designed machines and software.
  • Over the long term, US threats to cut off semiconductors will further motivate Chinese efforts to achieve IC independence, but this goal is years or decades off.

Huawei OS? The loss of Google’s Android operating system is also a major challenge. However, Huawei says that it may be able to deploy aproprietary operating system by the end of 2019. Attendees were skeptical of a quick replacement—but did not see the Android loss as a death blow.

  • This OS is rumored to be named Hongmeng. According to TechNode reporting, Huawei’s “next-generation OS” research goes back to at least 2016, and the project has a large team that includes several prominent Chinese OS experts. Chinese reports date Huawei OS work to 2012.
  • Stewart Randall, head of electronics and embedded software at Shanghai-based consultancy Intralink, told TechNode that, at best, Huawei OS phones will be competitive only in China.
  • Like Microsoft’s now-defunct Windows phone OS, Huawei will face ecosystem challenges owing to network effects.
  • Google apps such as search, YouTube, and Gmail, while not relevant in the Chinese market, are beloved in Huawei’s European and Indian markets.
  • With political support and subsidies, Huawei could probably overcome the ecosystem barrier in China—if it has chips to run its OS on.

Slow damage: If the ban remains in place for a long time, expect a whimper, not a bang.

  • With some new chips already designed but not deployed, Huawei can update phones for some time.
  • Randall estimated that a three-month ban would leave the company mostly unharmed.
  • TechNode editor in chief John Artman warned, the company’s bottom line will quickly collapse without new products. As competitors release updates, the price of older phones falls quickly.
  • Huawei is feeling some immediate pain as potential customers anticipate trouble: British carriers Vodafone and EE have already dropped Huawei phones from 5G launch plans, citing uncertainty associated with the bans.

Will it last? Huawei’s situation echoes the ZTE crisis from last year; when China’s second-largest telecoms equipment maker was placed on the US entity list, it was forced to shutter production lines during May-June 2018.

  • The mood at Emerge was surprised. Observers expected the US to challenge Huawei’s market access, not its survival. Many suggest that the ban may be lifted after serving its purpose as trade war leverage.
  • But Artman said that this time could be different. “ZTE was a great show of force, an amazing show of force, from the US side, but it hasn’t been the same kind of whipping boy as Huawei has. Huawei is the center of a lot of technical tension, because it’s a serious competitor in infrastructure to US companies and an alleged security threat.”
  • Randall said: “If the ban continued we would see Huawei disappear as we know it today but it would be propped up.”

What’s next? American media report that the US government is considering both import and export bans on other Chinese companies, especially in surveillance and facial recognition.

  • Bloomberg reports that five Chinese surveillance companies, including industry leader Hikvision, are in the crosshairs.
  • However, it is not clear if these companies are as vulnerable as Huawei, writes the Wall Street Journal:

For Hikvision, it isn’t clear that the loss of access to American suppliers would deal a devastating blow. The company is a heavy user of chips designed by China’s HiSilicon, a unit of Huawei Technologies Co.However, the company does stand to lose access to more sophisticated machine-learning chips, like those made by Nvidia Corp., the Silicon Valley maker of graphics processing units, said Rex Wu, technology analyst at investment bank Jefferies. Such chips are required for more advanced surveillance techniques drawing on artificial intelligence, such as facial recognition technology, experts have said.

Wall Street Journal

  • DJI, the Shenzhen-based company that is the world’s largest drone maker, has also been named as a possible import ban target. Unlike Huawei, DJI has a large US market to lose.

Read more:

Additional reporting by Rachel Zhang.

David Cohen is a former acting editor in chief at TechNode. Since 2010, he has covered China as a writer and editor at outlets including the Diplomat, the Jamestown Foundation, and China Policy. He’s...

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