Huawei’s CEO Ren Zhengfei has offered a hand of friendship and cooperation to President Biden more in hope than expectation, but boosted by a strong set of results for 2020 in defiance of the sanctions imposed in three intensifying rounds by the previous Trump administration. As we have indicated before, Biden will be in no hurry to reverse the Trump sanctions against Huawei even if his tone will be more emollient, but the Chinese giant can at least approach any negotiations from a position of greater strength than it had warned its investors to expect.
It acted quickly to reduce the impact of the squeeze on smartphones by selling off its low end cut price smartphone subsidiary Honor, in a year in which briefly it had overtaken both Apple and Samsung to become the top global smartphone brand in terms of unit shipments, even if it was far from that by revenues or profits on this side of the business. An average iPhone costs $758, well over double that of a Huawei smartphone even though there are high end versions of the latter such as the Mate 40 Pro.
Huawei’s advance had been almost unchecked over the last decade until the US sanctions kicked in, overtaking Ericsson as the world’s largest telecommunications equipment maker in 2012 and then Apple as the second-largest manufacturer of smartphones behind Samsung in 2018, by which time its revenues had reached $108.5bn.
Then in July 2020 came that giddy moment when Huawei overtook Samsung as well for smartphone shipments, even though that proved a short stay on the perch of that podium and reflected the latter suffering a sharper decline in worldwide sales in Q2 of 2020 resulting from Covid-19’s impact. Huawei’s mantra of affordable quality seemed to resonate with consumers at a time of uncertainty.
But then US actions quickly kicked in. Market forces changed little and consumer demand for Huawei’s phones remained high, but the company was starved of the chips needed to sustain supply. The big winners, apart from Apple and to a lesser extent Samsung, were ironically other Chinese smartphone makers, since these were deemed no threat to US national security, lacking significant presence outside china or in 5G infrastructure.
Yet the Chinese domestic market was hit by the very sharp fall in Huawei smartphone production after mid-2020, choking its revival in sales after its early recovery from the more serious impacts of the pandemic itself. Indeed, shipments in China’s mainland, excluding Hong Kong and Macau, were 11% down over the full year at 330m units. Yet, shipments at domestic rival Oppo rose rapidly by 23% to 17m smartphones, and at Vivo by 20% to 15.8m units, taking second and third place respectively.
Just behind was Apple with its best performance in China for some years, up 18% at just over 15m units, reflecting the brand’s enduring popularity among young consumers there. Apple also gained hugely worldwide from Huawei’s clobbering combined with Samsung’s relatively lackluster performance, shipping almost 82m smartphones in Q4 2020, equating to about 22% of the market by the year end.
Huawei’s smartphone slump was a direct consequence of the three successive US moves against its supply chain, starting with the blacklisting in May 2019, banning US companies from doing business with it. This cut Huawei off from key suppliers, notably Google with Android and Google Mobile Services, including YouTube and Gmail. This first move hit smartphone sales only outside China given that Google services have been blocked in the country anyway. Huawei’s own Mobile Services, including an app store, available with newer smartphone models, cut little ice with consumers at this stage outside China.
Then the US government was made more aware of the vulnerability of Huawei to moves against technology employed by the key foundries where its chips were fabricated, including Samsung but especially Taiwan’s TSMC. This led to the US extending its ban on Huawei to chips made on foreign soil that incorporated US technology, even if to Huawei’s specifications.
However, this still left two loopholes. Huawei could still buy generic chips off-the-shelf, and more crucially any chips through third-party distributors in cases where the original vendor was unaware of the ultimate destination. The US Commerce Department therefore acted to close those loopholes in August 2020 by prohibiting sales of any chips to Huawei made with the help of US technology to Huawei, including transactions when Huawei was the “ultimate consignee”. This was effectively a blanket ban on sales of semiconductors fabricated by TSMC or any other foundry using US technology.
The company reported that the initial action in 2019 cost $12bn in lost revenues that year. So given that the subsequent two actions of 2020 were widely hailed as a killer blow, Huawei’s preliminary results for the year look surprisingly good, with infrastructure performance outweighing that smartphone decline. These figures obtained by China Business Network report revenues up by 11.2% at $136.7bn and profit by 10.4% to $9.9bn.
Subject to official ratification, these compare favorably with Ericsson, which late last month reported revenues up by 2% at SEK 232.4bn ($28.0bn), although by 5% when adjusted for currency movements. Network equipment sales were up 10%, reflecting some gains from actions to exclude Huawei from 5G infrastructure in North America and parts of Europe especially.
It is true Huawei’s rate of revenue growth has declined from the sustained levels of the last decade, which were close to 19% up in both 2018 and 2019, but were going to subside slightly anyway. It looks likely the US actions cost Huawei around 4% to 5% of revenue growth last year, in the region of $5bn, which represents less damage than many analysts had anticipated.
Huawei’s future prospects still depend on geopolitical factors, some beyond its control. The crucial one is whether Huawei is able to retain or gain a significant stake in the 5G infrastructure among the many countries of outside North America that have not caved in fully or at all to US pressure. That in turn depends on whether that pressure declines under the Biden presidency, or if on the contrary he adopts a more outreaching diplomatic approach that succeeds in establishing a broader anti-China coalition. There are signals it could be the latter, with Zhengfei himself admitting at a recent media roundtable that it is be extremely unlikely the new US administration would lift the current restrictions imposed by former President Trump.
Equally crucially in the longer term is the speed at which China can close the semiconductor manufacturing gap with TSMC and Samsung especially, which themselves are investing heavily. China now regards that as an existential priority, but as we have said before currently lags about a decade and two process generations behind.
Restrictions over exports of the relevant equipment and technology from the US, Japan and the Netherlands will disrupt China’s semiconductor programme, especially in the short term, but will also probably ensure that it does eventually gain self-sufficiency for all aspects of semiconductor production and not just design and assembly.