Implications of the Huawei export ban

Andrew N. O'Brien, CFA, Assistant Director of Equity Research, and Di Yao, Portfolio Manager, Analyst, 05/23/19

Implications of the Huawei export ban

  • We view the U.S. ban on Huawei as linked directly to the escalating trade war with China
  • Huawei is among the largest global purchasers of semiconductors, and the ban is likely to be highly disruptive to the technology industry
  • Risks include retaliation from policymakers in China and a slowdown in the global rollout of 5G network technology
Last week, the U.S. Commerce Department announced that it would add China-based telecom and smartphone giant Huawei and its subsidiaries to a U.S. “entity list.” This prevents Huawei from buying U.S. technology without prior approval. While this was publicly justified under the guise of national security, we view the move as linked directly to the escalating trade war with China. It suggests that if a trade conflict agreement is eventually reached, we could see the ban partially or entirely lifted. A similar ban was imposed on a Chinese telecom company in 2018, but was later lifted when the U.S. government negotiated a settlement with the company and the Chinese government that included a penalty payment and compliance monitoring.

In the meantime, the export ban is likely to be highly disruptive to the technology industry in both China and the United States. Huawei is the world’s largest vendor of networking equipment and the second-largest smartphone manufacturer. However, Huawei still relies on U.S. technology for products it is unable to design and build domestically — primarily semiconductors. In fact, our data suggests that Huawei is the fifth-largest global purchaser of semiconductors and accounts for more than 3% of total annual demand, primarily purchased from U.S.-based companies. This explains why we have seen several U.S. semiconductor companies lower their revenue outlooks as they confirm their compliance with the ban.

“We have seen several U.S. semiconductor companies lower their revenue outlooks as they confirm their compliance with the ban.”

The potential ramifications depend on numerous factors that are impossible to judge (we try to avoid predicting President Trump’s tweets). One ramification we expect is that the ban will drive the Chinese government to increase its support of domestic semiconductor and software companies in order to reduce their reliance on U.S. technology. In the United States, we have already started to see evidence that the ban will be a modest headwind to many Huawei suppliers.

Potential risks and implications

  • Policymakers in China, who have so far been fairly muted, could take retaliatory measures
  • A prolonged export ban could bring a slowdown in the global rollout of 5G network technology
  • If Huawei remains crippled by the ban, its smartphone and telecom equipment peers, mainly in Europe and Asia, will have the opportunity to gain market share
  • Further escalation of the conflict could lead to a broader export ban for Chinese companies and/or embargo not only from the United States, but also from U.S. allies
We continue to track the developments closely and expect pressure to remain on financial markets, and the technology sector in particular, until there is increased visibility to a negotiated settlement.

Huawei is not a publicly traded company.

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