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  • Joel Werner

4 Ways US Sanctions Have Affected China's Telco Giant

In August 2021, China’s Huawei Technologies Co. reported a 38 percent fall in quarterly revenue. Huawei is the world’s biggest telecom equipment manufacturer and 5G base station equipment vendor. It was, at one point, the world’s second-biggest smartphone supplier.



However, Huawei has shown declines in revenue for three quarters in a row due to sanctions imposed by the United States. The effects of commercial sanctions can be difficult to measure, but in the case of Huawei, the US seems to have hit the giant where it hurts with great accuracy—for now, anyway.



Why Were Sanctions Launched Against Huawei?



US defense agencies have long claimed that Huawei acts as an agent for the Chinese Communist Party (CCP). However, no evidence of this has been made public, and the company itself maintains it's an independent organization.



The US has also put pressure on its allies to stay away from Huawei 5G technology, stating the CCP could use it for espionage purposes. Furthermore, US officials note that Chinese laws can be used to compel companies to aid their government by disclosing data concerning the national security of other nations, despite Huawei’s attempts to distance itself from the CCP and insist it would never allow its equipment to be used in that fashion.



Huawei has also been accused of infringing international sanctions imposed against Iran. In 2018 Meng Wanzhou, aka Sabrina Meng, Huawei’s CFO and the daughter of its founder, was arrested in Canada in response to a US request for her extradition regarding this matter. However, she arrived home in September 2021 in what appears to be an exchange of prisoners between Canada and China. Ms. Meng admitted to some wrongdoing in exchange for the US deferring her trial and dropping charges if she doesn’t violate the terms of the agreement.



What Sanctions Have Been Imposed?



In 2018 the Trump administration banned the procurement of Huawei equipment by federal agencies. The next year, Huawei was added to the Commerce Department's entity list, effectively disallowing the sale of American goods and technology to the company. A further 38 subsidiaries of Huawei were added to the list in August 2020.



The sanction meant Huawei mobile phones could no longer use Google's Android operating system and apps like Google Maps. In addition, other American apps popular with Western users, like Netflix, Facebook, and Uber, have also been withheld from Huawei’s app store, limiting its appeal to mainly Eastern audiences.



Huawei Forced to Experiment with New Business Lines



Huawei has been forced to sell its entry-level mobile phone brand and predicts a possible $40 billion loss in smartphone revenue this year. The company’s executives have begun directing operations toward systems for electric vehicles and are targeting 300,000 vehicle sales next year, twice what Tesla Inc. sold this year in China. Other new business lines include software, as opposed to hardware that relied on foreign components, and coal-mining technology. However, at this stage, none of these are making a real contribution to results.



Ceding Overseas Territories to Competitors



Australia and Japan banned Huawei from developing their 5G networks in 2018, and the UK followed suit in 2020. The company was snubbed by Malaysia in July 2021 when Malaysia’s state-owned telecom company selected Ericsson AB to deploy its 5G network, despite Huawei building half of the country's 4G network.



Rebuild Supply Chain Independent of America



China already had a policy of securing technological independence by 2025. US sanctions may have fast-tracked this objective. Huawei has developed its own smartphone operating system, Harmony. It is already running on 50 million Huawei phones in China and being adopted by other Chinese manufacturers, such as Haier Group and Midea Group, who make Internet-connected appliances.



Depletion of Stockpiled High-End Chips



Huawei is also excluded from procuring any chips made using American technology. While it had stockpiled impressive quantities of high-performance chips, these are now largely depleted. As a result, its latest smartphone, the P50, can’t make use of 5G networks. Where previously the company's philosophy was to select the best components to make the best product, it now turns to "appropriate components to make high-quality products." It has improved its profitability following this credo, according to executives.



The Biden administration has maintained sanctions against Huawei with no indications of reducing pressure. It’s a sore point in relations between the US and China, with China demanding that the US “stop suppressing Chinese companies.” Yet, despite everything, Huawei produces profits each quarter. At the end of 2020, it was sitting pretty with $55 billion in cash and short-term securities. Executives are betting on their sizable research and development (R&D) budget to pull them into the future. In 2020 Huawei spent more than $22 billion on R&D, more even than Apple Inc.

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