Since the tech war between China and the United States started, Huawei is in the scope of the US government, and in May 2019 Trump effectively banned the Chinese giant from his country. Trump’s administration accused Huawei of being a national threat by spying on people and working with the Chinese government to steal other countries’ secret information. However, in my opinion, it ́s possible that what made Trump adopt this policy was the race for the next generation of technology (5G). In 2019, 19 million of 5G smartphones were provided by Huawei. I think it’s safe to say that China is the biggest United

States competitor in the race for 5G and it appeared to have the upper hand until 2019, a lot due to Huawei. However, according to Strategy Analytics, in the first quarter of 2020 Samsung had more shipments per vendor of 5G smartphones, contrary to what happened in 2019 where Huawei sold 6,9 million units (and Samsung sold only 6,7 million) and represented 36,9% of the market. But even in 2019, there was a big downfall in the growth of net profit, because in 2018 and 2017 net profit grew 25% and 28% respectively, and in 2019 that value was only 5,65%. Eric Xu, Chairman of Huawei, reportedly told CNBC that Huawei missed its goals and blames Trump’s decision of blacklisting Huawei for the 12 billion dollar shortfall in revenue.

This happened because the smartphone and laptop sector, which represents more than half of sales, took a huge blow. Considering this and the fact that R&D expenditure increased a lot in 2019 due to the 5G race against the US, we can now understand why the profit margin shrunk so much. Smartphone sales were very affected due to the decision from the US government in May 2019 of banning Huawei. Because of this, google can’t work with this company, which means Google Apps like YouTube or Google Maps won ́t be pre-installed. So, I think Huawei’s revenues didn’t suffer even more because of two key factors: 1. Huawei dominates the smartphone Chinese market, so even if google apps are banned, consumers have other options 2. Even in international markets, Huawei is trying to maintain Android as their smartphone’s operating system by recurring to several devices’ updates. However, I don’t think this tech giant wants to be dependent on its domestic market so its only option is to develop a better alternative to the consumer then the one Google provided, and there are even rumors Huawei will develop its own operating system. Developing an operating system better then Android will be a challenge, and to make things worse Trump recently restricted, even more, Huawei’s access to the United States semiconductor market, to the point where not even third parties who use US materials or software to fabricate chips can sell to the Chinese company. In other words, because the US dominates the global chip market, Huawei will have to rely on Chinese chipmakers. So, to conclude, I think Trump’s decision of blacklisting Huawei is having its negative effect on the company (but there are a lot of companies from different countries who suffer from it, especially American semiconductors who supplied Huawei), and it will have to rely a lot on its capability of innovation since even European companies like Nokia or Ericsson who are also in the 5G race pitched themselves as Huawei 5G alternatives to the US government, trying to close a deal. Trump’s policies are making this tech war more “even”, putting it a lot more dependent on China’s ability to innovate, since the US is blocking its access from the high technology of other countries.

Article published in our August Newsletter

Pedro Santos, BSc in Economics

Published by lisboninvestmentsociety


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