3 July 2019
Taiwan's Huawei Suppliers Fear US Ban Could Render Them Non-Viable
With the US-China trade war now zeroing in on individual mainland businesses, long-term Taiwan-based contributors to Huawei's supply chain fear the blacklisting of the telco could have serious repercussions on their balance sheets.
Following the early 2018 onset of the ongoing trade conflict between China and the US, it was all but inevitable that the knock-on effects from the punitive tariffs imposed by both sides would impact on the wider tech sector. Huawei, the Shenzhen-based telco giant that is one of the global leaders in 5G and smartphone technology, was pretty much caught in the eye of the storm. Though the trade war is fought essentially between China and the US, the US action against Huawei has sent ripples through the global technology industry. Given their standing as important links in the global technology chain, it is understandable that many high-tech manufacturers across Taiwan are now looking at how best to manage being caught in the crossfire.
Over recent months, China-US friction has extended from general trade to the technology sector, with ZTE the first mainland business to be targeted. On 16 April 2018, the US ordered a ban on exports to ZTE for alleged breach of trade sanctions against Iran, bringing the company's operations to a standstill. Although ZTE reached a settlement with the US on 7 June, alarm bells were already ringing across the mainland tech sector. Concerns were then far from allayed when it transpired that Huawei was also in the US crosshairs.
Since last year, the US has pursued Huawei on three fronts, each time taking more serious action and making a more severe impact on the global technology industry. First, the US Department of Commerce and Department of Justice put pressure on Huawei for allegedly breaching trade sanctions against Iran. In early December 2018, the US requested that the Canadian police arrest Sabrina Meng, Huawei's Chief Financial Officer and daughter of Huawei founder Ren Zhengfei, with a view to her being extradited to the US for trial.
The second attack was a bid to check Huawei's 5G business expansion, both in the US and globally. Internally, the US Federal Communications Commission (FCC) voted in April 2018 to ban the use of federal funds to buy network equipment from companies considered to pose a threat to US national security. No company was named in the banning order, but it was believed that Huawei and ZTE were the prime targets.
Externally, the US then exerted pressure on other members of the Five Eyes intelligence-sharing group – Australia, Canada, New Zealand and the UK. This saw US Vice-president Mike Pence and Secretary of State Michael Pompeo take multiple trips to Europe to lobby for a ban on Huawei's 5G communication equipment. Given Huawei's dominant position in the 5G technology sector, many US allies found themselves in a 'catch-22' situation, having to choose between safeguarding communications security and keeping up to date with the latest technology. With not all of them willing to toe the American line, the global campaign waged against Huawei by the US struggled to meet all its objectives.
The biggest blow to Huawei, though, came when it was banned from importing US technology and components. On 15 May 2019, US President Donald Trump signed an executive order to declare a national emergency in the information-security sector, banning businesses from using telecommunications equipment made by companies deemed a national security risk. On the same day, the US Department of Commerce announced that Huawei and 70 associated corporations had been put on the Entity List, meaning that Huawei could not buy parts and components from US enterprises without US government approval. Immediately after the ban, tech giants such as Google, Intel, Qualcomm and AMD announced the suspension of their business dealings with Huawei.
Backed by proprietary key technologies and a relatively straightforward supply chain, Huawei enjoys an unrivalled position as the market leader in the 5G sector. The situation is different, however, when it comes to things like smartphones. Although the Huawei brand has gained popularity and an enviable share of the global market in recent years, it still relies on a number of European and US manufacturers for its supply of several essential components, including chips and computing platforms. In light of the export ban, many such manufacturers, however, announced they would be ending their commercial relationship with the company.
In Taiwan, the US action against Huawei dealt a blow to the many technology companies that formed part of its supply chain. Consequently, the Taiwanese business community is keeping a close eye on the situation, while considering how best to mitigate its likely impact.
Taiwan's particular vulnerability here is not hard to discern. As personal computers and laptops became ever more ubiquitous on a global basis, the territory nurtured the growth of fully fledged industry chains dedicated to the manufacture of such products. As mobile devices, notably smartphones and tablets, grew in popularity, their dedicated supply chain increasingly overlapped with that of computers, enabling Taiwanese manufacturers to transition smoothly into this new and rapidly expanding sector. As a consequence, Taiwanese companies are now an integral part of the supply chain for many of the leading manufacturers of digital devices, including Apple and Samsung, as well as a number of their mainland-based competitors, such as Xiaomi and, of course, Huawei.
According to data from Guosen Securities, a Shenzhen-based financial-services company, Huawei has about 2,000 suppliers on its roster. While many of these, including Qualcomm, Analog Devices and DHL, are US-based, it also works with 50 Taiwanese manufacturers, with Foxconn, MediaTek and TSMC heading the list.
When it comes to meeting the requirements of Huawei's dedicated smartphone division, a further raft of Taiwan-based companies are key contributors. This long and varied list includes such diverse manufacturers as Largan (optical lenses), FocalTech (touch screen drivers and controllers), Sitronix Technology (display driver IC) and Unimicron (printed circuit boards), Ichia (mobile spare parts), Young Fast (touch panels) and AVC (heat sink assembly).
As tension between Huawei and the US has escalated, share prices of many of these Taiwanese suppliers has, understandably, taken a tumble. Of greater concern to the majority of these companies, though, is rethinking their forward planning and implementing strategies that will allow them to weather this current crisis, while considering how far they should go in complying with the US ultimatum.
Indeed, several Taiwanese businesses including TSMC and MediaTek have already made it clear that they view themselves as exempt from the ban. According to US export control regulations, products "made overseas but with a US content exceeding the prescribed limit" are subject to the ban, with the limit being 25% in the case of Huawei. It is believed that the decision by TSMC and MediaTek to continue supplying Huawei was based on their understanding that this proscribed limit would not be exceeded.
In its most recent move, the US announced on 21 May that it would postpone implementing the ban for 90 days, giving Huawei a brief respite and allowing it to provide support for existing handsets and network components until 19 August. In order to fully exploit this period of grace, it is rumoured that Huawei has placed rush orders with many of its suppliers, suggesting many manufacturers will be obliged to dramatically step up production before this window closes.
Once this deadline expires, however, it is unclear how Huawei intends to source alternative suppliers for the chips and systems that are critical for its manufacturing operation. Should the company's smartphone production lines grind to a halt, there is also a question as to whether the affected Taiwanese producers can fill their orders books by serving other manufacturers in the sector. Understandably, this is the prime concern of many such businesses, with the prospect of having to shutter their own operations a distinct possibility for even some of the larger players.
Robert Kang, Special Correspondent, Taipei