Huawei's future is in peril as its problems mount in wake of US crackdown

Things just keep getting worse for Huawei.

Before last month, Huawei's place in the technology industry was defined by its ascent to become the world's second-largest smartphone maker and its sizeable presence in the telecom equipment market.

But now, the Chinese tech behemoth's future is uncertain as it grapples with the repercussions of being blacklisted in the United States over national security concerns a move that will require the company to re-evaluate how it builds its products and conducts business.

Company founder and chief executive Ren Zhengfei said on Monday that its smartphone sales outside of China have dropped by 40% and that Huawei's revenue over the next two years could take a $30 billion hit.

It has also scrapped the launch of its new MateBook laptop as a result of the trade ban and has delayed the release of its foldable Mate X smartphone. (That delay, however, was attributed to the company's decision to conduct additional testing after the issues that plagued Samsung's Galaxy Fold .)

While the long-term impacts on Huawei's business are unclear, experts agree that the path forward will be a difficult one. The company could lose the majority of its overseas market share, and the debacle could result in heightened tensions between US and Chinese companies.

In a nightmare scenario, Huawei could end up like ZTE

ZTE booth REUTERS/Sergio Perez

When asked what a worst-case scenario could look like for Huawei, Patrick Moorhead, principal analyst for technology advisory firm Moor Insights & Strategy, drew a comparison to another Chinese tech giant: ZTE.

Like Huawei, ZTE was banned from purchasing components from US companies last year, a restriction that almost put the company out of business. ZTE was barred from working with US firms in 2018 for violating sanctions on Iran and North Korea, and it suspended all major operations last May before the ban was lifted in July.

The ban nearly caused the company to collapse, and Moorhead said Huawei could find itself in a similar situation because it relies on US companies for so many parts of its business.

Processors from Intel power Huawei's laptops, while software from Microsoft and Google drive its mobile devices and laptops. Broadcom's semiconductors are used in Huawei's telecommunications gear. Firms like Skyworks and Qorvo provide components that power its smartphones.

Moorhead estimates that if the company were to go out of business in a worst case scenario, it could run out of inventory in as little as 90 to 120 days.

Read more: A California-based chip company just took a $2 billion hit following Trump's Huawei ban

Otherwise, Huawei could see a major dip in its mobile market share outside of China. Losing Google's popular Android platform, which powers 86.7% of smartphones worldwide and supports millions of apps, will make it very difficult for Huawei to convince consumers to purchase its mobile devices.

The firm is readying its own operating system to replace Android, but the smartphone market is essentially a two-horse race between iOS and Android. Other entrants that have tried to challenge Apple's and Google's dominance have failed in the past.

Take Microsoft for example, which abandoned its mobile phone platform in 2017 after it failed to catch up to iOS and Android. That example alone leaves analysts skeptical that Huawei will be able to succeed with its own homegrown smartphone software, which will reportedly be called Hongmeng OS.

"If it's the worst-case scenario, Huawei will lose most of its overseas market share," said Mo Jia, an analyst at market research firm Canalys. Jia estimated that in a hypothetical situation under the most dire circumstances, Huawei could see its overseas market share drop by as much as 70%.

Although Huawei's biggest audience is in the Greater China region, where it claimed roughly 33% of smartphone shipments in the first quarter of 2019 according to Canalys, the Europe, Middle East, and Africa (EMEA) region and Latin America are also critical markets. Huawei products accounted for 23.3% of mobile device shipments in the EMEA region during that same period, and 19% of smartphone shipments in Latin America.

huawei global market share Shayanne Gal/Business Insider

It's not just about the fact that Huawei will no longer have access to Google's massive app store and widely-used services. Because its mobile devices will no longer be part of the Android ecosystem, it's unclear exactly how often they'll be updated.

"It's going to be very challenging for Huawei to persuade consumers to choose its products because they don't feel stable," Jia said.

In a comment provided to Business Insider, Huawei said it has reduced its reliance on a single country or supplier in order to continue business "despite any issues we face." Below is the full statement from a Huawei spokesperson:

"Through our long-standing relationship with IBM, Huawei has anticipated risks of difficulties whether manmade or natural to prepare our supply chain. We mitigated reliance on any single country or supplier to ensure business continuity and honor our commitment to our customers despite any issues we face. To survive and thrive in the current situation, Huawei might have to develop our own operating systems and/or other components. However, as Ren Zhengfei recently said, we continue to order from our current suppliers and encourage them to apply for license from the U.S. Government to conduct business with us. Any attempt to place sanctions upon Huawei, either by cutting off our supplies or through restrictions, will not be the end of the company. While the U.S. government is exerting massive pressure on us, we have plans in place to survive the resulting challenges."

The ban could heighten tensions between US and Chinese companies

Regardless of how things turn out for Huawei, the situation will likely have far-reaching impacts on the way companies in the US and China work with one another.

Companies are more likely to reassess their approach to the market given the US government's conflict with Huawei, Moorhead said. A Chinese company, for example, may choose to expand its product offerings in the US at a slower pace than initially planned, and vice versa.

"I do think it makes companies pause and re-think how they will enter China," said Moorhead. "And if you're a Chinese company, how [you] would enter the US."

The ban is more than just a blow to Huawei's business. It represents a broader conflict according to Frank Gillett, a vice president and principal analyst at market research firm Forrester.

Read more: Trump says tech giants like Facebook, Google, and Amazon 'discriminate against' him and colluded with Democrats during his election run

The trade ban that the Trump administration has implemented against Huawei stems from concerns that the company's technology can be used to provide a backdoor to the Chinese government, allegations that the tech juggernaut has repeatedly denied. But Chinese national security and espionage laws have raised concerns over whether the company or any Chinese tech firm would have a choice in the matter.

Two pieces of legislation, the National Intelligence Law and the Counter-Espionage Law, could require Chinese tech firms to hand over data to the government to assist with "intelligence work," as CNBC notes. Plus, the Chinese government is known to play a prominent role in the economy, especially when it comes to technology firms, many of which have implemented Communist party committees in recent years.

"Huawei is just a big symbolic target to the larger issue of fundamentally whether companies and governments think they can trust products built in China," Gillett said.

Huaweis advantages

FILE PHOTO: A Huawei company logo is seen at CES (Consumer Electronics Show) Asia 2019 in Shanghai, China June 11, 2019. REUTERS/Aly Song Reuters

Despite all the controversy surrounding Huawei, the company does have assets working in its favor that could prevent a worst-case scenario.

Huawei charges far less for telecommunications equipment than its competitors, making it a compelling option regardless of ongoing trade conflict and security concerns.

Huawei accounted for 29% of the telecom equipment market in 2018 according to Dell'Oro Group , which specializes in the analysis of the telecom and data center information technology industries.

"The issue is, they're very cheap and they're very effective," said Oliver O'Donoghue, a vice president at market research firm HfS Research. "So it's kind of a catch-22 situation where I think organizations would like to be using a different kit, but they can't. It's too expensive."

While countries such as Japan, New Zealand, and Australia have blocked Huawei's technology, other areas of the world are continuing to use the firm's products or have not yet taken a clear stance. In April, before the US trade ban was announced, the Financial Times reported that Huawei would not be excluded from Germany's plans to build out 5G networks, for example. The United Arab Emirates and India also have plans to work with Huawei on network infrastructure, according to reports from The Wall Street Journal published in February.

Given Huawei's massive global footprint and its reputation as being one of China's largest tech players, it's also unlikely that the Chinese government will let the company deteriorate.

"I have confidence that Huawei will survive in one form or another, given the way the Chinese government and economy are intertwined," Gillett said. "The question is what form it takes in the short run and in the long run."

If Huawei does manage to continue producing phones without US parts, it will likely continue to have a large following in the Greater China region, a market in which Huawei already has a big following and where Google's services are blocked.

"Of course the government will like it and the consumers [in China] wouldn't feel uncomfortable using Huawei's operating system," Jia said. "They don't use Google Search; they don't use Google Maps."

All told, the long-term ramifications of Huawei's blacklisting are unclear, and will likely remain that way for a while. Because global supply chains are very complex and often involve many different companies, there's no definitive way to tell precisely where and how Huawei or its partners will be impacted.

But if one thing is for certain, it's that nothing will be the same for Huawei and the industry as a whole moving forward in 2020 and beyond.

"I don't think they can go back to before Trump," Gillett said. "I think it's finding a new reality. And I think it's up to the incumbent to the US and the Chinese government to work out something new, because it's in the interest of both parties to figure something out."

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