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Trump’s Huawei sanctions underscore U.S. dependency on China tech

Telecommunications firm says it spends more than $1 out of every $7 buying components from U.S. firms.

A woman looks at her phone as she walks past a Huawei store in China. (Thomas Peter/Reuters)

U.S. suppliers to China-based Huawei would be affected quickly if a ban on exporting hardware and services proposed by the U.S. Commerce Department on Wednesday goes into effect.

The telecommunications company said Thursday it spends more than $1 out of every $7 of its annual $70 billion procurement budget buying components from U.S. firms. Huawei is dependent on U.S. suppliers for components including wireless chips, antennas and handset operating software, meaning the ban could also cripple its ability to continue producing the latest equipment.

Huawei immediately pushed back against the directive, which has not yet taken effect, saying it threatens U.S. jobs.

“This decision is in no one’s interest,” spokesman Chasen Skinner said in an email. “It will do significant economic harm to the American companies with which Huawei does business, affect tens of thousands of jobs, and disrupt the current collaboration and mutual trust that exist on the global supply chain.” He didn’t respond to a request for further comment.

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Highlighting the risk to American companies, investors punished several Huawei suppliers Thursday by selling off shares. Little-known network gear manufacturer NeoPhotonics’ stock price closed down 21 percent, while semiconductor firm Qorvo was off 7.1 percent. Qualcomm fell 4 percent.

Those stock prices fell following the Trump administration’s decision Wednesday to add Huawei and about 70 affiliates to its so-called “Entity List," which precludes the company from acquiring equipment from U.S. firms without government approval. It’s the latest broadside to the Shenzen-based company, which U.S. officials have said represents a security threat because of its ties to the Chinese government. Huawei has denied those allegations.

The company has been in U.S. crosshairs for years over claims it could use its network equipment to spy on foreign nations, prompting network providers AT&T and Verizon to ban the sale of Huawei handsets. In its statement Thursday, Huawei said it would “seek remedies immediately” and “endeavor to mitigate the impacts of this incident.”

Such trade bans can be crippling. Trump last year restricted ZTE, another Chinese telecommunications company, from doing business with American firms over violating U.S. sanctions with Iran and North Korea. That effectively prevented the firm from manufacturing new equipment. The administration ultimately lifted its limits on ZTE, which agreed to pay a fine and restructure its management.

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Representatives for U.S. suppliers, who did not want to be identified, said they were unsure about the lasting impact of the Huawei ban on their operations.

Those companies and potentially dozens of others would have to apply to the government for special consideration to continue supplying Huawei, said Center for Strategic and International Studies adviser William Reinsch, a former Commerce Department official in the Clinton administration.

“That doesn’t mean every license would be denied, but it would be on a case-by-case basis,” he said. “It also gives the government an intelligence bonanza” in the form of a list of every U.S. supplier to Huawei.

Foreign companies that rely on U.S. firms for 25 percent or more of their components probably would also be subject to the disclosure requirements, said Reinsch.

Customers using Huawei’s mobile handsets could also face disruptions in their operating software, industry observers said. The company relies on Google’s Android software and licenses certain Google apps, such as those for mapping, in its markets outside of China, said Chetan Sharma, a wireless industry consultant.

Huawei may not be able to get updates to those apps or allow customers to access the Play app store if Google is not granted a reprieve from the Commerce Department order, Sharma said. “It would start to impact new handset sales very quickly,” he said. “Huawei would essentially be a sitting duck.”

In-app purchases could be rendered impossible if transactions routed through Google’s servers aren’t permitted.

Google spokesman Colin Smith said he didn’t have an immediate comment.

Attempts by other firms to create a third operating system to compete with Android’s or Apple’s iOS have largely fallen flat in the Western world, meaning Huawei would have few options to make its mobile phones relevant to customers.

There was broad confusion, though, on exactly how the restrictions on Huawei might work. One supplier representative, who spoke on the condition of anonymity, said, for example, that U.S. chips made in Taiwan could still be sold to Huawei, even though they were designed by U.S. companies. That would spell good news for U.S. chip makers that supply Huawei. It would also be a relief to Huawei, because chip design is one area in which Chinese companies still lag behind the United States.

Nelson Dong, a partner at law firm Dorsey and Whitney, disagreed with that assessment. A chip designed mostly within the United States would make it a U.S. product, even if the chip itself was manufactured elsewhere. “It’s a product made from U.S. technology," he said, and therefore would be prohibited to companies on the entity list. Even so, he said, some companies decline to sell to customers who are on the restricted list, even if the sale could be defended legally.

Most U.S. technology companies have compliance departments that maintain lists of customers restricted by U.S. export sales. Before selling technology products, it’s common to run the customer through a database to ensure the sale doesn’t violate any U.S. restrictions. As of Thursday, Huawei had not officially been added to the list of restricted companies. Companies may have already started scaling back production in anticipation, experts said.

The Chinese company and a top executive are also being prosecuted for allegedly violating the U.S. sanctions on Iran and for stealing trade secrets from competitors and partners. The ban on exports to Huawei could be used as leverage in settlement talks over Huawei’s criminal case, the supplier representatives said.