The Washington PostDemocracy Dies in Darkness

Huawei supply ban roils stocks as U.S. companies begin to cut off China tech giant

Google’s announcement puts future access to popular apps such as Gmail, YouTube and Chrome in doubt. Huawei founder defiant in the face of U.S. action.

An Android logo on a Huawei phone. (Marko Djurica/Reuters)

U.S. companies began complying Monday with a White House order to curb sales to Chinese telecom giant Huawei, sending U.S. technology stocks sharply lower and signaling what’s likely to be widespread fallout that will hurt not only one of China’s most important companies but also suppliers in the United States and consumers across the globe.

With $105 billion in global sales last year, Huawei has a vast web of customers and suppliers on nearly every continent. The company is the world’s largest provider of equipment used in 5G telecom networks, and the second largest seller of cellphones. Last week, Huawei said that it spends more than $1 out of every $7 of its annual $70 billion procurement budget buying equipment from U.S. companies.

Google said it would restrict Huawei’s access to future updates of its Android operating software, which powers many of Huawei’s phones. Other U.S. manufacturers also began suspending business dealings with the Chinese firm.

The markets punished many of those suppliers Monday, including Intel, Broadcom and Qualcomm, as well as Micron and semiconductor manufacturer Cypress. Chip makers Qualcomm and Broadcom fell 6 percent. Intel declined nearly 3 percent, and Lumentum Holdings shares fell more than 4 percent after the company said it would stop selling to Huawei.

The United States said last week it was adding Huawei to a trade blacklist because the company “is engaged in activities that are contrary to U.S. national security or foreign policy interest.” That punishment means U.S. firms aren’t allowed to sell to Huawei unless they get special approval from the government.

How China’s Huawei took the lead over U.S. companies in 5G technology

On Monday evening, the Commerce Department slightly eased the timing of the restrictions, saying it would allow some transactions to continue for 90 days, to facilitate “certain activities necessary to the continued operations of existing networks and to support existing mobile services.” The temporary reprieve will allow Huawei to receive U.S. equipment to service existing Huawei mobile phone users and rural broadband networks.

Kevin Wolf, a former senior Commerce Department and current partner at Akin Gump, called the reprieve “very narrow.” “It’s not relief for exporters. It really is to prevent unintended operational problems with existing networks,” Wolf said.

The United States views Huawei as a security risk because it believes the company has close ties to the Chinese government, which Huawei has denied. U.S. officials have said Huawei could potentially tap into and monitor sensitive U.S. communications through its network technology.

Ren Zhengfei, the founder of Huawei, said that the U.S had underestimated his company as he sought to dismiss the impact of the ban.

“The current practice of U.S. politicians underestimates our strength,” Ren said in a group interview with Chinese media Tuesday morning. Huawei had a stockpile of chips and “can’t be isolated” from the world, he said.

China's foreign ministry says the country continues to attract investors despite President Trump’s claim that his tariffs are causing companies to move away. (Video: Reuters)

The 90-day extension “doesn't mean much” and Huawei is fully prepared for the American actions, Ren said, even appearing to brag about luring workers away from U.S. companies.

“We are very grateful to the U.S. companies. They have made a lot of contributions to us,” he said in the comments, which were shared in real time by state media. “Many of our consultants are from American companies like IBM.”

Earlier, Huawei reacted to Google’s decision to stop allowing updates by saying the Chinese company had “made substantial contributions to the development and growth of Android around theworld.”

“As one of Android’s key global partners, we have worked closely with their open-source platform to develop an ecosystem that has benefitted both users and the industry,” said spokesman Joe Kelly, adding that Huawei would continue to provide security updates and after-sales services to its existingsmartphone and tablet products.

Google’s announcement came at an awkward time for Huawei, which on Tuesday is expected to unveil its Honor 20 series of smartphones in London, and security experts were divided on how quickly and severely the ban could hurt Huawei.

Some said Huawei is bigger and better prepared for the blockade than its Chinese competitor ZTE was last year when the Trump administration restricted ZTE from doing business with U.S. firms. The U.S. later eased ZTE’s punishment.

Trump administration cracks down on giant Chinese tech firm, escalating clash with Beijing

Unlike ZTE, Huawei makes some of its own semiconductor chips, and Huawei can tap alternative, non-U.S. suppliers for some parts and technology, analysts said. “There are very few [parts] they can’t just buy from Japan or Korea or France today,” said Dave Burstein, a telecom analyst for STL Partners who recently began publishing Huawei Report & News.

Huawei also has about $38 billion in cash and short-term securities it can tap to weather the storm, Burstein noted. And recent quarterly earnings reports from some U.S. tech firms have suggested that Huawei may have been stockpiling parts before the White House ban, in anticipation of a possible blockade, Burstein said.

Other analysts took a dimmer view of Huawei’s prospects. “They are still heavily, heavily dependent on U.S.-based companies for multiple different technologies,” said Geoff Blaber, vice president of research at CCS Insight.

Among the U.S. products Huawei most relies on, analysts said, is a semiconductor device called a Field Programmable Gate Array, or FPGA, which Huawei uses to build 5G telecom equipment. Huawei also relies on a type of U.S.-made software used to design high-end semiconductor chips, analysts said.

Google said it would restrict Huawei’s access to future updates of its Android operating software. But Huawei can still update Android itself because the software is open-sourced, meaning the source code is publicly available and can be accessed freely.

Existing Huawei devices that have Google apps and services should generally work normally and updates will still be provided, a person familiar with the matter said.

“While we are complying with all U.S. government requirements, services like Google Play [and others] will keep functioning on your existing Huawei device,” Google said in a statement on its Twitter account.

U.S. officials planning for a future in which Huawei has a major share of 5G global networks

But Google is suspending licensing agreements with Huawei for access to its Play app store, meaning future Huawei customers won’t have popular Google apps such as Gmail, the Chrome browser and even YouTube. That would make future Huawei handsets very unattractive with rival devices offering the full set of Google apps.

“A smartphone without an app store is a paperweight,” said Roger Entner, an analyst with Recon Analytics, who focuses on wireless. “Huawei is extremely popular around the world, but there are many other options for consumers, so the choice to go with another handset should be easy.”

Huawei has indicated it has its own proprietary operating system it could use to replace Android, which by some estimates commands nearly 70 percent of the market for mobile operating systems globally. But Huawei would also need to persuade app developers to produce versions that would work on Huawei’s proprietary system.

Huawei sold about 200 million phones last year and was on pace this year to overtake South Korea’s Samsung as the world’s largest seller of mobile phones. That possibility would seem more remote, however, if the most popular Google apps remain unavailable to new Huawei customers. According to data released before the U.S. government listing, Huawei claimed 19 percent of the global smartphone market, research firm IDC said, trailing only Samsung’s 23.1 percent, which was on the decline.

One former Huawei executive, who asked not to be named to discuss internal company matters, said Huawei has spent years planning for a possible U.S. technology blockade. “When I was there there were a lot of concerns about this throughout the company,” the former executive said. “They were trying to take steps to buffer this kind of existential threat.”

In additional to attempting to develop their own phone operating system to replace Android, Huawei invested heavily to design and manufacture more of its own chips, the former executive said.

Still, the U.S. ban could be “catastrophic” for Huawei, the former executive said. “I just don’t think you can properly prepare.”

Anna Fifield, Hamza Shaban and Thomas Heath contributed to this report. Fifield reported from Beijing.