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Huawei crackdown

Exclusive: Huawei stockpiles supplies, fearing new US tech ban

China's biggest telecoms company asks Asian suppliers for up to a year's inventory

Ren Zhengfei, Huawei's founder, has claimed the impact of any new US tech ban against China's biggest telecoms company "would not be very significant"  (Nikkei montage/Reuters)

TAIPEI -- Huawei, the Chinese telecoms giant that Washington views as a global security threat, is scrambling to stockpile up to a year's worth of foreign supplies for its core telecoms equipment business ahead of a widely-expected toughening of U.S. technology sanctions that may come as soon as next month, multiple sources told the Nikkei Asian Review.

The new U.S. measures, which Huawei and its suppliers fear could amount to a U.S. technology quarantine of the world's largest telecoms equipment maker, underlines how the two countries' battle for global technological and military supremacy continues unabated even though Washington and Beijing signed a phase one trade deal last week.

In a sign of how seriously Huawei is taking the risk of an outright U.S. ban, sources said the company, which has a roughly $70 billion global procurement budget, was prioritizing inventory for its more strategic 4G and 5G routers, switches and base stations businesses over its smartphones operation.

Washington has focused on Huawei's 5G equipment business as being its main security concern as it fears that its widely used base stations could be hacked by Chinese spies via so-called backdoors, thereby compromising entire telecommunications networks. Huawei has consistently denied that it poses a security risk.

"It is [also] easier for Huawei to stockpile components for its telecoms equipment business as that does not require as many [imported] components as its smartphones," one source familiar with Huawei's thinking said. In 2019, Huawei shipped 240 million smartphones compared to millions of base station units.

Huawei's smartphones business, the world's second largest by shipments, accounted for half of the company's global revenues of 850 billion yuan ($124 billion) last year, but overseas sales were hit by a Washington ban last May on its use of Google mobile services, including Google Play. This gives consumers access to popular Android-based apps such as Google maps and Gmail.

Although there are no details about the scope or timing of the widely rumored tightening of sanctions, two sources close to Huawei said the company anticipates it could happen next month.

One factor that may weigh on the timing is that Meng Wanzhou, Huawei's chief financial officer and daughter of the company's founder, is in a Canadian court this week for a hearing that will determine whether she will be extradited to the U.S. to face charges of fraud and Iranian sanctions busting.

Donald Trump, the U.S. president, said in 2018 that he might intervene in the case if it were in the interest of national security or would help close a trade deal with China. Trump recently said he would visit Chinese President Xi Jinping in Beijing soon, to start talks on a phase two trade deal.

Ren Zhengfei, Huawei's founder and CEO, said on Tuesday at the World Economic Forum in Davos, that his company was ready for any tightening of sanctions and their impact "would not be very significant."

Huawei declined to comment for this story.

Any new measures from Washington would escalate a first round of U.S. restrictions put in place last May. These required companies such as Qualcomm, Intel and Microsoft to seek exemptions if they sold products to Huawei or its sanctioned affiliates.

U.S. companies that moved production offshore, or foreign companies such as ARM Holdings, the leading chip design company that is controlled by Japanese conglomerate SoftBank, would also have to seek an export license under the so-called de minimis rule if they sold products with more than 25% American content.

Huawei had also stockpiled foreign supplies ahead of that move, but in the end the restrictions had little substantive or lasting effect, except on sales of its latest smartphone models outside of China.

For one, U.S. tech companies found ways to continue sales while remaining compliant with the rules.

Second, Asian suppliers to Huawei such as Taiwan's TSMC, the world's largest contract chip maker and also Apple's largest chip supplier, have less than 25% American content in the components they sell to Huawei.

Now, however, sources told Nikkei they fear that the mooted new rules could lower the content threshold to 10% or even 0% -- as tough a level of sanctions as that faced by Iran.

Furthermore, industry sources, Asian government officials and lawyers believe the ban could be extended to include U.S.-made equipment from companies such as Applied Materials, Lam Research and KLA Group that is used to manufacture chips.

Harry Clark, a Washington-based lawyer and chair of Orrick international trade and compliance group, told Nikkei he was aware that "the U.S. government may soon adjust these rules to expand the scope of items that are subject to Export Administration Regulation, at least with respect to transfers to export-sanctioned Huawei entities."

Clark added that: "We understand that the U.S. government is [also] considering expanding the types of microelectronics hardware, including production equipment ... to be covered by EAR controls."

An expanded ban would hit a wider array of U.S. companies such as Corning, which supplies glass to Huawei for its smartphones, as well as Asian suppliers such as Sony, liquid crystal display maker Japan Display, South Korea's LG Display and Samsung, as well as Taiwanese contract chip makers TSMC and United Microelectronics Corp.

"We have looked at the worst-case scenarios," an executive from UMC, which indirectly supplies Huawei, told Nikkei. TSMC chairman Mark Liu has also said his company is ready to "deal with [any] new export control regulations."

Some U.S. hawks are reportedly seeking an outright quarantine on all sales to Huawei, several industry and government sources said. They may even be seeking to ban all U.S. technology sales to China, though no consensus exists on the issue in the White House, the Wall Street Journal recently reported.

Even if sanctions are not tightened, the possibility that they might be has already had widespread effects.

For one, Asian suppliers say the recent spike of Huawei orders has warped their production schedules out of shape.

"Huawei's team are quite credible and mostly keep its promises. ... That's why we have helped them expand," said one tech industry executive. "But we are also concerned that it might suddenly scale back its orders at some point."

Another executive at a Huawei supplier added: "We have been a bit conservative in customizing production for Huawei too much in case the company adjusts it orders and later we need to find other clients."

Second, the prospect of tighter sanctions has increased the urgency with which Huawei has pushed suppliers to increase production in China -- just as Washington is doing much the same. It has pressed TSMC to relocate production of its U.S. military-grade chip making facilities to America, as Nikkei previously reported.

New Kinpo Group, a contract manufacturer for British household goods company Dyson and U.S. computer maker HP, is building a new production complex for Huawei in the Chinese city of Yueyang, according to a high-ranking supply chain source.

Huawei has also asked Unimicron and Nan Ya Printed Circuit Board, both leading printed circuit board providers, to help it build new production capacity in China that will make high-specification materials used in 4G and 5G base stations, servers and switches.

"There is a clear trend that Huawei is asking many suppliers, if they can, to just move their production into China," another Huawei supplier executive told the Nikkei. "They think that's the safest way is to produce as many components on Chinese soil."

Washington has pressed the U.K. to exclude Huawei from its 5G build-out, arguing that it would jeopardize intelligence sharing; the British government is debating what to do. The Huawei issue has also become a hot topic in Germany.

Analysts warn that if the playbook continues as it has until now, the result would be an isolated Huawei, shut out of the U.S. and perhaps western Europe as well. But at the same time, the company could sweep up China's domestic market, Beijing-friendly countries in Asia, Africa, the Pacific islands and, perhaps, Latin America with its cheaper gear.

The result of this decoupling would be a world operating two parallel internet networks or, as Terry Gou, founder of Foxconn, the world's biggest contract electronics manufacturer, has called it: "one world, two systems."

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