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Huawei crackdown

Huawei posts bullish earnings but tamps down enthusiasm

Tech giant defiant as specter of Android cutoff looms over second half

  © Reuters

SHENZHEN/TAIPEI -- Huawei Technologies warned Tuesday of "challenges ahead" due to the U.S. crackdown on exports to China's biggest tech company, despite posting a strong first half with revenues jumping 23%.

The world's second-largest smartphone maker, which was blacklisted by Washington in May and restricted from trading with vital U.S. suppliers, said the action would hit its overseas consumer electronics business in the second half.

While suppliers had resumed certain shipments and technical support, this was "only limited to nonessential components," company chairman Liang Hua said Tuesday. Huawei was still cut off from Google's Android operating system, which was vital to smartphone deployment overseas, he added.

"We don't know if we can use Google's Android system in future. If we can use it later, that will definitely be our top choice... But if we can't, we will have our own backup plan," Liang said, referring to the company's plans to develop its own operating system. "We do see a lot of challenges ahead for our consumer electronics business but we think we can survive after all."

Liang said that while overseas sales had fallen significantly after the U.S. blacklisting, they had recovered to "80% of the level before the restriction."

Liang's comments came as U.S. trade officials met with their Chinese counterparts in Shanghai for the latest round of talks aimed at resolving the trade war which has seen billions of dollars in tariffs imposed by both sides. The crackdown on Huawei is likely to be discussed.

China's tech champion delivered a robust performance in the first half despite the effect of the trade war, thanks in part to its rapid action to stockpile crucial components. Huawei turned in a 23.2% increase in sales in the first six months to 401.3 billion yuan ($58.23 billion). The net profit margin of 8.7% compared with 8.2% for 2018.

Total smartphone shipments climbed 24% on the year to 118 million units in the first half of 2019. However, a closer examination of the quarterly performance shows that growth slowed significantly in the second quarter as the U.S. campaign intensified. Huawei shipped 58.9 million smartphones in the April to June quarter, about 9% annual growth, much weaker than the 50.3% year-on-year increase it enjoyed in the three months to March.

The company's server-related business also took a hit from the U.S. restrictions, with revenues falling 24% year-on-year.

But Huawei's deliveries of fifth-generation base stations are on track, Liang said. The chairman said the company also received 11 new contracts for its telecom equipment despite the U.S. new trade constraints in May, for a total of 50. In a bid to help Huawei prove its technology, the Chinese government granted earlier-than-expected commercial 5G licenses to its major carriers in early June, as a key accelerator for the rollout of the next generation mobile network.

A point working in Huawei's favor is the fact that so far, while the Android issue could prove a major blow, the U.S. crackdown has otherwise proved less of a hindrance to doing business with the company than many expected, according to a parts maker that does business with the company.

The ban applies to any product containing more than 25% American technology, which should cover most of what U.S. companies sell to Huawei. But this has not always been the case in practice, as views are split about whether the use of American chipmaking equipment, for example, counts toward that.

U.S. chipmaker Micron Technology "lawfully" resumed some shipments to Huawei in June. It did not provide details behind its reasoning, but industry watchers say it contends that the restrictions can be interpreted to exclude products made outside the U.S., even if produced by an American company. Intel has reportedly continued supplying chips to Huawei based on similar logic.

While British chip design house Arm, a unit of Japan's SoftBank Group, has said it will abide by U.S. regulations, it has reportedly kept up most of its dealings with Huawei. Some Japanese and Taiwanese suppliers that initially put shipments on hold have resumed them after determining that they were not violating the 25% rule.

Huawei's performance was also helped by preparations the company made for the clampdown after its chief financial officer was arrested at the end last year. It had stockpiled some 12 months worth of crucial components as a buffer against any U.S. action, the Nikkei Asian Review first reported.

The Chinese company had also been put on alert by the moves against its smaller local peer ZTE, which was forced to cease operation for months after the U.S. cut its supply of American technology last April. Washington had claimed that China's second biggest telecom equipment maker had violated sanctions on Iran.

Finally, Huawei received strong consumer support for its smartphone business at home. The group now commands a record-high market share of 38% in China, with more than 37 million smartphones sold in the home market during the April-to-June period, according to Canalys, the market research group. Huawei's rivals, Oppo, Vivo, Xiaomi, and Apple, the top five vendors in the market, all saw a double-digit drop in Chinese shipments for the April-June period from a year ago.

Yet this would not be enough to offset the potential difficulties ahead, said Chiu Shih-fang, a veteran smartphone and supply chain analyst at Taiwan Institute of Economic Research.

"One of the biggest challenges ahead for Huawei in the second half of this year and beyond is whether the company has access to Google's Android service and other American components," she said. "The ban on using Android will continue to affect Huawei's consumer electronics business going forward unless it is eased. Huawei can build its own OS and ecosystem but that doesn't happen overnight."

Huawei's chairman said the group was making progress in addressing the vulnerabilities in its supply chain identified as a result of the U.S. crackdown. Those "holes," as Liang called them, had mostly been dealt with in the networking business, while issues remained in the consumer electronics division.

"We dropped some products that were not that essential to our business as we continue to patch holes in our supply chain," Liang said. "We think we can still maintain growth for the whole year, but can't specify numbers as there are still uncertainties."

The company will invest another 120 billion yuan for research and development this year, according to Liang.

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