May 24, 2019 / 3:54 AM / 25 days ago

Breakingviews - Isolated Huawei may be shoved into Beijing’s arms

FILE PHOTO: A scratched surface Huawei logo is seen on a smarthphone in this illustration picture taken May 20, 2019. REUTERS/Dado Ruvic/Illustration/File Photo

HONG KONG (Reuters Breakingviews) - A U.S. blacklist could wind up thrusting Huawei Technologies into Beijing’s embrace. Important suppliers including Arm, Panasonic and Intel have been cutting off the Chinese telecom champion following the Trump administration’s ban last week. Extreme endgame scenarios can no longer be ruled out.

    President Donald Trump has signalled he might give Huawei a pass in exchange for broader trade concessions from his Chinese counterpart, Xi Jinping. State-owned rival ZTE, similarly embargoed in 2018, was let off the hook as a pre-condition to talks. Damage has already been done to Huawei, though. The significance of U.S.-sourced intellectual property throughout the supply chain and a laundry list of overseas partners, suppliers and customers has been revealed.

    The costs could be high. Networking equipment that relies on American components will need to be redesigned. Denied access to Google’s app store, Huawei might have to roll out a new smartphone operating system. Sales outside China account for half of Huawei’s $100 billion top line, but being frozen out even puts domestic market share – against rivals such as ZTE and Xiaomi – at risk.

     Huawei has cash to cope, with some $39 billion of it on the balance sheet at the end of last year. That should keep bondholders relatively calm for now, but absent a U.S. policy reversal things are bound to deteriorate.

    Founder Ren Zhengfei could consider selling off parts of Huawei. Under normal circumstances, the handset division, which generated $50 billion of revenue last year, would hold appeal. Its network-gear outfit, which provokes the bulk of American security concerns, is similarly valuable.

    Divestiture might not be enough to satisfy the U.S. government, however, which is beating up Huawei to induce concessions from China. At home, any Huawei carve-up would be seen as capitulation, and play badly for Xi. The same holds true for using layoffs to conserve capital. Huawei employed 180,000 people at the end of 2018, a fifth of them abroad.

    With those options looking shaky at best, Huawei will have to keep its focus mostly at home. That might include more mandated purchase orders from state-controlled companies, and lobbying for tax breaks and other assistance. Long accused of being Beijing’s agent, Huawei may end up its ward.

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