Huawei’s smartphone supply chain reveals reliance on US technology
Aug 20, 2019
Huawei has been given another 90-day reprieve that allows the Chinese telecommunications equipment giant to purchase components from United States companies to supply existing customers, the US Department of Commerce announced on Monday.
The extension of the reprieve “is intended to afford consumers across America the necessary time to transition away from Huawei equipment, given the persistent national security and foreign policy threat,” said the department in a statement.
While renewed access to US suppliers has given Huawei more breathing room, a closer look at Huawei’s smartphone supply reveals glaring vulnerabilities. Despite its efforts to find alternative sources or build in-house replacements, the hardware giant still relies heavily on American sourcing.
Temporary relief not enough
On May 16, the Trump administration put the company on a trade blacklist barring it from buying parts and technology from American companies. The US government then issued a “temporary general license” for exports to Huawei to maintain its existing production, effective from May 20 through August 19.
Under the shadow of US sanctions, Huawei reported a 23.2% year-over-year increase in revenue for the first half of the year last month.
But the company was not cheered by the growth. Chairman Liang Hua warned that its consumer business, which contributed 55% of revenue in the first half, would face huge difficulties in the following months.
In January, the company announced its ambitions to overtake Korea’s Samsung to become the world’s biggest-selling smartphone vendor by the end of this year. The company surpassed Apple in smartphone sales last year after shipping over 200 million units.
However, in June, Huawei announced that it had given up on fulfilling this ambition because of the US sanctions.
That same month, Bloomberg reported that Huawei was preparing for a 40% to 60% decline in international smartphone shipments.
Analysts have attributed the loss of international market share to Google’s restriction on Huawei’s access to its Android operating system and apps. A recent teardown, however, of Huawei’s newest 5G-enabled handset shows that some US-made components are also critical for Huawei’s smartphone production.
The keys to a 5G smartphone
Most of the parts found on the motherboard of Huawei’s Mate X 20 5G are made by the company’s in-house chipmaker HiSilicon and other Asian manufacturers. There are, however, a few key components that enable the phone’s 5G connectivity are made by US companies, according to iFixit, a computer repair company based in the US.
The teardown shows that the phone’s radio frequency (RF) front-end chips, the key communication module that connects a phone between the RF transceiver and the antenna, are made by two American companies.
These include a middle/high-band front-end module made by Qorvo, a North Carolina-based chipmaker, and a low-band front-end module made by the Massachusetts-based Skyworks.
It could prove hard for Huawei to find alternative sources to these components. According to Southwest Securities, a Chongqing-based securities firm, the market is currently dominated by Broadcom, another American semiconductor manufacturer, Skyworks, and Qorvo with market shares of 29%, 28%, and 18% respectively.
While these three American companies have a combined 75% share of the RF front-end chip market, the third-largest player, Japanese electronics company Murata with 22% of the market, is also likely to be bound by the US restrictions.
The Tokyo-based company, whose 5% of sales come from Huawei, said in May that it had been looking into the implications of US ban on Huawei, according to the Japan Times.
“American suppliers usually have more advantages in some key components for 5G phones, such as RF front-end chips,” said Will Wong, a Singapore-based analyst at research firm IDC.
“I believe Huawei can find alternatives to these RF front-end chips, but it will take time for it to find sources that can compare favorably with American supplies in terms of stock and quality,” he said.
Though US-made components only make up a fraction of the Huawei phone, they contribute to a large proportion of the phone’s costs. Another teardown by Tokyo-based research firm Fomalhaut Techno Solutions of Huawei’s P30 Pro, the company’s newest flagship model, shows that while US components account for less than 1% of the phone’s parts, those components add up to over 16% of the cost of all parts, according to Nikkei Asia Review.
Uncertainty keeps consumers away
Despite being granted the extended reprieve, the cloud of uncertainty still hangs over Huawei.
In addition to the Monday announcement, the Commerce Department also added another 46 Huawei affiliates to the entity list, hinting that the US government is not completely dropping the pressure on the company.
Before the first 90-day reprieve’s expiration, Huawei on August 9 unveiled its long-awaited in-house mobile operating system HarmonyOS, which many have speculated will be their Android replacement.
At the launch of the new OS, Huawei’s consumer business group chief Yu Chengdong demonstrated a wide range of devices on which the company plans to install the system, including personal computers, smartwatches, and virtual reality glasses.
But he didn’t mention any plan to install it on smartphones. Later, he told reporters that HarmonyOS is ready to run on phones and migrating from Android to HarmonyOS would only take a few days if the company had to.
Huawei didn’t want to harm its relationships with Google at that time since the results of the US restrictions were still uncertain, according to Wong.
That uncertainty also dampened consumer confidence in overseas smartphone markets, said Wong, adding that consumers don’t want to run the risk of losing access to popular Google services on their Android phones.
Huawei’s smartphone shipments in Europe tumbled 16% year on year in the second quarter, according to market research firm Canalys. By contrast, the company’s smartphone sales in Europe saw a 50% yearly surge in the first quarter.
The dramatic decline has indicated how smartphone consumers are sensitive to such uncertainty, given that Huawei’s smartphones were not affected by the US in most of the time in the second quarter.
“Huawei will find it difficult to operate in the overseas smartphone markets in the short term, no matter how the US ban ends up with,” said Wong.