International manufacturing advisor

As I previously wrote in an update to The Huawei Sales Ban: Brrrrr., Huawei’s response (so far) to the U.S. Entity List export ban has been one big “So What?” Huawei claims to have no worries because it inventoried enough U.S. chips and components for another six months of production and by the end of that six months it will have converted its products to Huawei made chips and the Huawei cell phone operating system. Huawei will then be free of U.S. influence. The U.S. is simply forcing Huawei to do what it had been planning to do for years. The U.S. attack on Huawei was inevitable, but Huawei is prepared. The U.S. has fallen into a Huawei trap.

There is surface credibility to Huawei’s story because even before the U.S. ban, Huawei had released a series of 5G based chipsets designed to compete with U.S. and Korean competitors. These chipsets cover most of the telecom field:

  • Kirin 980 chipset for smartphones
  • Balong 5000 chipset for modems
  • Tiangong 5G base station
  • Kunpeng 920 chipset for the Taishan cloud server

So Huawei has it covered, right? The situation is not so simple.

Assume Huawei is able to use its own chipsets as an alternative to U.S. components. This still leaves Huawei with many problems because cell phones use far more components than chips. In a typical Huawei phone, Huawei uses other U.S. components: Micron for flash memory and Skyworks and Qorvo for signal processing are just a couple important examples. The same applies for all Huawei products. U.S. components are used in virtually all Huawei products in virtually all applications. So even if Huawei has truly solved its chip problem it still must find alternatives for various other critical components. Even if there are such alternatives they will need to be integrated into Huawei’s systems and this will be an enormous task. Let’s just say that if Huawei were a publicly traded company (and am I the only one who views it as suspicious that it is not?), I would issue a SELL order on it.

More important is that Huawei has a much deeper issue related to its new set of chips. The designs of Huawei’s new chips are based on advanced RISC machine designs licensed from ARM, an England based company and Huawei itself has announced that its new Kunpeng cloud server chipset is based on RISC technology licensed from ARM. ARM dominates chip design; it is estimated that 98% of the cell phones in the world contain at least one ARM designed chip.

So how does ARM relate to the U.S. ban? ARM is based in England and is owned by the Japanese company Softbank. ARM has no ownership relationship with the U.S. So ARM is not subject to the U.S. export ban. Moreover, ARM does not make chips. ARM licenses the technology and leaves the manufacturing to others. As a non-U.S. company, Huawei’s reliance on ARM is not an issue. Right? Wrong.

BBC news reported yesterday that ARM has informed its employees to cease providing any technology or service to Huawei. See Huawei: ARM memo tells staff to stop working with China’s tech giant.Why would ARM do that? Because ARM technology includes technology licensed from the United States. For that reason, ARM has concluded that ARM is subject to the U.S. ban against Huawei. Moreover, ARM has concluded that it does not benefit from the 90 day reprieve on the sales ban. This is because the reprieve applies to sale of chips and other hardware items. It does not apply to technology licenses. So ARM is subject to an immediate ban.

Over time, ARM may find a way out of this limitation on its business dealings with Huawei. Or the U.S. may on its own initiative propose some solution. But the basic issue remains that an entirely non-U.S. company is immediately affected by the ban. Other European companies that make use of U.S. technology are in the same position.

There have been conflicting reports regarding the response of European chipmakers to the Huawei ban. Some chipmakers have said they will follow the ban, but then they later that same day change their position on this. The U.S. ban applies to hardware components, software and other technology. So the decision requires a careful review of the product to ensure it is clear. Consider the difficulties. Say the product relies on an ARM license. And say the ARM license includes U.S. technology. What is the rule in that situation? No one truly knows. So the current situation is absolute uncertainty now and in the future in probably the most important technical field of the modern economy. The impact is substantial. On Huawei and on its suppliers.

The decisions facing European companies illustrates the point I made in my previous post on the U.S. ban. It is not a just a U.S.-China issue; it is an international issue. The ARM situation shows that a European/Japanese company has been immediately impacted by the decision. Other impacts will follow. For example, Huawei is one of the largest providers of smartphones in the European market. The current U.S. plan will cut future Huawei phones off from Google’s Android system. This will have a huge impact on consumers all over Europe and all over the world. From another viewpoint, European chip and technology companies may see this move by the U.S. as an opportunity to replace U.S. companies in the gigantic Chinese market. But these companies may find this opportunity simply does not exist because U.S. technology is pervasive in the mobile and networking sectors and few (if any) European manufacturers will find its product is free from all U.S. technology. If the product is not “clean,” it cannot be sold to China. From this we can see that the U.S. ban is a fully international issue. The entire world is impacted by the decision. The means virtually every country in the world will need to decide how to respond.

To a large extent this internationalization of the US-China cold war holds true for tariffs as well, where a good number of oor European and Latin American clients have been working with our international trade lawyers in an effort to shift some or all of their manufacturing from China to countries like Vietnam, Thailand, Mexico, the Philippines  — really just about anywhere other than China — in an effort to avoid the U.S. tariffs on Chinese goods. These companies are working with our international trade lawyers to make sure that their products that will be made outside China will be legally viewed as having been made outside China. See Avoiding the New Tariffs on China Products: Watching the Substantial Transformation Sausage Get Made.

Why do European (and Japanese and Australian and Latin American and other country) companies care enough about U.S. tariffs on Chinese goods to seek to move their manufacturing out of China? Because these companies realize that the U.S. tariffs apply to incoming goods from China, regardless of the nationality of the company that has those goods in China. Interestingly enough, not all European companies yet realize this is the case as just yesterday, one of our clients from Europe came to us for a manufacturing agreement for a new product with a new China manufacturer. One of our international manufacturing lawyers asked this client — as we usually do now — whether this client had considered making this new product somewhere other than China to avoid U.S. tariffs. This not unsophisticated company responded that it wasn’t worried about the tariffs because it is European. Further discussion revealed that it planned to sell more than 80% of this new product in the United States and by the end of this phone call, we had connected them (via email) with our International Manufacturing Advisor.

Welcome to the New Normal.

5-23 Update: Just as we expected, more non-US companies have announced that they are severing their ties with Huawei. Panasonic (Japan) has announced that it has stopped shipping certain smartphone components to Huawei and Vodafone and the BT Group, the biggest phone carriers in the U.K., said they are removing Huawei phones from their 5G network plans. See this morning’s article, Dow drops more than 300 points, continuing this month’s slide on trade-war fears.

5-23 Update: AmCham China says “slightly more than 40% [of its members] had relocated, or were considering moving production facilities, outside of China because of tariffs” and yet many in country China consultants continue to insist this isn’t happening! See US firms in China fear ‘retaliation’ against Huawei curbs: AmCham.