Huawei CEO says further U.S. restrictions could open ‘Pandora’s Box’

Huawei's 2019 was marked by the events of May 16 when the U.S. government placed it on the “entity list.” (Huawei)

The image behind Huawei’s rotating CEO Eric Xu as he delivered the company’s annual report could be metaphorical, describing Huawei’s 2019 experience.

“2019 was a very challenging year for Huawei,” said Xu at the videoconference of his earnings presentation. He attributed much of the company’s problems to the events of May 16, 2019 when the United States Department of Commerce placed Huawei and 70 of its affiliates on the Bureau of Industry and Security’s (BIS) “entity list,” effectively banning the company from buying components from U.S. companies without government approval. 
 
RELATED: Commerce Dept. bans Huawei, 70 affiliates from sourcing U.S. components

One of the most immediate effects of the entity list was that Huawei’s smartphones no longer had access to Google’s Android operating system.

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“The consumer business outside of China was growing very fast before May 16 and declining very fast after May 16,” said Xu. “The impact on Huawei’s consumer revenue outside of China was at least $10 billion.”

Xu gets testy

Ever since the Trump administration has targeted Huawei, asserting that the vendor poses a security risk to telecom networks, the Chinese company has tried every tactic available to defend itself. It’s tried appeasement, reasoning, threats, counter-strikes, and public relations campaigns. But in today’s earnings call, Xu seemed quietly menacing.

When asked what he thought of a Reuters report that the Trump administration was preparing further restrictions on the supply of semiconductor chips to the company, Xu said, “I think the Chinese government will not just stand by watching Huawei to be slaughtered on the chopping board, and I believe the Chinese government may also take some counter measures.”

He suggested the Chinese government might ban the use of American chips and American smartphones in China. Xu said in the short term, Huawei could look to chipsets from suppliers in China, Korea and Taiwan, and in the longer term “if Huawei was denied access to chip manufacturing, I believe there would be many Chinese companies that would start working on chipsets.”

This is something that American semiconductor companies, along with Apple, do not want to happen. And earlier this year, even the U.S. Department of Defense briefly opposed further restrictions of Huawei’s chip supply chain, saying it would ultimately hurt U.S. semiconductor companies, which the Pentagon relies on. But the DoD ultimately dropped its objections.

Xu said if the Chinese government decided to retaliate against the U.S. it would be a “Pandora’s Box” that would lead to the “catastrophic destruction to the global industry chain, and it’s not going to be just the one company of Huawei that could be destroyed.”

Huawei’s 2019 numbers

The company reported its net profit grew 5.6% year over year to $9 billion. And it reported revenue of $123 billion, an increase of 19.1% year over year. While these numbers are positive, they show a slowing of growth during the year, compared to 2018 when net profit grew 25%.

RELATED: Despite U.S. security concerns, Huawei's profits increase by 25% in 2018

Its consumer business grew at 34% year over year, while its carrier business only grew 3.8%, and its enterprise business grew 8.6%. The company shipped over 240 million smartphones in 2019.

Huawei chart 1

Growth by region was interesting. Huawei reported that growth in the Americas increased 9.6% during the year, but its growth in Asia Pacific declined by 13.9%. Although the company has a reputation for leading the charge in Africa, its growth in Europe, the Middle East and Africa increased by only .7%. Not surprisingly, Huawei reported year-over-year growth in China of 36.2%

As a Chinese private company, Huawei is not subject to reporting laws of the U.S. Securities Exchange Commission or any other similar agency. But it voluntarily reports its earnings and says that the numbers are independently audited by the accounting firm KPMG.

2020 forecast

Xu said 2019 “was probably the most difficult year for Huawei,” but at least the company enjoyed fast growth before May 16. He said 2020 will be harder because the company has begun to deplete its stock-pile of inventory.

“It’s going to be the most difficult year for Huawei, because we will be subject to entity listing throughout the year,” he said. “Therefore 2020 is going to be a very crucial year to test whether Huawei’s supply continuity program can really work. On top of that the outbreak of coronavirus is something unexpected. It brings about new unexpected challenges. In 2020 we will try everything we can to continue to survive so we can release our 2020 annual report at the same time next year.”

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