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U.S. Department of Defense suspends further sanctions on Huawei

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On the New Year’s Eve of the Chinese Lunar Year, due to joint opposition from the US Department of Defense and the Treasury Department, the US Department of Commerce withdrew a proposal to further restrict US companies’ supply to Huawei.

Earlier, Huawei was included in the entity list by the US Department of Commerce’s Bureau of Industry and Security (BIS), and a large number of US suppliers, including Google, were banned from doing business with Huawei. Despite three 90-day temporary licenses, Huawei is still on the physical list.

However, the regulations at the time were flawed, that is, if the proportion of goods manufactured in the United States was less than 25%, they would not be affected by the export ban and could be sold to Huawei without applying for a license. The so-called “further” is that the US Department of Commerce intends to reduce 25% to 10% in order to modify this loophole.

Such changes will extend the limits beyond sensitive types of technology, including widely used US software, chips and other components.

After being jointly opposed by the US Department of Defense and the Treasury Department, this proposal was eventually withdrawn by the Commerce Department.

Why did the Ministry of Defense and the Ministry of Finance jointly oppose the Ministry of Commerce?

Before answering this question, you need to understand the different responsibilities between the US Department of Commerce, the Department of Defense, and the Treasury.

The US Department of Commerce is responsible for US international trade, import and export controls, and trade remedy measures. Including statistics and publication of economic data, control of import and export commodities, management of foreign direct investment and foreign tourism, conducting various economic surveys, social surveys, patent management, etc.

The U.S. Department of Defense is a division of the United States of America’s government. It is also the office where the President of the United States leads and directs the entire military. However, the Department of Defense also plays an important role in science and technology.

The United States Department of Defense research institutions include the Defense Advanced Research Projects Agency, Defense Laboratories, Research and Development Centers, and Test Centers. The United States Department of Defense scientific research institution has an independent legal person status, and the Department of Defense directive requires it to perform the functions of “science and technology, engineering development, engineering support and modernization of deployed equipment”.

This makes them not only positioned at the front end of equipment development, that is, the discovery of scientific knowledge, the invention and creation of technology, but also the middle and back end of equipment development, participating in equipment development, procurement, operation and maintenance.

The US Treasury is a cabinet department of the US government. The main tasks are to deal with the federal financial affairs, taxation, bond issuance, debt repayment, supervision of currency issuance, formulating and recommending policies on economic, fiscal, tax and treasury revenue, and conducting international financial transactions. The Secretary of the Treasury has a very high position in the President’s Cabinet, ranking second after the Secretary of State (equivalent to the Prime Minister).

Regarding further restrictions on Huawei, the Department of Defense’s concern is to restrict the business exchanges between US companies and Huawei, leading to a decline in research funding and not conducive to the technological competitiveness of US companies.

If the investment in research needs to be maintained, the Department of Defense and even the US government need to increase more budgets. The U.S. Treasury Department’s reason is simpler, that is, it is afraid of affecting the income and profits of related US companies. At the end of 2018, Huawei announced a list of 92 core suppliers, of which 33 were in the United States, accounting for the highest proportion.

Companies such as Intel, Qualcomm, Broadcom, Micron, Scarlett, Corvo, Xilinx and Xinfeitong are Huawei’s important suppliers in the United States.

For example, Huawei’s purchase with Broadcom in 2018 was as high as 2 billion yuan, and Qualcomm’s was about 1.5 billion yuan. The transaction value between storage equipment manufacturers Micron and Seagate and Huawei were also about 700 million to 800 million yuan. 47% of NeoPhotonics, an integrated circuit and optical communications module maker, NeoPhotonics’ business comes from Huawei. RF supplier Weixin Qorvo also generates 11% of its revenue from Huawei.

Public data shows that in 2018, Huawei’s number of component procurement reached 70 billion US dollars, of which about 11 billion US dollars were used by US companies including Qualcomm, Intel and Micron Technology. If the US Department of Commerce further severely restricts trade with Huawei, these numbers will continue to decline sharply, which will not only affect the revenue of US companies, but also affect the Treasury ’s tax revenue.

The US Treasury will convene a conference on Huawei and other China-related issues in the coming weeks.

In fact, not only the United States Cabinet Department, some well-known American companies have once opposed the relevant policies of the Department of Commerce and even resorted to court. On June 25, 2019, FedEx brought the U.S. Department of Commerce to the court, asking the U.S. Department of Commerce to prohibit the enforcement of the ban in the Export Administration Regulations (EAR) on FedEx.

According to the regulations, FedEx must check the contents of each package to comply with US import and export regulations, which is “a fundamentally impossible task” for FedEx to handle about 15 million packages per day.

Removing further restrictions not only benefits Huawei

The US Department of Commerce’s proposal to withdraw restrictions on U.S. companies’ supply to Huawei through overseas agencies is a good thing for related companies, including Huawei.

On the evening of January 24, after the opening of the US stock market, affected by the good news, Micron Technology, Intel and Nvidia all rose. Intel’s gain once reached 8%. The same is true for Huawei, although Huawei has repeatedly claimed that U.S. sanctions cannot fundamentally affect the company’s development.

After being sanctioned by the United States, Huawei turned to Japanese suppliers for help. On November 21, 2019, Huawei’s chairman Liang Hua talked about Huawei’s response to the “physical list” in Japan when attending the meeting-increasing procurement of Japanese companies.

According to Huawei’s data, Huawei’s total purchases from Japanese companies in 2019 will be 1.2 trillion yen (RMB 77 billion; USD 11 billion), which is almost equivalent to Huawei’s purchases from U.S. suppliers last year.

In 2018, the United States was Huawei’s largest parts supplier. Huawei’s purchases from US companies reached US $ 11 billion (approximately 1.2 trillion yen), but after entering the physical list, the number was decreasing.

In the list of suppliers announced by Huawei in 2018, there were a total of 12 Japanese companies, the number of which ranked third behind China and the United States. Therefore, it is not surprising that Japan eventually surpassed the United States as Huawei’s largest supplier of parts in 2019.

Also in 2018, Huawei’s purchases from Japanese companies were only 721 billion yen (about 6.6 billion US dollars), which is 60% of 2019.

The reason for turning to increase the purchase of Japanese companies is because the American technology content of Japanese products is less than 25%, which does not conflict with the US export ban. It will also be affected by the ban, making it impossible to trade with Huawei.

This is just one of them. On the other hand, it will seriously affect the sales of Huawei products. Although Huawei has launched the Hongmeng operating system and HMS (Huawei Mobile Services) to seek to offset the impact of the most severe sanctions, compared to Google’s Android and GMS, Huawei’s ecosystem is only in its infancy.

Moreover, the US Department of Commerce has considered further reducing the minimum threshold for products exported to Huawei, and expanding the product range to consumer electronics products including non-sensitive chips.

2020 is the first year of 5G terminals’ large-scale popularization. Huawei will launch flagship terminals such as P40 and Mate 40 this year. Brands including Nova and Honor will also launch 5G terminals. If more severe sanctions are imposed, Huawei terminals Huawei ’s sales will face great uncertainty, which Huawei is not willing to face.

Now Huawei is getting a respite. Since entering the US Department of Commerce’s entity list, Huawei has gradually de-Americanized and has achieved significant results.

According to market research agency IHS Markit, as of the end of 2019, Huawei has used self-developed Kirin chips on mobile phone chips , which will further increase.

There will be a protracted battle between Huawei, Meng Wanzhou and the United States

This time, the US Department of Commerce’s proposal was stopped because of opposition from the Department of Defense and the Treasury, but it does not mean that Huawei will become easier in the future. On the one hand, Huawei is still on the list of US Commerce entities. It is Meng Wanzhou’s case that remains inconclusive.

On January 21, 2020, at the 2020 Davos World Economic Forum, Huawei’s founder Ren Zhengfei once again sent out a Huawei voice to the outside world in a conversation: The U.S. crackdown on Huawei in 2019 did not play much role because Huawei Some preparations have been made in the past.

The United States will escalate the blow to Huawei this year, but the company’s impact will not be very large, because the company has accumulated the experience of being blown last year and has trained the team.

He revealed that the United States will continue to crack down on Huawei in 2020.

The Wall Street Journal quoted a senior US government official as saying that the Trump administration is exploring how to help US companies produce hardware that can compete with Huawei on 5G within 18 months. This is similar to Ren Zhengfei’s judgment. On the one hand, the United States will continue to increase its crackdown on Huawei, and on the other hand, it will increase its support for American companies.

The day before the U.S. Department of Commerce’s withdrawal of the motion, Huawei ’s deputy chairman and chief financial officer of the Meng Wanzhou extradition case ended its first formal hearing after four days of continuation, but it was still inconclusive.

In the face of the pressure of the complicated case, the trial judge only expressed his reservation in court, and the case was temporarily adjourned. People still need time to wait for a decision.

During the waiting period, there were still variables in this case, and many people were even ready to face the “protracted war.” The timing of the two things is quite coincidental, but the only thing that can be determined is that Huawei and Meng Wanzhou can only choose to move forward.

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