TELECOMS: Spurned by US, Huawei Turns to UK

Bottom line: Huawei’s latest big financial commitment to the UK is mostly for show, but Britain could still emerge as a winner over the longer term if Huawei conducts more R&D work in its British labs.

Huawei gives $4.2 billion gift to UK

After getting the cold shoulder from the US for its smartphones, telecoms superstar Huawei is turning increasingly to Europe, and specifically to Britain, for consolation. That’s the key takeaway from the latest reports that say Huawei has told British Prime Minister Theresa May that it will spend a further 3 billion pounds ($4.2 billion) on procurement from the UK on top of its other commitments to the country. (English article)

This particular move seems mostly political, and also it’s questionable how significant it is. Huawei made its commitment last week during a trip by Theresa May to China, and this kind of mega-commitment is quite common during these meetings between Chinese and global leaders. The fact of the matter is that Huawei posted 600 billion yuan ($97 billion) in sales last year, meaning it had to spend perhaps half of that amount, or around $50 billion, on procurement of various components for its core networking equipment and smartphones.

There’s also no time frame given for this commitment, meaning it’s likely over a period of years, with five being a quite typical period. Again, the fact of the matter is that many of the kinds of equipment that Huawei needs aren’t just available anywhere, and many are most readily available from US suppliers like Microsoft (Nasdaq: MSFT) and Oracle (Nasdaq: ORCL). That reality was quite apparent a few years ago when crosstown rival ZTE (HKEx: 763; Shenzhen: 000063) was briefly thrown into big uncertainty when Washington threatened to cut off its access to key US suppliers.

All that said, the reality is that Washington’s ongoing hostility to Huawei certainly won’t encourage the company to invest in the US or purchase more products from the country. The latest reports say Huawei’s latest commitment to the UK would include global risk management and forex operations that are run out of the country. It also includes licensing fees the company pays to ARM, one of the world’s leading developers of technology used in mobile phones.

This blossoming love affair contrasts sharply with Huawei’s experience in the US, where Washington has taken a much more confrontational approach. After informally banning the sale of Huawei’s core networking equipment to US telcos a few years ago, Washington has zoomed in again to block the company from signing partner deals with the telcos for sale and distribution of its newer smartphones. Reports last month said such pressure scuttled a deal with AT&T (NYSE: T) (previous post), and later reports indicated the same thing had happened with leading wireless carrier Verizon (NYSE: VZ).

Rolling out Welcome Mat

By comparison, Britain has been one of the most welcoming countries for Huawei in the western world. When Huawei first began expanding into the west, Britain’s BT Group (London: BT) was one of the first to make a major commitment to buying the Chinese company’s networking equipment. Huawei rewarded the country by setting up an R&D center in the UK and now uses the country as a major base for its European business.

By comparison, the company has invested relatively little in the US, at least in terms of facilities, even though I expect it still does major procurement from American companies. The company quietly accepted the US ban on the sale of its networking equipment several years ago, and appears to be accepting this new pressure on the carriers to shun its smartphones.

The one difference this time is that Huawei is still being allowed to sell its phones through regular retail channels like Amazon (Nasdaq: AMZN) and Best Buy (NYSE: BBY). I do expect that these channels, while relatively bit players now, will become more important over time. That could help Huawei to eventually gain a foothold in the US despite Washington’s attempts to stop it through backdoor pressure, which is why Huawei is probably keeping a low profile for now.

As to whether the US is losing important investment by shunning Huawei, I have to say that personally I doubt this is making a big difference in dollar terms. The bigger loss could be in technology development, since Huawei is clearly emerging as a leading developer of new telecoms technologies. While most of that activity is probably happening in China for now, countries like Britain could also be poised to reap some benefits from supporting work being done by the company’s local operations.

 

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