Posted by Fitch Ratings
The breadth of the US ban on Huawei Technologies will likely determine the effect on the Chinese telecom firm’s suppliers and competitors, says Fitch Ratings. Near-term credit effects should be minimal, despite significant exposure for some upstream US technology companies. We believe companies can divert sales to Huawei’s Asian and European rivals that will likely benefit from Huawei’s struggles.
The US granted temporary 90-day exemptions to some of Huawei’s suppliers and customers this week, after banning exports last week due to national security risks. The duration of sanctions and whether European allies follow suit is uncertain. Global supply chains led to concerns about technology transfer, particularly given China’s Made in China 2025 policy, which aims to increase its technological capabilities and reduce reliance on essential technologies from other countries. Huawei, the world’s leading supplier of telecom equipment, 5G networks and smartphones, sources extensively from US semiconductor firms and uses Google’s Android operating system for its handsets.
China is a major consumer of US technology products, with Huawei likely being a key customer of many US companies. Last year, sales generated in China represented 20% or more of the annual revenue generated by Texas Instruments (A+/Stable); Flex Ltd. (BBB-/Negative); Intel Corporation (A+/Stable); Western Digital (BB+/Positive); and Jabil (BBB-/Stable), according to data from Factset. A material amount of annual sales generated by Nvidia (A-/Positive); Keysight Technologies (BBB/Stable); Avnet (BBB-/Stable); HP (BBB+/Stable); KLA-Tencor (BBB+/Stable); and Dell Technologies (BB+/Negative) were also from China.
We do not expect demand for semiconductors and other hardware to decline as a result of sanctions on Huawei. A potential contraction of Huawei’s telecom network equipment and smartphone sales due to US sanctions would likely be absorbed by the company’s competitors. Therefore, credit implications should be negligible for most global technology suppliers rated by Fitch given their diversified global customer base and strong market positions.
Samsung Electronics (AA-/Stable) may benefit in terms of smartphone sales, as it may have an opportunity to increase market share in Europe and the rest of the world, excluding China, which represents around 49% of Huawei’s smartphone sales. However, restrictions would only apply to new models so the actual benefit will depend on how long sanctions last. Sony (BBB-/Positive) supplies image sensors to Huawei and has a near monopoly position in the high-end image sensor market so a loss of sales to Huawei could be offset by supplying other major brands.
Huawei is a top ten customer of STMicroelectronics (BBB/Stable), Europe’s largest semiconductor manufacturer supplying Huawei microchips and sensors for smartphones. US-only restrictions could provide ST an opportunity to gain market share from US competitors. If European suppliers are forced to comply with US restrictions on Huawei, however, revenue implications for ST would likely be negative.
Ericsson (BBB-/Stable) and Nokia (BBB-/Stable) compete with Huawei in supplying global telecom sector network equipment. Security concerns facing Huawei improve the strategic standing of Nokia and Ericsson in many regional markets, particularly as 5G adoption grows. If Huawei’s ability to sell and support its network equipment to operators in certain parts of the world is impaired, as the company is currently prevented from doing in the US, Ericsson and Nokia would likely benefit. European network suppliers may not necessarily experience immediate market share or pricing gains as a result of sanctions on Huawei but they are likely to be winners in the long-run as telecom operators will likely consider long-term cooperation implications when assessing vendor options.―CT Bureau