Huawei, Day 2: Braced for impact

The US government’s decision to target Huawei is likely weighing on the minds of thinkers and doers alike in the Greater Bay today. SupchinaSinocism and Trivium have good wraps on the latest developments. We can focus on how important Shenzhen Huawei Technologies is to the Greater Bay Area.

First off, apologies for calling the company “Dongguan-based” previously. Although Huawei does most of its manufacturing in Dongguan, it is still called Shenzhen Huawei Technologies for a reason. Its new campus in Dongguan is impressive, with a people-moving train, but the Shenzhen campus is where the boss sits when he is not globetrotting. Where Ren Zhengfei sits is also where 60,000 of the company’s 180,000 global workforce sit. Around 25,000 staff will be based in Dongguan, but the new campus has been built mostly for future growth.

Huawei has four main business lines. Three are easy to understand: telecom network technology, smart devices, and cloud services. The fourth, Information Technology, covers everything else: AI, robotics, etc. You name it, Huawei does it. But without the cashflow from the first two, the second two don’t yet matter. This is the concern, as the US action would cut off the supply of key components for the world’s No.1 telecom equipment firm and No.2 smartphone manufacturer.

Huawei does most of its work in the Greater Bay Area. It would not be too much of an exaggeration to say that the company is an integral part of the GBA masterplan released in February. Without Huawei’s manufacturing scale, tens of thousands of jobs would not have been created here in the past decade. Without Huawei’s innovative capabilities, tens of thousands more will not likely be created here in the coming decade. As we reported earlier this week, Huawei is the top destination for graduates from eight of the country’s elite universities. The privately owned company is the GBA’s top all-round tech gun, with revenues of US$105b last year generating nearly US$10b of profits. Its R&D budget alone gives confidence in the GBA masterplan’s designs for industrial upgrading.

The repercussions for the region will be serious if the US goes ahead with its ban. Which is why we have reason to believe two things:

1) The central government will likely step in to support Huawei – it is too big to stumble, let alone fail. This support will likely trickle down immediately to the local governments in Shenzhen and Dongguan.

2) Non-tariff retaliatory action will likely follow. Anyone with a US-owned business in the GBA that is dependent on local supplies of components, or local access to sensitive data, can expect government scrutiny to be ramped up.

It is still early days in this new chapter of China-US relations. The leadership team in Beijing is not known for short-term reflexive policymaking on major issues, so we may have some time to figure out what comes next. And the GBA does have a lot of other positives, including a large private-sector economy focused on a vast domestic market. But there is no use whistling in the graveyard on an issue as important as this. Investors had best strap in: the ride is going to be bumpy.