Huawei’s plan to stockpile chips didn’t pay off

March 31, 2021, 10:50 AM UTC

Huawei Technologies reported overall revenue growth of 3.8% for 2020, raking in $136.7 billion across all of its business units. But the telecom manufacturer’s marginal growth represents a steep decline from the double-digit rates Huawei has posted in previous years, as U.S. sanctions tanked the firm’s flagship smartphone business.

“Our mobile phone business was impacted because of shortage in [chip] supply,” Huawei rotating chairman Ken Hu said, citing “unfair sanctions placed on us by the U.S.”

According to Hu, last year marked the first time that revenue growth from Huawei’s consumer business unit—the unit including smartphone sales—declined. Consumer sales rose 3.3% in 2020, substantially lower than the unit’s 45.1% revenue growth in 2019.

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The Trump administration prohibited semiconductor manufacturers from selling chipsets to Huawei if U.S. tech had been used in any part of the chip supply chain in May last year, essentially severing Huawei’s access to the advanced chips needed to power its smartphones.

Facing a supply crisis, Huawei entered “survival” mode and stockpiled chips before the ban came into effect. But the company’s rush to acquire chipsets slashed the group’s cash flow 61.5% to $5.4 billion. Stockpiling did little to help Huawei’s smartphone sales, either.

A separate U.S. embargo, imposed in May 2019, prompted Google to pull its Android services from Huawei’s handsets that same month. Without Google’s apps, Huawei phones quickly lost their appeal in markets outside China. The group’s international smartphone shipments declined 41% year on year in the fourth quarter of 2020.

“We believe Huawei’s smartphone business will take a big hit in 2021, and some $30 billion in revenue could be wiped out from the balance sheet if the current restrictions remain in place,” says Neil Shah, partner and vice president of research at market analyst Counterpoint Research.

The assault on Huawei’s core consumer business precipitated a steep decline in the group’s profit and revenue growth. Huawei’s net profit crept up 3.2% in 2020 to $9.85 billion. That increase was lower than the 5.6% growth in net profit Huawei posted in 2019, and a steep decline from the 25.1% increase Huawei posted in 2018.

The slowdown in Huawei’s annual revenue growth was even more marked, decelerating to 3.8% from 19.1% in 2019 and 19.5% in 2018. Huawei recorded its first-ever annual quarterly revenue decline in the final quarter of last year, Bloomberg reports, plummeting 11% to $33.5 billion.

Shah estimates that Huawei’s chip stockpile will expire either this quarter or next. The supply could be stretched a little further since Huawei offloaded its budget Honor phone brand late last year. But even if restrictions on Huawei’s component sourcing were lifted today, the company would likely struggle to purchase chips.

“Whether or not the situation around chip supply can be alleviated is highly dependent on the situation around the global semiconductor industry and whether or not the industry and cooperation within it can be recovered,” Hu said.

The global shortage of semiconductors has constrained growth of sales for a wide assortment of products including video game consoles, personal computers, and autos. Even if Huawei were able to regain permission to place new orders, it would be obliged to join at the back of the purchasing queue.

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