US sanctions are starting to catch up to Huawei

The Chinese telecoms giant Huawei reported limited Q1 earnings that show their phone business is feeling the impact of US sanctions.
The Chinese telecoms giant Huawei reported limited Q1 earnings that show their phone business is feeling the impact of US sanctions.
Image: REUTERS/Matthew Childs/File Photo
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Huawei sales fell for the second quarter in a row as the Chinese telecom giant’s mobile phone business is buffeted by geopolitical tensions between China and the West.

As a private company, Huawei is not subject to the same strict reporting requirements as its publicly listed rivals. Its quarterly earnings reports typically disclose only unaudited revenue and net profit margin numbers. They are:

  • 152.2 billion yuan ($23.5 billion) in sales revenue in the first three months of the year, a 16.5% decrease from the same time last year, when it reported revenue of 182.2 billion yuan.
  • An 11.1% year-on-year increase in net profit margin, which Huawei attributed to a $600 million check from a patent license and “ongoing efforts to improve quality of operations and management efficiency.”

The US government has targeted Huawei as part of its broader trade dispute with China, imposing sanctions on the company that have made it nearly impossible for US and non-US suppliers to sell Huawei the parts it needs to manufacture high-end smartphones. New Huawei phones also lost access to Google’s operating system and apps because of the sanctions.

The US government considers Huawei dangerous to national security, while the company has always argued that its “devices and networks are not a threat to the United States or any country.” Several other Western countries have banned Huawei from their telecommunication networks.

It’s not clear the extent to which the sanctions are responsible for the dip in the company’s consumer business revenue. Huawei’s quarterly earnings summary attributes that “in part” to its decision in Nov. 2020 to sell its smartphone brand Honor.

Huawei said its “network business maintained steady growth” but didn’t provide numbers. “On the network side, any growth at all is impressive in the circumstances,” mobile network analyst Gabriel Brown told Quartz via email. “Huawei has been buttressed by domestic demand, which has been extraordinarily strong due to the 5G build out.” In 2020, the Chinese market accounted for 65.6% of Huawei’s yearly revenue, up 15.4% from the previous year.

Huawei weathered the impact of US sanctions pretty well in 2020, thanks in part to a stockpile of semiconductor chips and strong demand for its products and services in China that offset losses elsewhere. But analysts predicted that the sanctions would eventually catch up to Huawei as it lost more market share in Western countries and ran out of essential components.

Brown points out that the next phase of China’s domestic 5G build-out in rural areas may be easier for Huawei because it may not require the kind of advanced technology that falls under US sanctions. “At its recent analyst day, the company presented a strong-looking, and competitive, mobile network product roadmap,” he said.

Huawei is attempting to reinvent itself as supplier of smart technology and IT, from self-driving cars to smart cities. Its current chairman, Eric Xu, warned that “2021 will be another challenging year for us, but it’s also the year that our future development strategy will begin to take shape.”