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Research Report

29/07/2020 16:58

Sanctions on Huawei put US$25bn APAC tech revenue at risk

[ET Net News Agency, 29 July 2020] The most recent U.S. restrictions on Huawei
Technologies Co. Ltd. will reverberate across Asian tech firms that trade with the Chinese
tech firm, the world's biggest telecoms equipment maker, according to a report S&P Global
Ratings published today, titled "U.S. Actions Against Huawei Reverberate Across Asian
S&P estimated this heightened strategic confrontation puts about US$25 billion in
revenue at risk across our rated Asia-Pacific technology firms. The U.S. Department of
Commerce (USDC) in May 2020 cut Huawei's access to U.S. technology to make semiconductors
offshore, adding to restrictions that were initially placed on the company in May 2019.
"These expanded rules in particular hit chipset production (foundries) companies that
use certain U.S. technology or manufacturing equipment," said S&P's credit analyst
Clifford Kurz. "Without a license from the U.S. government, such companies will be unable
to provide services directly to Huawei without facing restrictions themselves."
The agency estimated that the new restrictions could affect as much as 15%-20% of
revenues (nearly US$7 billion) of foundry companies such as Taiwan Semiconductor
Manufacturing Co. Ltd. (TSMC) and Semiconductor Manufacturing International Corp.
(SMIC)(00981). There could be secondary hits to other rated Asia-Pacific technology firms,
indirectly affecting a further US$18 billion due to their exposure to companies on the
USDC Entity List (which specifies license requirements for certain types of exports to
these companies).
S&P anticipates operational upheaval as Asia-Pacific tech firms adjust to a ramping up
of restrictions on Huawei's access to U.S. technology, however, the ultimate revenue and
credit ratings effect may be moderate. This is because S&P expects strong demand for
advanced node chipsets (such as those with seven-nanometer and five-nanometer
transistors), would help offset the loss of Huawei orders for TSMC, while a shift of
Chinese customers to domestic suppliers should benefit SMIC.
Another possible consequence of the new restrictions could be a shift in focus for
Huawei from premium smartphones--once it runs out of critical components for these
products--to low- and mid-end smartphones and internet of things (IoT) devices.
As a result, Chinese tech firm Xiaomi Corp. (01810) could experience greater competition
for its smartphone and IoT devices in China, while gaining smartphone market share
In the meantime, as Huawei and other domestic technology companies sort through
challenges presented by the U.S. restrictions, the Chinese government will likely increase
financial and operational support for these firms. Such support measures will likely take
several forms, including capital injections, subsidies, tax breaks, expediting regulatory
approvals, or cutting red tape.
In addition, while the agency anticipates some retaliatory measures that could restrict
sales of U.S. technology products in China, such measures would only put at risk 2%-5% of
the revenue of our rated Asia-Pacific issuers. And that is only for the fairly radical
scenario in which U.S. tech companies lost half their sales in China. (KL)

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