U.S. Defense Department halts further sanctions against Huawei for more complicated reasons

On New Year’s Eve, the U.S. Department of Commerce withdrew a proposal to further restrict U.S. companies’ supply to Huawei after a joint opposition from the U.S. Department of Defense and Treasury. But many have failed to notice “further” that the Us has lifted supply restrictions on China. In fact, the U.S. Department of Commerce withdrew only new proposals, other restrictions remain the status quo.

U.S. Defense Department halts further sanctions against China for less-than-easy reasons

On May 16, 2019, Chinese companies such as Huawei were listed by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS), and a large number of U.S. suppliers, including Google, were barred from doing some of Huawei’s business. Despite three 90-day temporary permits, Huawei is still on the list of entities.

However, the rules at the time were loopholes that allowed goods to be sold to Huawei without a license if the proportion of goods manufactured in the United States was less than 25%, unaffected by the export ban. The so-called “further measures” is the Commerce Department’s plan to reduce the loophole to 25 percent to 10 percent in order to modify it.

Such a change would extend the restrictions beyond sensitive types of technology, including widely used U.S. software, chips and other components.

After joint opposition from the U.S. Department of Defense and the Treasury Department, it was eventually withdrawn by the Commerce Department.

Why is the Ministry of Defence and the Treasury united against the Ministry of Commerce?

Before you can answer this question, you need to understand the different responsibilities between the U.S. Department of Commerce, the Department of Defense, and the Treasury Department.

The U.S. Department of Commerce is responsible for U.S. international trade, import and export controls, trade relief measures, etc. These include: statistics and publication of economic data, control of imports and exports of goods, management of foreign direct investment and foreign tourism, conducting various economic surveys, as well as social surveys, patent management, etc.

The United States Department of Defense is a division of the Government of the United States of America, the office of the President of the United States, which heads and commands the entire military, and is the military command authority that issues orders to the Joint Command sending orders from the President and the Secretary of Defense. But the Defense Department also plays an important role in science and technology.

The U.S. Department of Defense’s research institutions include the Defense Advanced Research Projects Agency, the Defense Defense Laboratory, the Research and Development Center, and the Test Center. The U.S. Department of Defense’s scientific research institutions have independent legal personality, and the Department of Defense directive requires them to perform their functions of “science and technology, engineering development, engineering support and modernization of deployed equipment.”

This makes them not only at the forefront of equipment development, i.e. the discovery of scientific knowledge, the invention and creation of technology, but also the mid-end and back end of equipment development, and their involvement in equipment development, procurement and operation and maintenance.

The U.S. Treasury Department is a cabinet department of the U.S. government. The main tasks are to handle U.S. federal financial affairs, taxation, issuance of bonds, debt service, supervision of currency issuance, formulation and recommendation of policies related to economic, fiscal, tax and treasury revenue, and conduct international financial transactions. The Finance Minister is in second place in the presidential cabinet, behind the Secretary of State (equivalent to the Prime Minister).

With regard to further restrictions on Huawei, the Defense Department’s concern is that restrictions on business between U.S. companies and Huawei have led to a decline in research funding that is detrimental to the technological competitiveness of U.S. companies. If it needs to maintain investment in research, the Defense Department and even the U.S. government need to increase their budgets. The Treasury’s rationale is simpler, fearing it will affect the revenues and profits of U.S.-related companies. At the end of 2018, Huawei announced a list of 92 core suppliers, including 33 in the United States, the highest percentage.

Intel, Qualcomm, Broadcom, Micron, Sijia, Corvo, Sillux and Novo, and New Flycom are all important suppliers to Huawei in the United States. Huawei, for example, will buy 2 billion yuan from Broadcom in 2018, and Qualcomm’s will be worth about 1.5 billion yuan, while storage device makers Micron and Seagate and Huawei will have transactions of about 700 million yuan to 800 million yuan, respectively. NeoPhotonics, a manufacturer of integrated circuits and optical communication modules, has 47% of its business from Huawei. RF supplier Qorvo also has 11% of its revenue from Huawei.

Public data shows that of the $70 billion Huawei spent on component purchases in 2018, about $11 billion was spent on U.S. companies including Qualcomm, Intel and Micron Technologies. If the U.S. Commerce Department further severely restricts trade with Huawei, those numbers will continue to plummet, affecting not only U.S. companies’ earnings, but also Treasury’s taxes.

The U.S. Treasury will hold a meeting in the coming weeks on Huawei and other China-related issues.

In fact, not only the Cabinet Department of the United States, some well-known U.S. companies have also opposed the Department of Commerce’s policies and even to the courts. On June 25, 2019, FedEx took the U.S. Department of Commerce to court, asking the U.S. Department of Commerce to block the enforcement of the Export Administration Regulations (EAR) ban on FedEx.

Under the rules, FedEx must check that each package meets U.S. import and export regulations, a “fundamentally impossible task” for FedEx, which processes about 15 million packages a day.

Removing further restrictions will not only benefit Huawei

The U.S. Commerce Department’s withdrawal of restrictions on U.S. companies supplying Huawei through overseas agencies is good for companies involved, including Huawei.

On the night of January 24th, U.S. stocks opened on the back of the good news, with Micron Technology, Intel and Nvidia all rising, with Intel’s gain ingress at one point, hitting 8 percent. The same is true for Huawei, which has repeatedly claimed that U.S. sanctions cannot fundamentally affect the company’s development.

After the U.S. sanctions, Huawei turned to Japanese suppliers for help. On November 21, 2019, Huawei Chairman Liang Hua spoke at a meeting in Japan about Huawei’s response to the “entity list” – increased procurement of Japanese companies. According to Huawei, Huawei’s total purchases of Japanese companies in 2019 will be 1.2 trillion yen ($77 billion; $11 billion), almost as much as Huawei’s purchases of U.S. suppliers last year.

In 2018, the U.S. is Huawei’s largest supplier of parts, with $11 billion (about 1.2 trillion yen) of purchases from U.S. companies, but the numbers are declining as they enter the list of entities. Huawei’s list of suppliers for 2018 includes 12 Japanese companies, the third-highest number behind China and the United States. So it’s no surprise that Japan will eventually overtake the U.S. as Huawei’s largest supplier of parts in 2019.

Also in 2018, Huawei’s purchases to Japanese companies amounted to just 721 billion yen ($6.6 billion), or 60 percent of 2019.

The shift to increased purchases of Japanese companies is due to the fact that Japanese products are more than 25 percent skilled in the U.S. and do not contravene the U.S. export ban. But if the Commerce Department lowers the 25 percent rule to 10 percent, many Japanese companies will also be affected by the ban, making it impossible to trade with Huawei.

This is only one of them, and on the other hand, it will seriously affect Huawei’s sales. While Huawei has launched Harmony OS and HMS (Huawei Mobile Services) to seek to offset the impact of the toughest sanctions, Huawei’s ecosystem is only in its infancy compared to Google’s Android and GMS.

Moreover, the Commerce Department has considered further lowering the minimum threshold for Huawei’s exports and extending the range to consumer electronics, including non-sensitive chips.

And 2020 is the first year of large-scale popularity of 5G terminals, Huawei will launch P40, Mate 40 and other flagship terminals this year, as well as brands including Nova, Glory and other brands will also be launched 5G terminals, if more stringent sanctions, Huawei terminal sales will face a lot of uncertainty, which Huawei is not willing to face.

Now Huawei has a breathing space. Since entering the U.S. Department of Commerce’s list of entities, Huawei has gradually de-Americanized, and achieved significant results. By the end of 2019, Huawei had 74.6 percent of its own kirin chips on mobile phone chips, according to IHS Markit, a market research firm.

Huawei, Meng And U.S. will be a protracted battle

This time, the U.S. Department of Commerce’s proposal was rejected by the Departments of Defense and Treasury, but that doesn’t mean Huawei will be easier in the future, first, Huawei is still on the U.S. Department of Commerce entity list, and the other is that the Meng late boat case is still inconclusive.

On January 21, 2020, at the World Economic Forum in Davos 2020, Huawei founder Ren Zhengfei made another call to Huawei in a conversation: the U.S. strike on Huawei in 2019 has done little, because Huawei has made some preparations in the past. The U.S. will escalate its crackdown on Huawei this year, but the impact on the company won’t be very big, as the company has accumulated experience in last year’s crackdown and trained its ranks, and Huawei will be more resilient.

He revealed that the United States will continue to crack down on China in 2020.

The Wall Street Journal, citing a senior U.S. administration official, said the Trump administration is exploring ways to help U.S. companies produce hardware that can compete with Huawei on 5G within 18 months. This is similar to Mr Ren’s judgment, which will continue to crack down on Huawei and support US companies on the other.

The until the U.S. Commerce Department withdrew the proposal, the first formal hearing of Huawei’s vice chairman and chief financial officer, Meng Nighting, ended after four days of talks, but to no avail.

In the face of pressure on complex cases, the presiding judge in court only expressed reservations of the right to rule, the case was adjourned for the time being. People still need some time to wait for a verdict.

While waiting, the case is still uncertain, and even many people are ready to face a “long-lasting war.” The timing of the two events is quite coincidental, but the only certainty is that huawei and Meng are only going to have to move on.