The U.S. sanctions and restrictions on Chinese telecom supplier Huawei Technologies are starting to ripple through the tech sector. The U.S. Department of Commerce in May moved to restrict access even to parts made outside the United States if they were made with U.S. technology.
That action is resulting in operational upheaval at many of Huawei's suppliers and rivals. Standard & Poor's estimates that there's a US$25 billion direct and indirect cost to Asian tech companies, with chip foundries in Asia losing 15% to 20% of revenues.
Here's how the impact breaks down.
Taiwan Semiconductor Manufacturing Co.
Taiwan Semiconductor Manufacturing (TSM) is the company most directly affected by the U.S. sanctions. The world's largest contract chip manufacturer uses U.S. technology in its production. It will need to cut off sales to Huawei or risk U.S. retribution. That puts 10% to 15% of its revenue at risk directly, with another 5% at risk due to indirect effects.
The reduced sales may last for three to four quarters. However, TSM is seeing strong demand for its high-performance computing chips for servers, personal computers and communications gear. It is benefitting from emergency investment in data centers and telecom infrastructure as work-from-home becomes the norm. TSM has a market-dominant position in high-end process technology.
Chinese companies have given Taiwan Semiconductor a short-term boost, increasing sales by about 33% year on year in the first half of 2020 as Chinese companies built up inventory to ward off the effects of U.S. sanctions. That goose to sales will now fade.
Semiconductor maker SK Hynix HXSCL in South Korea rivals Taiwan Semiconductor for size in the global market for memory chips, so it faces the same issues as TSMC. Lower supply to Huawei for its smartphones and telecom equipment poses a threat to 10% to 20% of the company's total revenue.
The Korean company nevertheless should see a strong 2020 due to demand for its solid-state drives and DRAM drives for servers that are in heavy demand at data centers. Its memory chips aren't affected by U.S. restrictions because they don't depend on U.S. technology. In the oligopolistic market for global memory chips, Hynix should sustain its business, S&P believes.
Samsung Electronics KR:005930 is the world's largest semiconductor manufacturer, a chip-making business that is directly hurt by the Huawei ban. Huawei buys Samsung's memory chips, display panels and camera modules for its smartphones. Given the challenge to retail sales in the current environment, the Korean company will struggle to replace that lost business.
However, Samsung also competes with Huawei on smartphone sales, an area where it will benefit from Huawei's sanctions. Seeing Huawei cut out of U.S. and European 5G networks presents an opportunity for Samsung's rival network-equipment products and substantially could strengthen its market position over the next two to three years, S&P believes.
The great span of the Samsung chaebol -- it accounts for 20% of South Korea's entire exports --insulates it. Less than 5% of its sales would be at risk from lost Huawei business. Its chip foundry could request a special license from the U.S. government to supply Huawei, but probably should be looking elsewhere for its customers.
LG Electronics, with a U.S.-listed subsidiary LG Display (LPL) that makes smartphone and TV screens, is Samsung's hometown rival. Its subsidiaries LG Display and LG Innotek supply Huawei with smartphone screens and components. S&P notes that in the current economic environment it will be hard to find customers in expansion mode that can take on that capacity.
But like Samsung, LG has competing smartphones that stand to benefit from increased sales. The Korean chaebol also has more than enough diversity to absorb the hit, losing less than 5% of sales due to Huawei exposure.
Foxconn HNHPF -- full name Hon Hai Precision Industry -- is the world's largest contract electronics manufacturer, making most of the world's iPhones for Apple (AAPL) in China. The Taiwanese company is the largest private employer in China, with more than 1 million mainland employees across a dozen factories. Some 5% to 10% of its sales are in trouble because they stem directly from business with Huawei.
Foxconn can ride out that dent to revenue, although it hurts. Foxconn faces far greater problems from the Covid-19 crisis, which is affecting almost all its sales and has disrupted its factory operations. Global disruptions due to the pandemic have led to a 6.7% drop in revenue for the first half of 2020. "Its recovery remains shaky as the pandemic effects play out," S&P states.
Best-known for its cassette tapes, TDK TTDKY is a market leader in manufacturing the lithium-polymer batteries used in smartphones and headphones. Some 5% to 10% of its revenues are at risk because of business dropping off due to lower demand from Huawei.
Sales may drift by a similar 5% to 10% in 2020 due to slower sales of its components. Profitability may see a dip, but with polymer-based technology a must-have in smartphones TDK should be able to shift sales to other customers in short order. TDK is a strong competitor in its battery business, so any short-term impact would be a blip.
Sony (SNE) supplies Huawei with image sensors for the cameras in its phones. Sony tech aids the augmented reality and autofocus functions on the smartphones, which have multiple Sony-backed cameras. In fact, they are basically Sony cameras inside a Huawei case, even though the Chinese company tends to promote the Leica lens.
Ironically, the smartphones that Sony supplies with sensors (including Apple's iPhones) tend to contain better cameras than the phones Sony itself makes. Sony would have less than 5% of its sales at risk due to Huawei exposure, revenue it could offset with sales to other customers and potentially with higher sales of its own phones.
Xiaomi XIACY is the big beneficiary of Huawei's woes in terms of international sales. The Covid-19 crisis likely will hold back its top line, resulting in sales growth of 3% to 7% in 2020, S&P predicts. That's down from 17.7% growth last year.
However, Huawei will be forced to sell its phones domestically to offset lost overseas sales, which likely will result in Xiaomi pricing its 5G handsets aggressively inside China. Huawei has specialized in high-end phones, but in the next two to three years may downshift to mid-range models once it uses up its inventory of high-end components. That would bring Huawei into increased competition with Xiaomi's low- to mid-range smartphones.