Business / Corporate | ANALYSIS

Huawei's trouble with U.S. ban could impact Japan's smartphone market and suppliers

by Kazuaki Nagata

Staff Writer

As the world watches to see if Huawei Technologies Co. survives the ongoing turmoil stemming from the U.S.-China trade war, wider implications are likely to hit Japan if the Chinese telecom giant continues to be blacklisted by Washington.

The move by the administration of U.S. President Donald Trump to put the firm on the so-called Entity List, effectively barring it from doing business with American firms without government approval, could severely harm Huawei’s ability to manufacture and market its products, including smartphones.

Consequently, the Japanese smartphone market is likely to see a change in the balance of power with the looming troubles facing Huawei, which had boosted its presence in the country in recent years, industry observers said. Japanese makers of electronic components that supply their products to Huawei may also take a hit from the potential loss of business with the world’s No. 2 smartphone-maker.

“If this situation continues, it will severely hit Huawei’s smartphone unit sales,” said Hideaki Yokota, an executive analyst at MM Research Institute, a Tokyo-based mobile-industry research firm.

“Unlike Apple’s (iPhones), Huawei’s smartphones are Android-based, so they can be replaced with many other Android devices, such as Samsung’s and Sony’s phones.”

According to MM Research Institute, Huawei was ranked fifth in terms of overall smartphone shipments in Japan last year with a 6.4 percent market share. Huawei had the lion’s share of the market last year for SIM-free smartphones that are not sold by major carriers, with 43.8 percent, according to BCN Inc., another Tokyo-based marketing research firm.

Huawei has increased its share in Japan because its high-end smartphones are cheaper than comparable models from its rivals, Yokota said.

The fate of Huawei smartphones has been further muddied on worries that Google LLC might decide to stop providing support for the Chinese firm’s handsets.

The U.S. Department of Commerce has given Huawei a 90-day extension in an apparent aim to support existing users. Yet Google’s compliance with Washington’s demands have raised the possibility that owners of Huawei phones may be cut off from updates for the Android operating system, as well as the use of its widely used apps such as YouTube and Gmail from late August.

Based on such concerns, Japan’s KDDI Corp. and SoftBank Corp. have postponed sales of Huawei’s latest P30 series smartphone, which was scheduled to hit store shelves this month.

Some mobile virtual network operators, or MVNOs, who rent network bandwidth from megacarriers and offer cheaper data plans than their larger rivals, also suspended sales. Aeon Mobile, however, plans to still market the new Huawei phones.

“I think there are probably some consumers who are choosing to stay away from Huawei smartphones out of concern that they won’t be able to receive Android updates,” said Yokota.

Other analysts say the situation may work in the favor of some Japanese smartphone makers such as Sony Corp. and Sharp Corp., allowing them to grow their shares in the domestic market.

Moreover, Arm Holdings PLC, a U.K.-based chip design firm owned by SoftBank Group , also apparently halted business with Huawei following the Trump administration’s move.

“Arm is complying with the latest restrictions set forth by the U.S. government and is having ongoing conversations with the appropriate U.S. government agencies to ensure we remain compliant,” an Arm spokesperson said in an email.

Huawei uses Arm’s architecture licenses to produce cutting-edge chips for its smartphones, so the business suspension is a heavy blow to the manufacturing of the handsets, said Yokota.

Gartner Inc., a U.S.-based research firm, says Huawei had a 15.7 percent share of smartphones sales in the first quarter of this year, the world’s second-biggest trailing only South Korea’s Samsung at 19.2 percent.

The Chinese firm’s procurement from Japanese makers has been surging in recent years. Huawei has estimated that the figure for this year will be $8 billion, more than double the $3.3 billion it procured in 2016.

If Huawei’s smartphone production capability is severely crippled, “there will be impacts on Japanese parts makers,” said Yasuo Imanaka, chief analyst at Rakuten Securities, adding that it is still difficult to estimate the level of damage.

He also said that in the event Huawei loses its smartphone share, other rivals will step in, so Japanese suppliers would have opportunities with them. It is possible that other Chinese smartphone vendors, such as Oppo and Vivo, would increase their market share.

But, still, Huawei would be a more profitable partner for Japanese firms because, unlike those firms, it procures quality electronic components from Japanese suppliers.

Some companies that are believed to be high-volume suppliers include Murata Manufacturing Co. and TDK Corp. Estimates by Mizuho Securities show that Murata Manufacturing’s 5 percent of sales come from Huawei and TDK’s is about 10 percent.

A spokesperson at Kyoto-based Murata Manufacturing, which has the world’s top share in the market for multilayer ceramic capacitors used for smartphones, said the firm has been evaluating the possible implications of the recent events.

Media reports also said companies that have either shunned Huawei completely or restricted buying from the company since the move include U.S. chipmaker Intel Corp. and Osaka Prefecture-based Panasonic Corp.

Another concern for Japanese companies linked to the U.S.-China trade war is industry speculation that China might retaliate by shutting out Apple Inc. from the world’s second-largest economy.

“Japanese electronic components providers remain cautious over the move,” said Imanaka. “They have started to think that that is a possible scenario.”