Huawei founder and CEO Ren Zhengfei says his company is reviewing future contracts with U.S. suppliers, even as those corporations appeal to Washington for relief from a trade blacklist that prevents them from selling to the Chinese telecommunications giant.
In an exclusive interview with Yahoo Finance, Ren maintained his preference to “still be friends” with companies like Qualcomm (QCOM), Intel (INTC), and Google (GOOG, GOOGL), but admitted Huawei would take a cautious approach moving forward.
“In the past, we were comfortable with signing 10-year contracts with U.S. companies, buying large quantities of goods from them,” he said. “But now, we have to sign smaller contracts on a rolling basis in case they no longer sell us certain components, all the other components will become useless. By signing smaller contracts on a rolling basis, we will be able to more easily bear the losses caused by a supply problem.”
On Monday, semiconductor and software executives met with Treasury Secretary Steven Mnuchin and White House Economic Advisor Larry Kudlow to discuss the U.S. ban on sales to Huawei.
The company sourced $11 billion in goods from U.S. companies last year out of a $70 billion global procurement budget for parts and components. But the telecommunications giant has largely been cut off from those suppliers since the Department of Commerce added Huawei to the Entity List in May, requiring American companies to apply for export licenses to continue selling to the Chinese.
While, Commerce Secretary Wilbur Ross has backed off since, saying the department would begin allowing American companies to sell components that do not pose “a national security risk” to Huawei, he has not provided specifics.
Ren has said the company will take a $30 billion hit, from the initial $130 billion, revenue forecast for this fiscal year, confirming significant layoffs at Futurewei, the R&D arm in the U.S. While Ren did not specify how many cuts, Reuters reported the number amounts to 70% of the 850 employees.
“Before Huawei was added to the Entity List, we invested 500 million U.S. dollars into Futurewei in 2018 and planned to invest 600 million U.S. dollars in 2019,” he said. “Now we cannot make further investment because we are not allowed to engage with Futurewei employees. What is our next step? This depends on the U.S. government's direction.”
Despite those headwinds, Ren said Huawei plans to double its purchases from Qualcomm, in the immediate term, from 50 million chipsets to 100 million this year to fulfill smartphone shipments, which is expected to reach 270 million this year.
Ren added that the company plans to continue sourcing X86 servers from Intel, if the U.S. government allows.
The Department of Commerce has yet to specify which American components would be banned from Huawei, given national security risks, but CLSA notes those involving 5G are likely to draw more scrutiny.
“Many critical semiconductor technologies for 5G networking equipment either originated from or were the result of deep partnership with the U.S. military/aerospace, such as RF and FPGA, which can be easily interpreted as national security-related chips,” analyst Sebastian Hou said in a note.
The company is expected to offer more clarity on its finances when it reports its first half results on July 30. Ren maintains the entity list has had no impact on its 5G business, but admits additional pain for the company may materialize in the second half of the year.
“If a company refuses to sell a certain component to Huawei, we will have to replace it with one of our own. This means that its version must be replaced, which will take time,” he said. “During this transition period, we will face some pressure in terms of production capacity and volume...while our growth may decrease over the next two years, but it will rebound in two or three years.”
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Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter at @AkikoFujita
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