In the months leading up to Washington’s decision to ban Huawei from doing business with US suppliers, the Chinese company stockpiled nearly a years worth of components in anticipation of coming headwinds. Now, the global semiconductor sector may have to pay for it.
A new report, out from CLSA points to a “prolonged tech/semis correction cycle with a later cyclical bottom” stemming from “fake demand” created by Huawei’s buildup. In all, analyst Sebastian Hou says the Chinese company’s inventory buildup added 8% to the chip sector’s global revenue growth in the 1st quarter, or $35 to $40 billion.
“Huawei’s inventory pre-build has helped related tech/semi suppliers to report better-than-expected or less-than-feared numbers in 1H19,” he wrote.
That was before the Department of Commerce added Huawei and its affiliates to the Entity List, requiring U.S. companies including Qualcomm ( QCOM ) and Intel ( INTC ) to apply for licenses to do business with the telecom company. Now that Huawei’s revenue contribution has essentially been slashed, Hou says investors should expect destocking to follow in the second half of this fiscal year, putting growth at risk.
“Huawei accounts for 8 to 9% of global semiconductor demand, without the inventory buildup,” Hou told Yahoo Finance. “Half of that is gone for this quarter, so at a minimum it’s a 4% impact to the overall semiconductor sector in the second quarter.”
The impact beyond that, may be tougher to gauge, largely because of the uncertainty stemming from U.S. China discussions on trade. While Secretary of State Mike Pompeo insisted Huawei’s ban was a national security issue unrelated to trade talks in a CNBC interview Thursday , President Trump said he would consider linking the two issues .
“You look at what they’ve done from a security standpoint, from a military standpoint, it’s very dangerous,” Trump said. “If we made a deal, I could imagine Huawei being possibly included in some form or some part of it.”
Google has already suspended Huawei’s access to its Android operating system for new devices, although a temporary 90-day reprieve allows the U.S. tech giant to continue supporting existing products. Chipmakers Qualcomm, Intel, Xilinx ( XLNX ), and Qorvo ( QRVO ) have also halted shipments. That has prompted non-American suppliers like UK chipmaker ARM who source U.S. content in products shipped to Huawei to follow suit.
Huawei executives have brushed off reports of the company’s demise, saying they are well positioned to weather the storm. Hou says its carrier business would be able to last a year, without any additional shipments from U.S. suppliers, but its growing consumer unit may feel a tighter squeeze. Hou says it only has enough components stockpiled to last six months, in part because smartphone specification features change much more rapidly.
“Before the end of this year, they will use up all the critical components,” he said. “If the ban is not lifted by then, they will be in trouble.
Huawei already develops roughly one-third of all components in its devices, according to CLSA estimates. The company has expressed ambitions to get that number to 90% in the past. But Hou remains skeptical about how quickly Huawei can move towards self-sufficiency, especially in its ability to develop an operating system that rivals Android and iOS.
“If they are ready, why aren’t they using it now,” he said. “Why are they waiting for things to happen?”
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