U.S. Plans Temporary Exemptions to Huawei Blacklist

Date : 05/21/2019 @ 1:38AM
Source : Dow Jones News
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U.S. Plans Temporary Exemptions to Huawei Blacklist

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By John D. McKinnon in Washington, Dan Strumpf in Hong Kong and Yoko Kubota in Beijing 

U.S. officials said Monday they would grant a handful of temporary exceptions to an export blacklist against Huawei Technologies Co., giving some suppliers and customers of China's telecom giant a 90-day reprieve from tough trade penalties.

In an order scheduled to be published on Wednesday, the Commerce Department said it would grant a temporary license for U.S. exports to Huawei and dozens of its affiliates. The U.S. announced the blacklist order last week on grounds that Huawei was a national security threat.

The reprieve comes hours after Alphabet Inc.'s Google unit signaled plans to cut access to some of its most-popular features on Huawei smartphones. The move late Monday put a hold on those plans, according to a person familiar with the matter.

The reprieve for Huawei eases tensions between the U.S. and China as both countries seek to get trade talks back on track. Shutting off Huawei's access to U.S. components without exceptions would be a devastating blow to the company.

The exceptions show the blacklist order has "always been for leverage in the trade talks," said Derek Scissors, an American Enterprise Institute scholar.

The reprieve also could help the U.S. as it seeks to persuade allies around the world to ban Huawei gear from their networks, by limiting the immediate global disruptions from the U.S. blacklist.

The effect of the new license is to create relatively narrow but significant exceptions to last week's tough export ban, allowing U.S. suppliers to begin figuring out how to move forward under the export ban, without unduly disrupting their contracts, or existing networks.

The temporary reprieve isn't a huge positive for Huawei, but it does give U.S. businesses some time to get their affairs in order, said Michael Allen, a managing director at Beacon Global Strategies LLC, which is advising clients on the issue. "It's a temporary stay of execution," he said.

Last week's blacklist order said that U.S. firms generally could no longer export chips or other technology to Huawei, unless they obtained an individual license from Washington, and few were expected to be granted.

One beneficiary of the new temporary license appears to be rural wireless carriers in the U.S., many of which still use Huawei equipment. They had worried that the blacklist could hurt their operations by limiting their ability even to communicate with Huawei about their networks.

But the scope of the exceptions isn't limited to rural carriers and applies to other networks that depend on Huawei gear. The exceptions also cover support to existing Huawei handsets that were available to the public on or before May 16, the day the blacklist became effective.

In advance of the temporary order, Google and other companies that provide parts or services to Huawei planned potentially disruptive changes. Huawei phones run on Google's Android software, and the U.S. company was set to cut off new Huawei handsets from software updates to popular branded apps like Gmail and Maps. Independent apps, such as video-streaming services, weren't expected to be affected.

The inability to use Google apps would be a big hit to Huawei, said Melissa Chau, an analyst at International Data Corp. "Google apps are incredibly important to a company like Huawei, which is deeply reliant on smartphone shipments outside of China, and representing half of its global shipment figure," she said. Ms. Chau said it was of "critical importance to have this resolved as soon as possible."

Moving forward, Huawei will be able to use only the public version of Android and won't have access to proprietary apps and services from Google, according to a person familiar with the matter. Though existing phones are expected to keep functioning largely as usual for now, users could lose some app functions, including some artificial-intelligence and photography features, the person said.

In a separate move, German chip maker Infineon Technologies AG said it was terminating the delivery to Huawei of some components originating in the U.S., in a sign that even non-U.S. suppliers to Huawei are being swept up in the U.S. trade restrictions. Infineon didn't specify which components were affected by the action but said the "great majority" of products it sells to Huawei aren't subject to trade restrictions.

Qualcomm Inc., based in San Diego, has suspended shipments to Huawei of its chips, and some employees have been told not to communicate with the Huawei side, according to a person familiar with the matter. Qualcomm chipsets are used in certain Huawei smartphone models. Huawei also designs a large number of its own chips for higher-end phones.

Lumentum Holdings Inc., which makes optical components for smartphones, said it was stopping shipments to Huawei. In fiscal 2018, the company generated about 11% of its revenue from sales to Huawei.

Lumentum altered its fiscal fourth-quarter guidance to reflect the halt, now expecting revenue of between $375 million and $390 million, down from a range of between $405 million and $425 million. It expects adjusted per-share profit of 65 cents to 77 cents, down from 85 cents to $1.

Xilinx Inc. said it also has begun complying with the Trump administration's order. The ban on shipments to Huawei could shave about $300 million off the chip maker's annual revenue for the calendar year, Christopher Rolland, an analyst at Susquehanna International Group, wrote in a research note. Xilinx is expected to record $3.43 billion of revenue this year, according to analysts surveyed by FactSet.

The U.S. also granted a similar but broader reprieve to ZTE Corp. after it violated U.S. trade sanctions against Iran. Huawei now faces its own U.S. charges of sanctions violations. U.S. officials also regard its network equipment as a security risk, fearing the Chinese government might use it for espionage or sabotage. Major U.S. carriers stopped using Huawei gear several years ago.

Other exceptions to last week's tough export ban will cover disclosures of cybersecurity vulnerabilities; and engagement with Huawei for development of international standards on next-generation 5G.

Kate O'Keeffe contributed to this article.

Write to John D. McKinnon at john.mckinnon@wsj.com, Dan Strumpf at daniel.strumpf@wsj.com and Yoko Kubota at yoko.kubota@wsj.com


(END) Dow Jones Newswires

May 20, 2019 20:23 ET (00:23 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.

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