The Power and Risk of Sole Vendor/ Supplier.

On Friday 17, 2019 The Trump administration blacklisted China’s largest tech company - Huawei

Background:

Huawei is the region’s biggest supplier of mobile network equipment and has staked out a major role in rolling out 5G networks.

Huawei faces two big threats from Trump decision. One is the loss of American components for its products. The other is the potential withdrawal of its Android license.

This is a political risk that would impact the business objectives. What are the reactions of Huawei’s stakeholders?

Huawei’s BoD/Management:

• Revisiting the company strategy, considering rivals to Android.
• Working on its own mobile operation system.
• This would put R&D under pressure.

Phone Carriers:

• Phone companies would scrap plans to order and sell Huawei 5G phone. 
• Not to include Huawei phones in 5G network because of uncertainty over whether they could use Android.

Suppliers:

• Chipmakers including Intel Corp., Qualcomm Inc., Xilinx Inc. and Broadcom Inc. will lose sales to Huawei.

Customers: depending on their loyalty,

• Some customers would stop purchase or return their handsets/mobiles. 
• Others would stick with the company and encouraged it to keep fighting what they saw as an attack on a foreign company by Trump.

Shareholders:

• Existing: Will accept cut dividends to fund R&D working on Huawei’s mobile operation system. They might sell their shares and consequently share price depressed. 
• Potential: will require high required rate of return in response to increased risk.

Debt holders / Bankers:

• Existing: they might not wish to lend more. 
• Potential: will require high required rate of return and restrictive covenants.

Rivals / Competitors:

• Big phone makers, like Samsung, would surge its sales and market share but this surging is reliant on Google’s Android.
• Hence, backup plan must be in place to avoid being the next victim.

Google:

• Google exploits the decision to be corporate citizenship and align with governance by complying with all US gov’t requirements.
• Maintains its corporate reputation snice it continue to provide software updates and security patches to existing Huawei models for the next 90 days.
• However, Huawei might be forced to develop Android rival which may be undermine and challenge Google’s Dominance.

Local Government:

• Enacts new regulations in respect of Huawei’s operations.
• Delay launching of 5G networks.

Employees:

• Like customer, their reactions will depend on loyalty and Huawei’s working conditions.

Auditors:

Their role is to catch up the risks and design plan based on, hence they will pay attention to the high risk area at Huawei:

• Revenues 
• R&D Expenditures 
• Going concern
• Provisions: since Google won’t be allowed to work with Huawei on software bugs and other technical fixes, consumer devices and date will be at cyber security risk which may be incur fines and penalties.
• Impairment of 5G network assets.
• Loan agreement and restrictive covenants.
• Inventory valuation in respect of mobile phones.

Finally, Huawei and other phone makers are locked into comfortable relationships with Google and if Google takes away the Android license, it will force these companies out of its comfort zone.

Written by: Walid Yassin, ACCA