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May 20, 2019

Huawei’s inclusion on US ‘entity list’ may drive China tech into Europe’s arms

By GlobalData Technology

The inclusion of Huawei – the world’s largest telecommunications equipment producer – on the US entity list will put a recently inked Qualcomm deal in peril and make Europe an attractive 5G proposition for the China tech company.

Huawei in the US market

The White House and US Department of Commerce have banned Huawei from selling technology into the US market, making US companies obtain a license to sell their components to Chinese counterparts.

Huawei recently signed a short-term licensing agreement with the US semiconductor equipment company Qualcomm, obliging Huawei to pay Qualcomm $150 million each quarter, with Qualcomm providing semiconductors by Huawei for the launch of 5G services. However, the partnership, which is significant for both companies, is now at risk.

Although the precise contractual terms are unknown, cancelling the agreement will likely be extremely expensive for Qualcomm. Thus, the technology company will have to obtain the license needed and strike a new deal with Huawei, accepting any additional costs which might arise. A fresh agreement would probably include further expenditure for Huawei to cover any costs of obtaining the license needed. A deal of this kind is not favourable to Huawei due to the high costs, making it more profitable for the Chinese company to look for next-generation 5G technology elsewhere.

Europe is the obvious place for Huawei to seek 5G technology

Nokia or Ericsson could offer a good alternative for Huawei to obtain the 5G technology required for the company’s products. Compared to Qualcomm, gaining technology from the two companies may prove more cost-efficient. Qualcomm charges as much as $16.25 for every phone that uses the company’s technology; Nokia and Ericsson only charge $3.5 and $5 respectively.

However, questions might arise regarding how these two companies can provide the same services as Qualcomm at a lower price. Nokia and Ericsson likely sacrifice quality to reduce production costs, while Qualcomm keeps quality standards high and offers its products at a premium.

Accepting a European alternative would enable Huawei to avoid any additional tariffs which might arise from the threatening US/China trade war. Both companies have their headquarters in Europe, which currently does not impose any heavy tariffs on importing or exporting goods from China.

Helpfully, most European countries are interested in doing more business with Chinese companies, including Huawei.

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