Where you sit determines what you see, which is true across the supply chain relative to the trade war with China and the U.S. tariffs, as well as Huawei's issues.
A new report by 650 Group breaks down the impact that the tariffs, trade war and Huawei's blacklisting are having across various vendor market sectors. While the enterprise wireless LAN market has already taken a hit, the cloud sector is relatively unscathed.
Last month, the U.S. Department of Commerce put Huawei on a trade blacklist that was designed to make it difficult for the world's largest telecom vendor to do business with U.S. companies. The "Entity List," which is set to take effect after a 90-day reprieve, would require U.S. companies to ask the government's permission to do business with Huawei. Also last month, the Trump administration increased tariffs to 25% on $200 billion worth of Chinese products.
According to 650 Group Co-Founder and Technology Analyst Chris DePuy, the enterprise wireless LAN (WLAN) market has already been impacted by the escalating trade war between China and the U.S. In the first quarter of this year, enterprise WLAN revenues in China were down year over year.
"The big picture is we are seeing a slow down and it's driven by China," DePuy said. "That's obviously what is the big picture, but specifically we're seeing different rates of slow downs depending on which coverage area we're talking about. In the wireless LAN market we saw the gross rates in China go down to minus, year on year, single digits and it's taken the overall growth down to 3% year on year."
DePuy said the telecom industry went down a similar road last year when the U.S. government blacklisted China's ZTE, which nearly drove ZTE out of business. While the issue with ZTE was resolved, telecom companies need to re-think the impact of Huawei's troubles, according to DePuy.
"We're expecting that there will be a slowdown unless things very miraculously change near-term, and that we're going to see the telecom industry take a hit on a year on year basis in 2019 very similar to what we saw in 2018," DePuy said. "The irony is that 2018 was a disappointing year, and now we're saying that off of a disappointing year we might have another disappointing year, which is really a counter-trend. Usually when you have a tough year and the market is roughly flattish, you'd expect the next year to be up. Huawei is a bigger company than ZTE so we're seeing that kind of thing."
Alan Weckel, co-founder and technology analyst for 650 Group, said the tariffs, trade war and Huawei's difficulties are having a two-fold affect on enterprises.
"One, the component suppliers are underestimating the impact of how Huawei procures chips," Weckel said. "They're only looking at Huawei as an account and not as additional suppliers that sell chips into Huawei. That's an impact.
"The second thing is that a lot of these enterprise deals are multi-vendor and multi-solution. Certain vendors don't have visibility into the fact that Huawei is in the RFP. So, the deal is getting pushed out, but the visibility there into the system vendor isn't perfect because they (vendors) don't see the fact that Huawei is in that multi-vendor, multi-solution sale."
As a result, DePuy said that deals will get pushed out as enterprise customers are faced with replacing Huawei gear with another vendor's gear, which takes time.
On the flip side, Weckel and DePuy said North American vendors that do business in the enterprise and cloud markets will have stronger year over year results than their Chinese competitors. Due to short buying cycles and competition, the enterprise and cloud provides will take a smaller hit from the impact of the trade war when compared to the telecom industry.
"Cloud is more robust, and I'd also say it's very North American focused," Weckel said. "The cloud hyperscalers are almost all U.S. vendors with a U.S.-focused supply chain. The cloud in China is in its infancy, and the cloud in Europe is dominated by the U.S. Whereas, in the telco space there is a decent China or Huawei influence. There is really no Huawei influence in cloud in Europe because it's all Amazon, Azure, and Google, or from a social point of view, Google and Facebook."
By contrast, the sales cycle is longer and bit more elaborate in the telecom sector. For example, DePuy said only Huawei, ZTE, Samsung, Ericsson, and Nokia are competing in the radio access network (RAN) market. The evaluation time frame for RAN products can be up to 18 months, and service providers don't want to add to their 5G deployment timeframes.
The trade wars and tariffs could have a positive impact on non-U.S. semiconductor companies, according to DePuy. Semiconductor companies that could be negatively impacted by a lengthy trade war include Broadcom, Marvell and Xilinx
"Taiwanese semiconductor companies are salivating at the opportunity of the trade war and they sell their semiconductors into the enterprise market worldwide while the U.S. semiconductor companies are being put at a disadvantage as a result of all of these barriers that are being put up," DePuy said. "And negatively, I think you could argue, and this is being argued at the federal level right now, that U.S. chip companies are seeing their market get cut to a smaller size because they are likely to get excluded either immediately or over time from markets like China.
"So, it's probably bad for U.S. chip companies and good for non-U.S. semiconductor companies. That I think you can say with a high degree of certainty."
For the most part, Chinese vendors aren't really selling that much into the U.S. in the enterprise sector while U.S. companies, such as Cisco, aren't selling that much into China, DePuy said.
Huawei has made a concerted effort to be more involved in industry standards, but standards bodies and open source groups have been re-thinking their interactions with Huawei, which, in some cases, had led to a diminished role for Huawei.
"Huawei had a lot of interest in being involved in standards and was always interested in having a China-based supply chain and China-based standards," Weckel said. "I think the trade war is just accelerating something that China wanted anyway, which is, by necessity or by interest, they're going to develop their own standards. A U.S.-based country might not see that because Huawei was never selling here, but that's going to have a huge impact on say the Middle East or Latin America or Africa, all emerging markets because it might be something where the standards in the U.S. and China are not compatible.
"It could be that a U.S. chip company now needs to create a chip for a China standard, but that will only ship into the Middle East in order to win that business. That's a lot of burden."