Google Restricts Services to Huawei as Trade War Expands

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Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google has opened up another front in the U.S.-China trade war.

Following the Trump administration's executive order last Wednesday to blacklist Huawei, China's leading smartphone maker, Google and chipmakers including Intel (NASDAQ: INTC), Qualcomm (NASDAQ: QCOM), Broadcom (NASDAQ: AVGO), and Xilinx (NASDAQ: XLNX) are blocking the handset maker from using key software and components.

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In the latest sign that tensions between the U.S. and China show no signs of ebbing, President Trump said that Huawei and its affiliates posed a risk to U.S. national security and that it was banned from buying parts and technology from U.S. companies.

Now, Google has suspended its business activity with Huawei, the world's No. 2 smartphone maker and biggest maker of telecommunications equipment. This means it will no longer transfer hardware, software, and services that are not already publicly available through its open sourcing license, according to Reuters.

What it means for Huawei

The suspension could effectively cripple sales of Huawei phones outside of China. Google's move means that existing Huawei phones won't be able to run any updates to the Google-owned Android operating system it uses. Future Huawei phones will no longer have access to Google Play, the company's equivalent to Apple's App Store, and popular apps like Gmail, Google Maps, and YouTube. Current Huawei users will still be able to use Google Play and Google's other apps, so the effect will be strongest on future sales. In Europe, Huawei's second-biggest market, sales could be devastated, as many of Google's products have leading market share on the continent.

The privately held Huawei generated $107 billion in revenue last year, up 19.5% year over year, as the company has made great strides to improve its technology, especially its camera. Huawei had been hoping to take the top spot in smartphone sales from Samsung by the end of the year, but that seems unlikely after today's news, especially if the ban holds.

The blacklist on Huawei from using American semiconductor companies is also likely to send shockwaves through the industry and puts Huawei's future into question. Just last year, Huawei bought $11 billion in chips from American companies. Foreign companies are also banned from selling chips with U.S. components to Huawei.

Huawei itself, however, was unperturbed, as management said the chip ban would have limited effects. The company maintained its sales forecast for the year of under 20% growth, according to The Wall Street Journal.

Though the news clearly threatens Huawei the most, investors weren't keen on the impact on American companies, either. Alphabet stock was down 2.1% on the news, while Qualcomm, which counts on China for two-thirds of its sales, was down 5.3% in afternoon trading. This follows a slide last week after the new U.S. policy was announced. Other chipmakers were down several points as well. The tech-heavy Nasdaq was off more than 1% Monday.

For chipmakers, the impact of the ban is rather direct. For Alphabet, the move could have a modest impact on its advertising and app business. It could drive some potential smartphone buyers to purchase an iPhone, though it seems more likely that they'd replace a Huawei device with another Android-based phone.

An ongoing saga

This is not the first time Huawei has been a flashpoint for international conflict. The U.S. had previously accused the company of stealing trade secrets. As early as 2012, government officials said Huawei and fellow Chinese smartphone-maker ZTE posed a security risk. Several countries have recently expressed security concerns about the company, and earlier this year, Germany considered banning it from its next-gen telecommunications network.

Huawei's CFO Meng Wanzhou was arrested in Canada last December at the behest of the U.S., accused of fraud in relation to U.S. sanctions on Iran, further inflaming tensions. The U.S. and others think that China is using Huawei as a Trojan Horse to steal technology, though Beijing has vigorously denied such claims.

Now, the Trump administration seems to see the Huawei blacklist as a way to strengthen its negotiating position and crack down on China's technological espionage.

At this point, there may be no easy resolution to the Huawei ban or the greater trade war, as both countries have slapped tariffs on each other in recent weeks. Huawei's founder and CEO, Ren Zhengfei, has also denied that his company has spied on behalf of the Chinese government, saying in January, "No law requires any company in China to install mandatory back doors. I personally would never harm the interest of my customers and me, and my company would not answer to such requests," according to The Wall Street Journal.

If Huawei or China won't admit such espionage exists, it's hard to see any compromise on trade secrets being reached, since this is a key issue for the Trump administration. If the administration's goal is to stop such breaches, then the current blacklist may be a necessary step.

It's unclear how China will respond to the blacklist, and the U.S. still appears to hold some leverage in trade negotiations. However, the near-term impact of trade tensions on U.S. consumers, businesses and investors still looks overwhelmingly negative, even if it eventually leads to the U.S. getting a better deal.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Broadcom Ltd, Nasdaq, and Xilinx. The Motley Fool has a disclosure policy.