Trump’s Direct Product Rule Change, Another Ban On Huawei

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Trump’s Direct Product Rule Change, Another Ban On Huawei
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Today, the Trump administration moved to block shipments of semiconductors to Huawei Technologies from global chipmakers, involving something known as the direct product rule.

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Nelson Dong is a a senior partner at the international law firm Dorsey & Whitney law firm. He is a current member of the Board of Directors of the National Committee on US-China Relations (NCUSCR). Of the news he says:

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Amendment To The EAR's "Direct Product" Rule

"The Administration has consistently viewed Huawei and its various subsidiaries as surrogates for the Chinese government and thus sought to hobble Huawei’s growth at every turn.  In 2019, the Administration placed Huawei and over 100 of its subsidiaries on the Entity List that bars any sales of goods, software or technology subject to the U.S. Export Administration Regulations without a license from the Bureau of Industry and Security.  In its latest move, the Administration announced that it is amending the EAR's "direct product" rule to state that any Huawei integrated circuit designs produced with EAR-controlled technology or software and any Huawei chipsets produced with EAR-controlled semiconductor manufacturing equipment will both be considered “subject to the EAR” and thus require a BIS export license as well.

This drastic move had been rumored for some months and will now take effect after a grace period of 120 days to allow the global semiconductor industry to adjust and to avoid interruption of production cycles already under way.  This new move will affect designers and producers of integrated circuits all over the world but especially in China, Taiwan, Korea and Japan, where most such microelectronics are fabricated today," Dong says.

"Since the global semiconductor industry tends to rely very heavily upon both U.S.-origin semiconductor design software and U.S.-origin semiconductor manufacturing equipment, this amended "direct product" rule will probably lead to a number of near-term and long-term consequences.  Huawei had already begun to shift away from U.S.-origin parts and software because of its 2019 Entity List designation, and so this EAR change will certainly accelerate that design-out process," Dong says.

Negative Economic Consequences On The U.S. Satellite Industry

"However, indirectly, this move may well force the global semiconductor industry to look away from U.S. suppliers of semiconductor design tools and semiconductor production equipment and even to create new rival companies in other countries, including China itself.  At one point, the United States had held a comparable dominant market share in the global communications satellite industry but then chose to impose stricter export controls by making such satellite technology subject to the International Traffic in Arms Regulators.  That legal change, over time, caused customers all over the world to seek only “ITAR-free” satellite parts and components.

The resulting avoidance of U.S. suppliers and the vast expansion of alternative non-U.S. suppliers had profoundly negative economic consequences on those U.S. satellite industry suppliers who lost billions in sales and whose global market share fell sharply.  Ironically, the U.S. Government itself also paid higher prices for its own satellites because now those U.S. suppliers had to recoup their entire R&D costs by selling effectively only to U.S. customers but to almost no foreign customers.  If that recent technological history were to repeat itself into a move to seek “EAR-free” semiconductor designs and production equipment, the Administration’s "direct product" rule change could lead to tectonic shifts within the microelectronics industry for decades to come," Dong says.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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