How Micron Beat Trump’s Huawei Ban

I’m, I’m simply saying that life, uh… finds a way.

That pseudo-famous quote from Jeff Goldblum’s character in Jurassic Park seems to apply to the global technology supply chain.

Donald Trump thought adding Huawei to the Commerce department’s entity list last month would cripple China’s crown corporate jewel, and maybe he’ll be proven right. But, as the White House discovered on numerous occasions since the trade war began, rolling back globalization and severing supply chains built over decades isn’t something that can be accomplished overnight. Now, it sounds like the administration might have overlooked key loopholes in the effort to squeeze Huawei.

Specifically, both Micron and Intel are shipping some products to China’s pariah tech giant thanks to the exploitation of the so-called de minimis rule.

“Even when companies have headquarters in the US, they may be able, through ownership of overseas subsidiaries and operations, to classify their technology as foreign”, Bloomberg wrote Wednesday, citing Cross Research’s Steven Fox. “If less than 25% of the technology in a chip originates in the US, for example, then it may not be covered by the ban, under current rules”.

Oops. Here is what Micron’s CEO Sanjay Mehrotra said on the company’s call Tuesday afternoon:

To ensure compliance, Micron immediately suspended shipments to Huawei and began a review of Micron products sold to Huawei to determine whether they are subject to the imposed restrictions. Through this review, we determined that we could lawfully resume shipping a subset of current products because they are not subject to Export Administration Regulations and Entity List restrictions. We have started shipping some orders of those products to Huawei in the last two weeks.

Suffice to say Sanjay got some questions about that from analysts.

“I guess first question, I was hoping you could provide a little more granularity on Huawei. You talked about the ability to sell subset of products, can you walk through, I guess, where you are allowed, where you are not?”, CJ Muse of Evercore asked.

Mehrotra demurred, essentially repeating his prepared remarks as excerpted above.

Later in the call, Bernstein’s Mark Newman gave it a shot. “The first question really following on Huawei, can you give a little bit more quantification on how much the 13% or so revenue you expect you will be able to continue to export to Huawei?”, Newman pressed.

Again, Mehrotra demurred. “So, with respect to Huawei, as I’ve said before, our revenue expectation in fiscal Q4 is less than what it would have been without Huawei being on the entity list [but] beyond that we don’t really get into specifics in terms of revenue etcetera on a customer by customer basis”, he said.

Blayne Curtis of Barclays tried too. “Sort of follow up on the Huawei point. Just want to make sure I understood what you’re saying”, he began. “Are you able to ship because the IP resides in another country? Just trying to understand how exactly are you able to continue to ship?”

Mehrotra read from the same script. To wit:

So, with respect to what we are able to ship to Huawei, as I said before that what we are able to ship is what is not under the export administration regulations. And that’s what we are able to ship and actually export administration regulations have various complex aspects and considerations several criteria that you have to go through, if you’re interested in that, you can certainly go to the BIS site and look for those and we assess our products versus those and you know these considerations are not just limited to any one or two aspects such as what you mentioned, I mean they have several aspects and we assess our products that we can ship to Huawei versus those and have made determination or shipments and we, as we said, we began those shipments in last two weeks.

Bloomberg attempted to get more out of him, but was no more successful than Wall Street. “Micron’s Sanjay Mehrotra, in a conference call discussing his company’s earnings, declined to explain his analysis, despite repeated questions”, the linked article above reads. “In a brief interview after the call, he also wouldn’t elaborate and said he hopes the US and China quickly resolve their trade dispute.”

Don’t we all, Sanjay.

In a separate article, Bloomberg notes that “only 22% of [Micron’s] property, plants and equipment are in US.” The breakdown shows 33% is in Taiwan, 30% in Singapore and less than 2% in China. The upshot: Micron’s products are not, for the most part, made in America. That, in turn, means a lot of those products could be technically exempt from Trump’s efforts to cripple Huawei.

Micron of course turned in better-than-expected Q3 earnings on Tuesday afternoon. The shares look set for a blockbuster session.

The New York Times published a detailed take on Intel and Micron side-stepping Trump’s ban. A more straightforward way to explain all of the above is simply to say that the companies have found a legal way to “avoid labeling goods as American-made”.

“The components began to flow to Huawei about three weeks ago”, four people familiar with the transactions said.

As the Times goes on to note, “the sales will help Huawei continue to sell products such as smartphones and servers [and] hint at the possible unintended consequences from altering the web of trade relationships that ties together the world’s electronics industry and global commerce”.

It goes without saying that hardliners within the administration aren’t enamored with this. “While the Trump administration has been aware of the sales, officials are split about how to respond”, sources told the Times. “Some officials feel that the sales violate the spirit of the law and undermine government efforts to pressure Huawei, while others are more supportive because it lightens the blow of the ban for American corporations.”

John Neuffer, the president of the Semiconductor Industry Association, released a statement that reads as follows:

SIA companies are committed to rigorous compliance with U.S. export control regulations. As we have discussed with the U.S. government, it is now clear some items may be supplied to Huawei consistent with the Entity List and applicable regulations. Each company is impacted differently based on their specific products and supply chains, and each company must evaluate how best to conduct its business and remain in compliance. Over the longer term, SIA remains concerned restrictions on our ability to sell commercial products in major markets will erode the competitiveness of the U.S. semiconductor industry. We continue to call on the U.S. government to help advance U.S. semiconductor leadership as it works to preserve U.S. national security.

Trump could, if he chose, close these loopholes by instructing the Commerce department to alter the rules around which foreign-made commodities are covered under relevant regulations. There’s no word on whether the White House will attempt to curb what, in Trump’s eyes anyway, are probably seen as illicit transactions.

According to Kevin Wolf, a former Commerce Department official and partner at the law firm Akin Gump, who has advised US tech companies engaged in business relationships with Huawei, this is not, in fact, some kind of shady backdoor. “This is not a loophole or an interpretation because there is no ambiguity”, he told the Times. “It’s just esoteric”.

That’s a nice way of saying that Wilbur Ross’s Commerce department doesn’t understand its own rules.

White House National Security Council spokesman Garrett Marquis thinks Wolf has some nerve. “If true, it’s disturbing that a former Senate-confirmed Commerce Department official, who was previously responsible for enforcement of US export control laws including through entity list restrictions, may be assisting listed entities to circumvent those very enforcement mechanisms”, Marquis said.

Maybe. But what’s even more “disturbing” is that the Commerce department is heavily involved in upending global trade, very possibly to the detriment of the entire world, without even fully understanding its own regulations.

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