Lenovo Group Limited (992) Earnings Call Transcript & Summary

So the second question says, does the restrictions impact only China production and China sales? Or does it impact the entire operations? The restrictions, of course, the rule is rather complex. We continue to review it. Our understanding is that there are restrictions based on end use as well as end user and end destination. There are a number of destinations that are called out. They go by certain category of country groups, their D1, D4, D5, their broad categories of control and each category has a specific level of control based on the type of product -- type of GPU we're talking about and based upon the parameters of the GPU. We continue to review the parameters with our suppliers to determine which sets of products are controlled and which sets can be -- continue to be exported to all countries and which cannot and which can continue to be exported with a license. Okay. The next question, several countries other than China have been included in the U.S. restrictions. Some other countries have been included for some time, such as the Middle Eastern countries. Has Lenovo applied for licenses for these non-China countries? And what is the experience so far? This is a very brand-new rule. It was just written, directed and published last week. Prior to this time, the Middle Eastern countries that are called out in the rule were not subject to licenses. These products tended to be uncontrolled at the time. We understand based on what the rule is saying that with respect to some of these Middle Eastern countries that there is a licensing policy of approval. So while a license may be required to be submitted depending on the type of products we're talking about and whether they are controlled under certain parameters, it could be that a license is required, but it seems the licensing policy is one of approval. So we would expect in those situations that we would have to submit a license application, but likely, BIS would consider its licensing policies and make a determination in that way. Okay. So the next question is the export control restricts shipments to certain AI chips -- I'm sorry, the export control restrict shipments to certain AI chips to companies headquartered in China -- shipments. I think that's [indiscernible] does this mean that shipments are automatically denied to Lenovo unless there is a license? We're currently assessing. AI chips is actually a pretty broad term. The export control restrictions apply to specific parameters and they involve performance processing parameters as well as density parameters. So it depends on the chip that we're discussing where within the regulation they fall, whether there is a control. There are different controls based on the level of performance processing and as well as the level of the density. And so it's sort of a general calculation. So at this time, we're assessing with our suppliers closely to understand which of their chips fall within which categories. Certain categories have a potential license exception that is applicable and certain categories do require an export license. Will you focus on more projects in nonrestricted countries? At this time, we're actually assessing what -- how the rules can apply to the products that we currently have and to the products that we currently buy from our suppliers. It will depend on that assessment, what projects we pursue. But for the most part, the restrictions are, in some cases, while they require a license, licensing application policy is one of approval in certain instances. And so we will continue to assess and determine how best we need to comply with the rules and regulation. Are there any of the restricted chips that have a good potential for getting a license for China shipment, A100, H100, A800, L40S, L40, RTX 4090. So with respect to licensing, a license request is submitted to the federal government and then it is up to the federal government to make a decision based on the license application, whether a product can be shipped. So there is -- in these instances, already a license is required for the A100 and the H100 per the rule last year. At this point in time, I think we would have to see how BIS would review those license applications, given that the rule is brand new, we are assessing how strictly BIS would look at its licensing policies. Given that our key supplier NVIDIA posted the SEC filing that the scrutiny has been taken effective immediately, do we see the consistent situation from our side that there is no grace period anymore? Secondly, 2-part question, are all the subsidiaries from Chinese entities that require the licensing and are subject to screening? So the SEC filing that NVIDIA had posted yesterday, I believe, is what you're talking about indicated that part of the rule to [ immediate ] effect with specific GPUs. That indication was done by what's called an as informed letter. They received an as informed letter directly from BIS and the direction is from BIS to NVIDIA only. It does not apply to any third parties. Secondly, with respect to the second part of this question, are all the subsidiaries from Chinese entities that require the licensing and are subject to screening? It's likely that all entities are going to be subject to screening because there are very specific end use and end user requirements. So very likely screening will be required an understanding of how these products will be used in downstream distribution channels and so on will likely be necessary. Okay. Sorry. Okay. Does the U.S. restrictions apply to China region or to Chinese companies? China is called out as a D5 country. And in the regulations, there are licensing requirements for D1, D4 and D5 countries, which include most of the Middle Eastern countries, the embargoed destinations and also China to some degree. For H800, A800, are shipments restricted to Lenovo unless there is a license? At this time, our colleagues and suppliers are reviewing whether chips are restricted to Lenovo worldwide or if they're restricted in only certain locations. The rule is ambiguous, and our suppliers continue to review and assess. Okay. I just want to check on the announcement to develop hybrid AI products with NVIDIA. The license to export these products have been received. Thanks. So the rule was just drafted and announced last week. Of course, Lenovo is working together with our suppliers, including NVIDIA, AMD, Intel to determine whether license requirements need to be met and we will certainly take any steps necessary to ensure compliance of the law. For countries that are not included in the U.S. restriction list, what kind of KYC procedure Lenovo has in place to ensure clients are not under U.S. restrictions, e.g., overseas subsidiaries of Chinese companies. So Lenovo takes compliance seriously. We have various screening mechanisms in place to screen for restricted party as well as additional due diligence to screen for ethics to clients and anti-bribery and corruption. In all of those cases, we've deployed automated screening, and all of our third parties and business partners are screened at various points in every transaction. Do you think it's possible BIS approved to license and still export to restricted country as long as the end use is compliance? So the time from submit license request to approved is 90 days. So it depends on BIS' licensing policy. It also depends on the extenuating circumstances in which a license may be required as well as the extenuating circumstances in which BIS should issue a license. I don't have a crystal ball as to how BIS would handle license applications to restricted parties or restricted countries. But they have indicated that in some instances, the licensing policy is one of approval. The 90-day period is something that's written in the regulations, how -- so it could take up to 90 days. It could take less time. It could take more time. It really depends on the process, the number of questions BIS may have for the applicant, perhaps a request for a meeting may be necessary. There could be many things involved that could prolong the period, but there also could be many areas involved that shorten the period. So it really depends on each license application and the facts and circumstances associated with it. Who should apply the license, NVIDIA or Lenovo? When NVIDIA sells AI chips to Lenovo, who build the servers and sell to Chinese enterprises? So we are working with our suppliers today to determine. First, an assessment of which products, if any, are subject to the rules. And to the extent that they are, who should submit the license application who's in the best position to do so. We are working together to determine that right now, and we'll have to come back on that question. The second SEC filing that NVIDIA posted yesterday did not include the L40 and the RTX 4090 as being restricted immediately. While the first SEC filing for last week did include these 2 chips in its list of restricted chips. When do the restrictions for these 2 chips kick in? And why were they not included in the second SEC filing by NVIDIA? I would have to talk with NVIDIA about whether why those 2 chips were not included. It really as far as whether they will be restricted, the restriction for the whole rule applies within 30 days. So by November -- by midnight on November 17, the rule will be effective. It would depend on whether the L40 and the RTX 4090 meet the specific parameters of the rule. As I said, there are specific performance processing parameters as well as density parameters that need to be met. So it will depend on whether based on NVIDIA's assessment, those 2 chips are meeting those parameters or not and in which parameters they do fit and whether a license is required for one or the other or neither. If Lenovo produces a server using the A100, H100 for a customer in the U.S., but the manufacturing process is supposed to be done in a Chinese factory, does the new regulation mean AI chips can no longer be shipped to Lenovo Chinese factories? We're assessing the regulations and what kinds of manufacturing can be done where. Generally speaking, we tend to produce some of our servers for the United States in other locations, but it really depends on how these chips will ultimately be used in the U.S. and whether the chips are -- and in this case, they are controlled, so whether a license would be issued for the China factory. There are other sort of areas that we do consider from a supplier and manufacturing standpoint, some specific details around tariff classification as well as duty rates. So we do try to ensure that when we supply our products, we're producing in the best location for our customers. And so we will take all of that into consideration before producing in a specific factory. Has Lenovo seen cases where BIS approves a license for products destined for a country under presumption of denial? Any reasons why these cases might have been approved? Yes, we have -- I personally have seen cases where BIS approves export licenses when there is a presumption of denial, I know that others probably have as well. There are great examples publicly available already today that we've seen where approvals have been given. It honestly is based on BIS as evaluation and any extenuating circumstances that might exist. For the restricted chips, does the export control restrict shipments to Taiwan, U.S. server companies with production sites in China? My understanding of the rule is that at this point in time, of course, it depends on the parameters of the chips, but country groups, D1, D4 and D5 are called out in the rule, which includes China. I don't think the country groups include Taiwan, but they do include China. And so I think they are restricting certain chips for export to China. Of course, the rule is quite ambiguous. There are different license requirements as well as license exceptions and potential licenses that have a licensing policy of approval and those of denials. So it really depends on the chip and how it's going to be used both within China and outside of China.

Right. Due to time constraint, we will now take the last question, please.

Okay. How much operating costs for further KYC license applications, compliance stuff will be increased because of this new rule? Well, there's definitely additional due diligence requirements that need to be conducted and user certifications that might need to be obtained and certainly an increase in the scope of work that needs to be done by trade compliance teams and ethics teams across all organizations. So I imagine there would be some increase to the cost associated for this and submitting license application. I think it's a time-consuming task. So there certainly is a time element here.

Thank you, Shama, and thank you, Laura, for the very detailed responses. And thank you all for participating in the call. This is the end of the call. If you have any questions, please let us as Lenovo IR team is there. And we'll try to respond to your questions. Thank you, and we hope to hear from you again in the near future. Thanks. Bye-bye now.

Bye-bye.

Thank you, everyone. Bye-bye.