Trump: it’s my way or Huawei
An executive order banning US firms from dealing with China's Huawei is potentially calamitous to the entire global smartphone industry – and to those firms themselves
Even before US President Donald Trump’s surprise banning of Chinese telecoms firm Huawei last week, this trade war over a new wireless broadband technology has been strange and convoluted.
Last Wednesday, Trump issued an executive order against "foreign adversaries" that he said are "creating and exploiting vulnerabilities in information and communications technology and services … [to] commit malicious cyber-enabled actions, including economic and industrial espionage against the US and its people".
This was followed by the US department of commerce announcing that Huawei would be added to the government’s "entities list" — companies thought to be acting counter to US security or foreign policy interests. This would prohibit the "sale or transfer of American technology" to Huawei without a licence, issued by the department’s bureau of industry & security. The licence requirement was on Monday suspended for three months.
Podcast | Business Day Spotlight - Huawei vows it will not crack under pressure
Huawei responded on Friday, warning of much larger repercussions: "This decision is in no-one’s interest. It will do significant economic harm to the American companies with which Huawei does business, affect tens of thousands of American jobs, and disrupt the current collaboration and mutual trust that exist on the global supply chain."
The long-running feud got more complicated on Sunday, when Google announced it would suspend business with Huawei. Huawei’s handsets — which recently outsold those of Apple, to make Huawei the global No 2 smartphone maker — use Android, Google’s operating system, which runs on about 95% of global smartphones.
The ramifications are potentially crippling for Huawei’s handset division, which sold more than 200-million devices last year.
A Google spokesperson said it was "complying with the order and reviewing the implications. For users of our services, Google Play and the security protections from Google Play Protect will continue to function on existing Huawei devices."
Google is effectively saying it will continue to support existing phones, but the executive order threatens future sales of Huawei devices, for which the situation is less clear.
The "national emergency" ban is potentially calamitous for the entire supply chain that serves the smartphone industry, and for US firms that supply processors and components to Chinese companies.
The executive order effectively means US companies will no longer be allowed to deal with the Chinese telecoms maker. Even though its mobile division isn’t its prime business — that’s telecoms equipment — it will hit the company hard.
Along with Google’s Android operating system that runs on its smartphones, US chipmakers Intel, Qualcomm, Xilinx and Broadcom will be prohibited from dealing with Huawei.
Bloomberg reported that Huawei has apparently stockpiled processors from its key suppliers, which should mitigate the impact for a few months.
One alternative that’s been bandied about since December — when Meng Wanzhou, Huawei CFO and daughter of company founder and president Ren Zhengfei, was arrested in Canada — is for the company to create an alternative to Android.
Glenn Schloss, Huawei’s vice-president of corporate communications, tells the FM the company is reviewing the implications for its customers.
"We have diversified our global supply chain in anticipation of the ban," he says. "Huawei had been developing its own [operating system]. While we prefer to continue using Android, which our consumers love, we have been working on contingencies."
Huawei has found itself the unlikely flashpoint in a not insubstantial trade war between the US and China. The Trump administration is looking to levy tariffs on imported Chinese goods in a generalised way — but it is also very specifically against Huawei and the fifth-generation (5G) cellular networks in which the company is the world leader.
Trump’s focus on Huawei is hard to fathom. Most commentators downplay the espionage concerns and focus on the quality of technology Huawei offers because of its huge research & development (R&D) budget.
"Huawei is one of the global brands that shows the way in R&D, and also reaps the benefits of it," says World Wide Worx MD Arthur Goldstuck.
"With between $15bn and $20bn R&D spend expected this year, it may well overtake Google parent Alphabet.
"The real differentiator, though, is in the proportion of its workforce engaged in R&D: 80,000, or 45%. That is a Thanos-level disruption of global technology innovation," he says, referring to a character from the recent Avengers: EndgameD, having spent $15bn last year on it, and has aggressively upgraded its own equipment.
A tour of the Huawei booth at the MWC Barcelona exhibition in February offered an instructive view of the multiple ways in which the company innovates and upgrades the components and technology it uses. This ranges from casing its cellular antennas using materials that are lighter but sturdier and better at allowing radio frequencies to pass through, to more efficient heat distribution, to 3D-printed network cables for data centres.
But what is 5G — and why does it matter? Consumers may be weary of yet another generation of cellular network, but the networks themselves are really excited because 5G offers fibre-like speeds without having to dig up any pavements.
Celebrity banker Michael Jordaan’s local data-only operator, Rain, already has the first 5G network (built by Huawei) in Africa. Handsets are expected to be available mid-year.
"5G does to 4G what 3G did to 2G, and then some," says Goldstuck. "It will exemplify the ‘10X’ concept … the exponential increase we can expect in storage, connectivity and responsiveness. It will be the foundation of the new generation of applications, services and platforms, as it enables them to connect, interact and inter-operate seamlessly — a buzzword that, before 5G, was fairly meaningless."
Much of the furore about Huawei has focused on a 2017 Chinese intelligence law that would compel Chinese companies to co-operate with the government. Securocrats have pointed to this as proof that Huawei could undermine the networks of other countries, if ordered to do so by the Chinese government.
Goldstuck dismisses the likelihood of this law being put into effect: "If Huawei were caught out compromising security to suit the geopolitical demands of the Chinese Communist Party, it would spell the end of Huawei outside China. It’s an absurdity."
It’s nonetheless created a stir. So far, Australia and New Zealand have joined the US in banning Huawei technology.
The UK, meanwhile, decided to allow Huawei equipment in "noncore" elements of the country’s 5G network. Defence secretary Gavin Williamson was fired after news of this leaked from the UK’s top-secret national security council, with Prime Minister Theresa May accusing him of being behind the leak.
Earlier this month Huawei chair Liang Hua was in London, where he promised: "We are willing to sign a no-spy agreement with the UK government. No spying, no backdoors."
It echoed the vehement statement Ren made in February, that Huawei would not allow "backdoors" in its technology.
"Absolutely not possible," he told TV network CBS. "And also, we never participate in espionage and we do not allow any of our employees to do any act like that. And we absolutely never install backdoors. Even if we were required [to do so] by Chinese law, we would firmly reject that."
As Goldstuck says: "The fundamental reason for the US attack on Huawei is the abject fear of a Chinese company rendering US technology irrelevant."
But, he says, "the apparent leader of the free world should bear in mind where the most popular smartphone in the US is manufactured".
Not that this is likely to change things. The saga is almost certainly going to continue for the next few months — a trade war playing out under the guise of national security.