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The Rise of Huawei: Harbinger of a Brave New World or China, Inc.?

28/01/2020

Huawei is a name that appears to be everywhere, at least outside of the United States—and yet only five years ago, few non-Chinese not working in the telecommunications industry had ever heard of them. Nowadays, however, observers are warning that Huawei is poised to dominate the global technological landscape from the mid-2020s until who knows when. All of these concerns are based on Huawei’s perceived dominance in a critical new technology known as 5G.

 The Rise of Huawei: Harbinger of a Brave New World or China, Inc.?

What is 5G and why does it matter?

Most people realise that “5G” stands for “fifth generation.” But fifth-generation what? Put simply, 5G is the latest quantum leap for the wireless industry, a leap that could set international technical standards for years or even decades to come. Although wireless technology is commonly associated with mobile phones, it is much bigger than that—at least potentially. 

In just a few years, 5G technology will be critical for staying abreast of a wide variety of established and emerging industries including self-driving cars, the Internet of Things, virtual reality, big data management and many other industries. In short, 5G will operate as the technological nervous system of a brave new world that will be interconnected as never before.

What 5G can do

Data transmission has evolved from 1G to 4G with astonishing rapidity. In less than a quarter of a century, cell phones have moved from the ability to send texts to the ability to surf the Internet, to the YouTube era where users can stream video while riding on the tube. 5G, however, is the greatest innovation yet seen, and it promises to revolutionise the entire global economy. 

The primary advantage that 5G represents over current 4G technology can be summed up succinctly—speed, latency and connectivity.

  • Speed: 5G networks are expected to be up to 100 times as fast as 4G networks.
  • Latency: Latency refers to the amount of time that passes between the moment information is sent from a device until it is received in usable form by another device. Reduced latency could allow you to watch a video, for example, almost immediately without any buffering.
  • Connectivity: 4G networks are currently overburdened by the sheer number of devices that rely on them. 5G will greatly expand the number and kinds of devices that can be connected to a wireless network. These devices will not be limited to phones and laptops -- driverless cars and home appliances will also be connected. Telecom networks in the near future are likely to become so complex that they simply cannot operate without 5G.

How Huawei did it: The strategy

Huawei grew up in a very different technological environment than, say, Microsoft or Apple in the early 1980s. Back then, these two companies were pioneering not only new technologies but entirely new industries—Microsoft, for example, became the world’s first software company, which allowed it to largely evade direct competition with established tech giants such as IBM. 

Huawei grew up in a tech environment where the established players were decades ahead of anything that was available inside of China except, perhaps, at Sino-foreign joint ventures where Chinese parties had to license foreign technology. In such an environment, market leaders enjoy a nearly insurmountable advantage—unless your company’s leadership employs a visionary strategy. That vision, hatched in the 1990s, has now begun to shake the world. 

The art of war

Huawei’s strategy is conceptually simple if one is able, like legendary Chinese philosopher Sun Tzu, to effectively apply the relevant aspects of a historical analogy to a completely different field of endeavour. Instead of attacking the Maginot Line of established 4G technology, Huawei launched an economic blitzkrieg that allowed it to manoeuvre around and leapfrog over these technological barriers. 

While 4G heavyweights like Ericsson and Nokia, with so much global market share and cutting edge technology to protect, kept one eye on the rearview mirror, Huawei kept both eyes fixed firmly on the road ahead—and after a few years, competitors awoke to find a potential technological Dunkirk looming on the horizon. It is still too early to determine whether they awakened in time. 

Humble beginnings

Huawei’s beginnings, like so many other great companies before it, was inauspicious. Founded in 1987 by People’s Liberation Army (PLA) engineer Ren Zhengfei, Huawei started out importing and reselling telephone exchange switches that it imported from Hong Kong. Its ultimate mission, however, was always to eventually develop its own technology so that it could compete in the international telecom industry without relying on imported intellectual property. 

Because of this, R&D has always been a priority for Huawei, more so even than for international market leaders such as Nokia. Throughout most of the 1990s, Huawei dedicated more than twice as many employees to R&D as it did to production. Even now, Huawei’s R&D army of 80,000 employees far outnumbers Ericsson’s R&D department, which employs only 24,000.

Beijing takes notice

In 1993 Huawei picked up its first major client—the PLA, for which it provided a domestically produced telecom network. Huawei’s progress toward technological self-sufficiency won it the favor of the Chinese government, which by 1996 was focused on shielding its nascent domestic telecom industry from foreign competition as well as providing a magnitude of government financial assistance that is Western governments simply do not offer their companies.

For the record, Huawei is not a state-owned company, and it steadfastly denies that it receives any direct government assistance (this claim has been disputed by Western sources). Regardless, founder Ren Zhengfei has been candid about the importance of Chinese government support to the company’s survival. Without China’s policy of protecting domestic companies from foreign competition, he says, “Huawei would no longer exist,” 

The catapult

With one major client and the wholehearted support of the Chinese government, Huawei was on its way, at least domestically. By the turn of the millennium Huawei’s market share easily exceeded its number one domestic telecommunications rival, Shanghai Bell, a Sino-foreign joint venture. Stage Two of the company’s development plan was already underway—using its domestic base and enthusiastic government support to catapult itself into international markets.   

Government support and a commitment to R&D aren’t the only factors providing buoyancy for Huawei’s bid for global telecommunications dominance, however—a large domestic market and low labour costs (especially in Huawei’s critical startup years) have both contributed to the potent mix that Huawei represents. 

On its way to global dominance?

The results have been spectacular. Huawei’s global market share is now 29 percent, and it is approaching 50 percent in Asia. The future looks even brighter than the present—Huawei now holds over 1500 5G-related SEP patents, more than any other company in the world and one of only four companies with more than 1000 (by contrast, US tech giant Apple, Inc. holds only 12). Huawei currently has 30 contracts to build national 5G systems all over the world.

This state of affairs provides Huawei with disproportionate heft when it comes to setting international technical standards, a kind of leverage that could feed on itself to gift the company with a compounding advantage throughout the 5G era—with geopolitical consequences that are so profound that the United States seems to have launched a full-scale economic war on Huawei.

Is Huawei a Trojan horse?

Security concerns have always been at the heart of US skepticism about Huawei, although concerns about economic and technological competitiveness also heavily weighted. These security risks are hardly unfounded, since even US companies have been pressured to allow their technology to be used for US intelligence and law enforcement purposes. 

Under pressure from US law enforcement authorities, telecom networks are usually built in a manner that allows easy wiretapping, so that law enforcement officials and intelligence agencies can eavesdrop and copy data. The reasoning seems to be “If we can do it, they can do it too.” The assumption is that if the Chinese can build their equipment to allow spying, they will proceed to do so.

Indeed, in April 2019 Vodafone uncovered hidden back doors in Huawei equipment. A UK government report concluded that “underlying defects” left the company’s equipment, vulnerable hackers. Nevertheless, the report blamed substandard engineering rather than intentional malfeasance. Even if the report is correct, however, given the fact that intentions can easily change, some observers feel that focusing on intentions rather than capabilities is a mistake.

The race for global competitiveness

The prospect of a world dominated by Chinese technology is rarely at the forefront of the rhetoric-- but is is never far from the underlying concerns that animate the controversy. The US fears that China will replace it as the world’s foremost technological power, the consequences of which could be grave. A technologically dominant China, for example, could deny the US access to global commerce networks and even cripple its ability to project military power.

The empire strikes back: Trump’s executive order

On May 15, 2019, President Trump signed an executive order that bans the acquisition, importation, transfer, installation, dealing in or use of any information and communications technology with respect to any property in which a foreign country or national holds an interest if the US government determines that there is a risk of sabotage, subversion, damage to infrastructure or another unacceptable national security risk. 

Although the order itself does not mention Huawei by name, Huawei is among the companies whose technology that has been designated as posing a risk to the United States, and the executive order itself is widely believed to have been targeted mostly (although not exclusively) at Huawei. Chinese mobile phone manufacturer ZTE has also been targeted. 

The US Commerce Department has granted an extended a temporary license allowing US companies to do business with Huawei, leading some observers to believe that Trump’s executive order is being used merely as a bargaining chip in the US trade war with China. Although it likely is being used as a bargaining chip, this might not be its only significance.

US pressure and political fallout

The US has exerted immense political pressure on its allies to refuse to do business with Huawei, with mixed but mostly negative results. Among this campaign’s success stories are Australia and Japan, who have banned Huawei from participating in their nascent 5G networks. US pressure has been less successful, however, with respect to South Korea, Thailand and India, among others. Germany is still making up its mind.

The UK’s response (so far)

The UK, like Germany, has not yet decided on a Huawei policy but is generally thought to prefer a compromise solution—some cooperation with Huawei but exclusion from the UK’s core 5G technology. Skepticism abounds, however. Pessimists fear that the choice is not so much whether or not to become dependent on Chinese technology, but whether to opt in to 5G with Huawei’s help, or get left behind when the new 5G network is introduced in a few years.

Sources within the UK government point out that some of Huawei's technology simply isn't available anywhere in the West, much less in the UK, a state of affairs that threatens to force the UK’s hand on this issue. In any case, no final decision is expected before 2020 at the earliest.

What happens next

The exponentially accelerating pace of change makes it nearly impossible to speculate with any confidence on the ultimate outcome of the Huawei controversy. Will Huawei survive the US counterattack? If it does, will it act as the long arm of the Chinese Communist Party, or will it go rogue as a truly multinational company? Given the size of Huawei’s home market in China, the latter course seems unlikely. Huawei will likely choose a path between these two extremes.

A more profound question is the possible effect of globally dominant Chinese companies on the relative fates of Western-style free-market capitalism versus Chinese state capitalism. If Western companies consistently prove themselves unable to compete with companies like Huawei, what will the global political landscape look like 50 years from now? Only time will tell.

 

David Carnes

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