How Will Huawei Survive in the Current Hostile Global Environment?

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By Dimitris Mavrakis | 1Q 2019 | IN-5377

The past few months have been very challenging for the Chinese vendor, who is now barred from deploying 5G networks in the US, Australia, New Zealand and Japan. At the same time, amid security concerns and pressure from the US government to exclude Chinese infrastructure for telecommunications, Canada, Germany, the United Kingdom, Norway, and many other countries are also considering the institution of a ban. Canada is the only member of the Five Eyes alliance who has not yet banned Huawei equipment from its soil but is rumored to be next. Meng Wenzhou, Huawei’s CFO and daughter of the company’s founder and spiritual leader Ren Zhengfei, has been detained in Canada and faces extradition charges to the US, where she will be tried for breaking sanctions when selling infrastructure in Iran.

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Huawei Suffers Amid Security Concerns

NEWS


The past few months have been very challenging for the Chinese vendor, who is now barred from deploying 5G networks in the US, Australia, New Zealand, and Japan. At the same time, amid security concerns and pressure from the US government to exclude Chinese infrastructure for telecommunications, Canada, Germany, the United Kingdom, Norway, and many other countries are also considering the institution of a ban. Canada is the only member of the Five Eyes alliance who has not yet banned Huawei equipment from its soil but is rumored to be next. Meng Wenzhou, Huawei’s CFO and daughter of the company’s founder and spiritual leader Ren Zhengfei, has been detained in Canada and faces extradition charges to the US, where she will be tried for breaking sanctions when selling infrastructure in Iran.

Despite this challenging environment, Huawei announced it expects record revenues for 2018: almost US$109 billion with a 21% growth year on year. Ericsson and Nokia have not yet reported their 2018 revenues, but they did report US$22.29 billion and US$26.6 billion respectively for 2017 (approximations using current currency conversion rates). For reference, Huawei’s Carrier Business Group reported US$44.3 billion for the same year. This group, the once crown jewel of the company that sells network infrastructure, is now responsible for less than 50% of total company revenues, whereas the Enterprise and Devices business groups have grown considerably. Zhengfei also recently commented in an internal memo to all employees that Huawei will no longer be able to grow as fast as it did, and the Chinese vendor expects to have workforce optimization and even layoffs.

Understanding the Reasons Behind Huawei's Problems

IMPACT


Huawei is arguably involved in the broader geopolitical and financial feud between the US and China, and in the unfortunate position of being a leader in an important market for national infrastructure. Huawei is also among the leaders in 5G R&D; a senior technology officer of BT recently claimed that Huawei is way ahead in terms of 5G infrastructure and that other vendors should follow. That may not be the case, but facts indicate that Huawei was the size of Ericsson and Nokia combined last year, meaning that the Chinese vendor had grown well past its global competitors.

The US government may have perceived this as a threat to its national infrastructure, especially considering the fact that the Chinese government has not clarified what the new intelligence law means when it says “An organization or citizen shall support, assist in and cooperate in national intelligence work in accordance with the law…” On the other hand, Huawei has never been found to be guilty of any such activity and there is no evidence of connections to the Chinese government or intelligence agencies. Moreover, Huawei is one of the few companies not publicly traded or not owned by the government, but its opaque ownership structure--owned by employees--has created confusion about its nature. Taking this into account Huawei is arguably bracing for a turbulent two years, which come at a bad time: during the first wave of 5G deployments.

What Infrastructure Parts Are under Suspicion?

Huawei offers multiple solutions across the entire infrastructure chain from network access solutions including antennas and base-stations to core solutions for data traffic handling, service fulfillment, and network resources management. While most Western countries have no issues with Huawei access solutions, it is the core infrastructure business that poses most of the concerns.  Indeed, the core of the network is responsible of handling all network data traffic and is this part of equipment Western countries are suspecting it could be used as a "backdoor" for spying. Huawei’s strategy for cloudifying this equipment and using artificial intelligence is making the West even more nervous, since it is significantly more difficult to isolate equipment in a cloud-native network.

Although there is no evidence Huawei has created backdoors for spying in its equipment, the company needs to give tangible guarantees to the industry that this is not the case, for instance collaborating to allow third parties to perform adequate tests. 

 

Why Could Huawei Problems Go beyond Western Countries?

While Huawei’s problems may appear limited from a Western point of view, the situation could escalate beyond these regions provided that major Western operators have interests in other parts of the world including Africa and Latin America. Therefore, it is just a matter of time until these regions also voice their concerns. For these reasons Huawei needs to react imminently and collaborate with the right authorities in a transparent manner to prove innocence, otherwise the company could risk losing its prominent leadership as an innovative infrastructure supplier, especially for core network equipment.

What Can Huawei Do?

RECOMMENDATIONS


Arguably, Huawei needs to considerably change its strategy in order to survive and convince the world that its equipment and services do not pose any security concerns. These are not necessarily technology concerns and are largely driven by Huawei’s opacity in terms of organizational structure and business strategy. The following list represents a few actions that will restore some faith to its brand.

  1. Include a Western voice in the company board: this will allow the Chinese vendor to communicate better with the Western world and convince its critics about its vision and priorities.
  2. Huawei needs to act as an international organization and not as a local infrastructure supplier. This means that Huawei should follow the international norms global industry players follow, including open opportunities for talents beyond domestic candidates. While Huawei has made a significant effort in recruiting overseas talents for marketing roles, which, by the way, allowed the company to expose its brand internationally, the company should also open its product development and management to overseas talent.
  3. Establish a transparent R&D base outside China: Huawei could establish a 5G R&D base outside China, especially on core networks that seem to be the most challenging network domain for the Chinese vendor currently. The Chinese vendor would also have to transfer expertise and workforce to this new base.
  4. Become a public company: Huawei can choose to list on the Hong Kong exchange, becoming more transparent to the rest of the industry.
  5. Publicly challenge the US government on all the accusations, point by point, insisting on providing proof of misconduct and suggesting independent third parties to judge case by case. Vodafone’s CEO Nick Read voiced his concerns that a potential Huawei ban in Europe would hinder the technology deployment across the continent and argued that a “facts-based conversation” needs to take place about security.
  6. Establish strong and transparent corporate responsibility and work ethics programs to educate its work force on work transparency, bribery, intellectual property contaminations, and industrial espionage.

These are a few examples of a radical strategy that may not necessarily reverse the current negative climate but can act as catalysts to start Huawei’s turnaround. One thing is for certain: Huawei is indeed one of the leaders in 5G and its exclusion from many developed markets will result in less competition in the market and, ultimately, less choice for end users.

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