Digital Transformation » Technology » Huawei: A victim or a cause of the divide between the West and China?

Chinese tech giant Huawei is well known to businesses and consumers around the world as the world’s largest provider of telecoms equipment.

Its continued success in delivering everything from smartphones to equipment to build and operate networks, as well as consulting and engineering services, has seen its global revenues rose 19% to 721.2bn yuan ($107bn) in 2018, while net profit jumped 25% to 59.3bn yuan.

But Huawei has been at the centre of a geopolitical storm over concerns that its ties to Beijing represent a security threat to the US and other countries.

Huawei says it is independent and strongly denies its products pose a security risk.

The US, Australia and New Zealand have all blocked local firms from using Huawei to provide the technology for their 5G networks and several European telecoms operators are considering removing Huawei equipment from their networks.

A recent report by the UK National Cyber Security Centre, said it can provide “only limited assurance that the long-term security risks can be managed in the Huawei equipment currently deployed in the UK”.

Amidst this growing tension, Meng Wanzhou the group’s CFO and daughter of its founder, was arrested in Canada last December on charges of breaking American sanctions against Iran and she now faces extradition to the US.

 Origins of tension

Cedomir Nestorovic and Yan Li, professors at ESSEC Business School Asia Pacific, argue that at the heart of the issue are US fears that China will displace it as the leading global power and that China will take the opportunity of having its technology adopted by the whole world to gather intelligence and manipulate telecommunication.

“What is less debated is the business side of Huawei’s aggressive strategy. In that sense, we believe that Huawei is pursuing the top ends of Smiling Curve initiated by Acer. This curve is a graphical depiction of how value added varies across the different stages of bringing a product on to the market in an IT-related manufacturing industry.  The concept was first proposed around 1992 by Stan Shih, the founder of Acer Inc., an IT company headquartered in Taiwan.”

China has been named “the World Factory” since the 1970s with a global impression linking “low quality” and “low price” benefiting from low labor and material costs at that time. The country has thus been trapped at the bottom of the curve on fabrication with low extra value created, while US and other Western countries, including Japan and South Korea dominated both top ends focusing on R&D (as manifested by the number of patent registered and technology innovations), and Marketing (as manifested by their superiority in branding and services), say the ESSEC professors.

In 2015, inspired by Industry 4.0 which focuses on intelligent manufacturing, the Chinese Ministry of Industry and Information Technology drafted a national plan on “Made in China 2025” together with “Internet Plus” with the aim of enhancing manufacturing efficiency and value through the use of digital technologies and platforms.

“It means China has decided to climb up the smiling curve on both sides, which will unavoidably catch the attention of the current dominators on top. Therefore, a long-term trade war will be destined between the No.1 and No.2 economies in the world, as history has demonstrated again and again to us, especially through the Thucydides trap that forecasts a conflict between an incumbent power and emerging power,” say Prof Nestorovic, professor of geopolitics and Prof Li, professor of digital transformation, at ESSEC, which is based in France, Singapore and Morocco.

As a result of such a firm determination by the Chinese government and companies, Huawei made 5,405 patent applications to WIPO in 2018, more than any other organisation in the world, described by Francis Gurry, Director General of WIPO, as “Historically,  really quite extraordinary.”

Dual strategy

At the same time, Huawei is implementing a very smart strategy in sales and marketing by focusing on smartphones on one side and network on the other. This is the only company that pursues a strategy on both sides of the spectrum. From the US point of view the situation is intolerable because they cannot think out a peaceful coexistence of American and Chinese companies or the US and China as countries, say the ESSEC professors.

Ren Zhengfei, the founder of Huawei, recently said Huawei: “is just a technological company focusing on a very specific, if not tiny, area, with a long-term mission committed to bringing digital to every person, home and organization for a fully connected, intelligent world. We are not a nation. So how could we become a rival of any nation?”

According to him and Chinese officials who reject the concept of the Thucydides trap, there is no necessary confrontation between the two countries, a huge difference with the American interpretation of the situation that views it as a war between nations, say the ESSEC professors.

“The Chinese long-term goal is the rejuvenation of the Chinese nation, as the title of President Xi’s book indicates it and the revival of the Silk Road through the One Belt One Road Initiative. There is no willingness of a Chinese domination and it would be contrary to the whole Chinese history and philosophy that was obsessed by defense imperatives rather than expansionism.

“The United States and some other Western partners believe on the contrary that China does not play the rule because of the opaque ownership of Chinese companies and subventions and injunctions coming from the Government because they cannot imagine a harmonious development of competitive entities which is the heart of Chinese way of thinking.

“A conflict between China and the West is still possible but we believe that it is not probable because we do not see what interest would it be for both sides. What will happen is that some Western countries will adopt Ericsson’s technology under pressure from the United States but a full conflagration between the two countries is highly improbable,” they say.

 Spying game?

Mike Rosenberg, associate professor of strategic management at IESE Business School in Spain, says that because the Trump administration sees the $323bn  trade deficit is untenable it wants to keep Huawei of the market for 5G cell phone networks, which will be worth tens of billions of dollars over the next few years. “My understanding is that China simply does not allow US manufacturers to compete for similar business in China and since there is no other legal way to limit Huawei, the charges of espionage will serve to protect American vendors.

“A separate line of reasoning is that Huawei and other leading Chinese companies receive subsidized financing and other support from the Chinese government and that taking this kind of action, “levels the playing field”.

“Personally, I am not convinced that Huawei could provide some kind of back door into the 5G networks, and I feel the whole issue would be better handled through normal trade negotiations. But of course the current situation is anything but normal. In my view, what is really at stake is the larger geopolitical rivalry that is also playing out in the corporate sphere. This is about global market share, R&D spending and standards.

“By developing national champions such as Huawei, China has given such companies a leg up into the global competition for market share. In technological businesses a firm will need something like 15-30% world market share in order to be able to afford the cost of research and development needed to stay competitive.

“The next step after being in the game is to be the firm which sets the standards for the technology or in other words makes the rules of the game. This is the advantage that the US (and Europe and Japan, to a lesser degree) has enjoyed in a number of key technologies, and that China is now trying to edge its way into,” he adds.

Where next?

Huawei is fighting back in a multi-dimensional PR campaign to get past the idea that it is connected to the Chinese army and security services, says Prof Rosenberg. He believes Huawei will be successful in this campaign “as people like the handsets it makes and there is little, if any, proof of the charges”.

But he adds: “The deeper issue is that unless there is a breakthrough in the bilateral trade relationship, it is hard for me to see anything really changing. That breakthrough will either require Donald Trump to back away from a central part of his political rhetoric or President Xi to back down and “lose face”. I cannot imagine either happening.”

Prof Rosenberg says Huawei got to where it is today thanks to the generous financing it has been able to offer governments around the world. This has allowed it to come from virtually nowhere 20 years ago to command something like 30% of the global telecoms business, he says.

“Since telecoms in general and 5G in particular are critical for a number of technologies including self-driving cars, delivery drones, I imagine that the governments of the Western democracies, including the five English speaking countries in the Five Eyes Alliance, will do their best to keep their own national champions in the game.

“The wild card in this is the current administration in the United States and the confrontational style favoured by President Trump. As is widely reported, Trump does not appear to listen to the council of the US intelligence services so it is unclear what, if any, role they might have on influencing policy. That being said, my guess is that there is serious work being done at the working level in Five Eyes and beyond on fully assessing and understanding any real security risks employed by Huawei.

“The challenge going forward will be to untangle the purely protectionist aspect of the current situation from any real or perceived security threat. Of course when it comes to foreign intelligence services running cyber operations in the United States, the Trump team appears to be very vulnerable,” he adds.