Huawei is now reeling. The brutal reality of the latest U.S. crackdown is making daily headlines as the tech giant scrabbles to find a way to replace the key silicon in most of its flagship products. And it’s about to get worse, as the implications of those restrictions start to pay a heavy toll in the market. That impact looks like it will hit rapidly, along with an unexpected security issue that could be worse.
First, let’s put this latest U.S. move into perspective. Huawei has spent billions in R&D to build a patented ecosystem of innovative tech that it can hone in China and export to the rest of the world. Not just phones and 5G, but the AI in cars, cloud platforms, smart city programs and smart consumer devices. The U.S. has just rendered billions of Huawei’s investment spend worthless.
Huawei can’t dig itself out of this one. In truth, it doesn’t know where to start. Does it water down its flagships with off-the-shelf silicon from non-U.S. suppliers? Does it adapt to go head-to-head with smaller domestic rivals? How does it maintain its 5G network lock with so much of its kit now impacted?
As the U.S. blacklist of Huawei reached its first anniversary on May 15, the U.S. announced that the sanctions would be expanded. Washington is frustrated at Huawei’s seeming ability to brush off sanctions as an inconvenience, with the loss of Google from smartphones being the primary issue it has had to deal with. Not any more. Now Huawei will be cut off from the chips that drive most of its meaningful products as well as its future strategy. This is a devastating blow.
Huawei won’t admit this, but the company really wants to become a Chinese Apple. Founder Ren Zhengfei talks of the Cupertino giant as an inspiration—he and his family have even been seen with Apple devices. Huawei’s constant lauding of the new “Kirin” chips it has developed to drive its flagship devices is a statement: we are not just another Chinese brand, we can compete with Apple on the world stage.
America’s expansion of Huawei sanctions, cutting off its access to those custom chips on which it has staked its future is a clever but brutal move, one that drives a wedge into Huawei’s psyche. Huawei’s own chip subsidiary, HiSilicon, was at the heart of its initial blacklist defense, “un-Americanizing” its supply chain. But its homemade chips rely on U.S. tech in the design process, and the manufacturing houses that actually machine the chips use U.S. tech as well. All that now ends.
Huawei can simply go the market for existing chips that don’t fall foul of the new regs, Samsung maybe, but that instantly puts Huawei into a different bracket and removes the advantage garnered from the billions it has pumped into R&D. Huawei could also drop down from flagship to me-too processing. That, though, would be even worse for a company that apes Apple in the lengths it goes to stage manage the launches of its new devices. Huawei has a raft of smaller domestic rivals. These powerful chips are a key part of what differentiates Huawei from the rest.
As I said in the immediate aftermath of the latest U.S. move, Huawei either needs a Beijing-brokered compromise with Washington or for China to accelerate the development of missing domestic technologies, completing the east/west split. China is fully onboard with this plan, with reports of a new $1.4 trillion investment “master plan” to pump next-gen infrastructure spend into domestic champions.
Those investments would be designed to gap-fill those areas where foreign tech is still required—exactly what Huawei needs. The problem, though, is that this will take several years. Time that Huawei simply doesn’t have. It is already a year behind on the smartphone front—last fall’s Mate 30 and this spring’s P40 have fallen flat outside China due to their lack of Google. Continually re-launching the P30, its most recent device licensed for Google, is fast running out of runway.
Before last week, Huawei had a grand plan. An Apple-like ecosystem of consumer devices, AI and cloud platforms, even automotive, all stitched together on that common chipset and now a cross-platform OS. With Huawei, there’s also the addition of surveillance and smart-city automation, and its 5G equipment of course.
Now this strategy is in tatters. Cutting off its silicon supply chain affects all areas of its business, certainly those on which it has staked its future. Millions of hard-won consumers outside China will be lost, turning to Apple and Samsung, maybe even—and this will really hurt—domestic rival Xiaomi, which wants to replicate Huawei’s export success, unencumbered by any blacklist.
All of which has swamped Huawei’s management for the last week. And now the company’s flagship contract win of the year, its greatest victory over the U.S. blacklist, looks like it might fall apart. The U.S. blacklist was intended to curtail its sale of 5G network equipment to U.S. allies around the world, the argument being this opened security risks given Huawei’s alleged lack of transparency and relationship with the government and its agencies in Beijing. Despite the blacklist and U.S. lobbying, the world was reluctant to cut Huawei, infuriating Washington.
The eye of this storm centred on London. After much debate, the U.K. government confirmed in January that it would allow Huawei a role in its 5G network, albeit limited to 35% and at the edge not the core. The U.K. is America’s closest security ally. Trump was reportedly apoplectic. Not only did this undermine U.S. efforts, it also sent a message to the rest of the world that Huawei might not be as bad as the U.S. claimed, why else would London agree to keep it onboard?
Now the U.K. looks set to revisit this decision, likely reversing its stance, removing Huawei from its networks after three years, or at least ceasing further spend. “We’ve seen the reports from unnamed sources which simply don’t make sense,” Huawei VP, Victor Zhang, complained in hastily written response. “The government decided in January to approve our part in the 5G rollout, because Britain needs the best possible technologies, more choice, innovation and more suppliers, all of which means more secure and more resilient networks… This is our proven track-record.”
The U.K. was under pressure over its decision in any case, both from the U.S. and from the more hawkish members of the governing Conservative Party. That pressure has intensified with the building backlash against China over alleged disinformation—or worse—in the early stages of the coronavirus pandemic. Prime Minister Boris Johnson has reportedly asked officials to draw up plans to reduce the country’s dependence on China for critical technology and equipment.
But the reason the U.K. will give for any reversal is simpler and more alarming for Huawei. Absent U.S. technology, relying on less secure domestic alternatives, the argument will run that Huawei’s security profile has changed. A U.K. government spokesman pointed the Sunday Times in this direction today, “following the U.S. announcement of additional sanctions against Huawei, the National Cyber Security Centre is looking carefully at any impact they could have to U.K. networks.”
And that line, that this undermines Huawei’s proclaimed cybersecurity credentials and makes its technology more of a risk, if put out by the U.K., will cause real damage to Huawei. This will hamper the 5G contracts Huawei needs to win, as well as its ability to compete outside China on a level playing field with its main rivals.
We are at the very beginnings of a story that will build for months—Huawei has maybe a year’s stockpile of chips before devices have to be changed around. If there is no compromise to be found with Washington, then its relationship with China will have to get tighter, it will become even more dependent on its domestic market as it catches up with prohibited tech to compete with its global rivals.
What’s somewhat ironic is that the latest U.S. move doesn’t harm China in the long-run, not according to the country’s own strategy to “first keep pace with leading AI technology and applications in general by 2020, make major breakthroughs by 2025, and be the world leader in the field five years thereafter.” At least that was its view back in 2017. With those hard years of investment and development ahead, though, it is now hard to predict where Huawei will be by then.