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Seen in China: the Huawei Case

Part 1

Seen in China: the Huawei Case
 Gilles Babinet
Former Advisor on Digital Issues

On May 15, 2019, Donald Trump banned the use of telecom equipment in the USA from companies that pose a security risk to the country, including Huwaei. The next day, Gilles Babinet, Advisor on digital issues at Institut Montaigne, visited Huawei's offices in Shenzhen. He shares his experience with us here.

Note de voyage du 16 mai 2019

It is difficult not to be impressed by the majesty and importance of Huawei's headquarters, which covers several square kilometres, even when you have been to dozens of buildings of major technology companies.

The huge building dedicated to research and development (R&D) resembles more a luxury palace, with its marble floors and walls and carefully arranged artworks, than a research centre. The showroom, disproportionate, illustrates perfectly Huawei's strategic projection, product line by product line. The significant lead this company has taken becomes easier to understand, especially in an area where investment power and therefore critical size are decisive. Huawei now spends $15 billion a year on R&D (more than Apple, which in 2018 spent $14.24 billion) and should, due to the interruption in the supply of strategic American components such as Qualcomm's, significantly increase this amount to become, in a few years, the world's leading company in R&D spending (today the ranking is dominated by Amazon, with $22.6 billion in 2018). 

My visit to them was made particularly interesting by the announcement on the same day of the near total boycott of Huawei by the Trump Administration (no more sales of US components and software services to Chinese companies and no more purchases by US telecom operators of equipment manufactured by companies that pose a security risk to the country, including Huawei). Nevertheless, my interlocutors were calm, transparent and particularly precise in their answers. They made sure, each time we finished addressing one of the major themes on my agenda, that their answers provided adequate clarification. I spent three hours discussing piracy charges, cyber risks and audit models that would create transparency about their technologies, technology transfer issues, and how they plan to deal with Donald Trump's executive order.

Huawei now spends $15 billion a year on R&D [...] and should significantly increase this amount to become, in a few years, the world's leading company in R&D spending.

Surprisingly, Huawei knew very well it was threatened by such a risk long before Trump's statements. According to our exchanges, they have been trying for years to end their dependence on strategic American companies that supply them with components. My interlocutors assured me that the company was on its way to achieving a high level of technological autonomy but, did not hide the fact that the next 18 months were going to be difficult.

The critical threat posed by the potential closure of major markets, such as Europe, due to the cybersecurity risk of countries choosing Huawei as their infrastructure provider, has pushed Huawei to become more transparent. It is particularly true with the audit approach they have gradually implemented with the United Kingdom. The company's project is to create audit protocols approved by States (priority is given to Europe) that could be applied to all its equipment. The work is far from over, and many countries remain concerned about difficulties in ensuring this equipment meets essential safety levels. 

Huawei officials are well aware that belonging to an undemocratic country limits these transparency efforts. Their ability to recover sometimes only further exasperates the democratic countries and Huawei's most important competitors within those. Unfortunately, it was impossible to discuss in detail how they intended to respond to the loss of Google as a partner for Android. Here too, the Chinese approach (implementing an Android distribution and a business model completely similar to that of Google) should prevail.

How could Huawei succeed in overcoming these many headwinds in the long term? In the past, the company has demonstrated an impressive ability to resist adversity. The technological shock imposed by US sanctions is of a different nature: many supercritical components are no longer accessible and Huawei phones could become worthless, deprived of major social networks applications, such as GAFA services and Google e-stores to name a few.

Huawei officials are well aware that belonging to an undemocratic country limits these transparency efforts.

We often hear intemperate statements from supposedly wise observers, who seem convinced of Huawei's strength and ability to take this blow. This is very likely, but the difficulty in accessing all these services and the difficulty in accessing basic technologies could still seriously complicate the development of the Chinese telecommunications giant. It might be that the company is currently experiencing a decisive moment in its history. Let’s not forget that the company ZTE, which has been blacklisted for 18 months in the United States, is now only a shadow of itself, and some analysts believe that its turnover should fall by about 30% to 40% from its highest point.

Only time will tell; for now, the only reasonable conclusion to draw is the incredibly high level of global dependence on American technologies. Just as with the military tool, the dollar or the energy sector, the United States has reached a situation of domination in all these fields which, although strongly disputed, has not yet been reversed, no matter what is being said.

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