I have been monitoring the news surrounding Huawei over the years and particularly as it has intensified under the Trump administration. Lately, there has been no letting up. Hardly a day goes by without Huawei making headline news around the world, but how did we get here?
Huawei is undoubtedly the main beneficiary of China Inc.’s patient, strategic, and systematic plan to develop domestic tech champions in multiple categories. Baidu, Alibaba, and Tencent – known as BAT, are other such successful examples, but let’s focus on Huawei here.
China had the foresight and enormous market size to develop its telecommunications services by attracting leading foreign vendors to China. It also spurred on its local industry by implementing policies that went far beyond what other countries ever tried or could achieve. From the nineties onwards, these included conditional investment into local R&D labs and factories in exchange for market access. The effort has been long and concerted, leading to the rise of domestic competitors, and culminating with Huawei eventually displacing century old multinational telecom vendors and occupying pole position today. Gone are America’s champions Lucent (ex-AT&T) and Motorola, Canada’s Nortel Networks, UK’s Marconi, France’s Alcatel, Germany’s Siemens, and champions from Japan, South Korea and others.
Here’s an oversimplification of Huawei’s trajectory from its early days as a local telecom reseller to the global juggernaut it has become:
- Benefited from global vendors’ sustained multi-year investment and development of the Chinese telecom ecosystem. These global vendors included all those listed above now in the dustbin of history;
- Developed into the local champion. Remember, this was no small feat, as China is the largest market;
- Started overseas invasion in China’s backyard, South East Asia and South Asia;
- Followed market expansion in other developing markets around the world including Africa, the Middle East, and Latin America;
- Current phase: conquer the west. Western Europe, including UK’s BT, was the first to fall in 2005.
What I have covered so far refers to the telecoms infrastructure and services business which includes the much talked about 5G. Furthermore, Huawei surprised industry watchers when it announced a year ago that it derived in 2018 (results for 2019 have yet to be released) an even higher revenue from its consumer business, which includes smartphones and other devices, than from its carrier business. Enterprise sales are a distant third.
The question is what the rest of the world should do today. Accusing Huawei of cyber-espionage and introducing artificial barriers, such as outright bans by the USA and Australia, or partial bans by the UK, are not the answers. Huawei is the beneficiary of China Inc.’s policies and has immensely benefited from China’s interventions, which include subsidies, cheap loans, non-trade barriers, etc. Replying in the same way will not offer an adequate or sustainable solution.
I’d advocate to have faith that the market will eventually correct itself. Surely, no carrier wants to be held hostage by Huawei. All the talk of Huawei being cheap is misleading as it assumes Huawei is a philanthropic company. They like to conquer markets, true, but they want to make money too. Give them any opportunity and they will. As soon as they secure their position through incumbency or other types of advantages, they increase their prices. We have seen this happen already, particularly as Huawei’s R&D is now considered comparable to, and sometimes even superior to, its competitors’. The carriers know this and are vigilant not to allow it to develop into a monopoly, which is the path the industry is currently heading towards.
Sweden’s Ericsson and Finland’s Nokia are the last two standing in the face of Huawei for end-to-end 5G contracts, and they are not in very good shape. However, it should be left to the industry to develop new players that can out-innovate Huawei and others, one application at a time.
Indeed, a plethora of specialized innovators have sprung up and can play as disrupters, particularly as 5G brings about cloud computing, virtualization, edge computing, and other technological developments. However, the emphasis on 5G shouldn’t be overhyped, because even if the innovators don’t fulfil their promise with it, there will be more “G” ahead. Looking back, there have only been two other successful “G” transformations, 2G and 4G, that brought about fundamental change. 2G successfully leapt forward into the digital era which brought along security, efficiency, and messaging. On the other hand, 3G flopped because the promise of wireless internet did not materialize until a generation later with 4G.
It is not accurate to put the entire blame for the demise of the West’s telecom champions on China Inc. and Huawei. The reasons are numerous. This one stands out: with the advent of the internet and subsequent wireless internet, a new generation of firms sprung up, including the likes of Facebook, Amazon, Netflix, Google, to name a few. These over the top (OTT) firms delivered their products over the telcos and mobile operators’ networks without paying the due fee. Having to build ever larger bandwidth for their OTT-hungry consumer and enterprise customers without being able to charge more is in part what led to the unstoppable rise of Huawei (see points 3-5 above), that conveniently stepped in with cheaper products combined with subsidized loans to the suffering telcos.