By Neil Halligan
As the $100bn Chinese technology conglomerate is embroiled in President Donald Trump's trade war with Beijing, Arabian Business goes inside the global giant at its sprawling headquarters on the outskirts of Shenzhen to discover what actually lies behind the spying allegations, and how the Gulf fits into the war between the world's two biggest superpowers
In a small town in rural Ireland, an elderly woman is shown a selection of the latest mobile phones.
“This one is the best one we have – best camera and best value, and its battery is as good as any other on the market,” the shop assistant tells her. “It’s a Huawei phone,” he points out.
“Oh no,” the woman quickly replies. “Those are the phones that spy on you, aren’t they?”
As a bellwether for a generation of people in Ireland who watch and listen to the news on a daily basis, it’s a stark reminder of the influence the current US administration has globally, and the ongoing crises that Huawei faces 9,800 kilometres away.
It’s with this backdrop Arabian Business visits the global giant at its sprawling headquarters on the outskirts of Shenzhen to discover what actually lies behind the spying allegations, and why the privately-owned company is in the crosshairs of US trade officials, and more vocally, President Donald Trump.
As the world’s biggest supplier of telecommunications networking equipment and number-two smartphone manufacturer, Huawei has emerged as one of the central figures in the worsening US-China trade rivalry.
The Chinese giant reported revenues in excess of $100bn last year, generating a profit of $8.5bn, and while its impressive figures have been cited by some as the reason for US action, chief among the US government claims relates to security issues - that Huawei equipment could contain loopholes that allow China to spy on global communications traffic.
The emphasis is on could, because the US hasn’t, as yet, produced any concrete evidence. But its own security officials insist the world should shun Huawei’s 5G networks.
The latest to strongly consider US lobbying is the UK, with Boris Johnson – speaking at the recent NATO summit in London – suggesting that the UK will comply with the American stance on banning Huawei equipment within the country’s 5G network.
True to form for the Tory party leader, however, Johnson was spotted using what seemed to be a Huawei P20 to take a selfie following an interview on national television just a day later, something that wasn’t lost on the country’s media.
Lawmakers in Germany have put forward a bill that would impose a broad ban on “untrustworthy” 5G vendors. China’s ambassador bristled back with a threat of retaliation, pointing out that German manufacturers account for a quarter of the 28 million cars sold in China last year.
In truth, however, Huawei has been on the US radar for some time.
In 2005, the US-China Economic Security Review Commission - responsible for monitoring and investigating national security and trade issues, said “industrial espionage is an active tool of China’s strategy for technological development”.
Four years later, a $2.2bn deal for a US networking firm 3Com was scuppered by a similar US congressional committee over security fears.
Around that time, Huawei’s founder Ren Zhengfei reportedly instructed that its supply chain should be diversified. Ten years on, it generates most of its revenue (45 percent) from its consumer business, while 40 percent comes from its carrier market business (4G/5G) and the remainder from its enterprise business, which grew to $10bn last year.
The US campaign has yet to impact Huawei’s revenues, which jumped 24 percent for the first nine months of this year to $86.2bn, and its profit margin increased 8.7 percent.
“2005 was the first year that Huawei got more than half of its revenue from outside China,” Joe Kelly, vice president, corporate communications, Huawei, tells Arabian Business.
“We are still the only Chinese company that has more than half of its revenue from outside the domestic market.”
In addition to the spy allegations, the US has also targeted sales of Huawei smartphones by placing the Chinese firm on an ‘entity list’ that restricts its ability to buy and use American technology. This impacts on the Chinese firm’s use of Google Marketing Services, which includes Google Play Store, YouTube and Google Maps.
“I find it interesting that when Huawei was a small company, we didn’t have any challenges from the US government. The larger we become, the more challenges come from the US government,” Kelly says.
And last December, Huawei’s chief financial officer Meng Wanzhou was detained in Vancouver on a US extradition request, over allegations that Huawei is operating a secret subsidiary in Iran that obtained American goods, technologies and services in violation of US sanctions.
Kelly says there is no US equipment vendor in the world capable of offering what Huawei can - the cost of entry is very high when you consider the billions it has invested to date – 10 percent of its revenue each year is ploughed into R&D.
In an attempt to assuage any US concerns over security, Zhengfei (Mr Ren as he is known in Huawei) offered to license Huawei’s 5G intellectual property to a new competitor, to create a new US entity and go into competition with the Chinese firm.
“That new competitor can take all of our source code, check it for any vulnerabilities. We suspect they won’t find any, but if they do, tell us and we can fix them too,” says Kelly. “And then it could be an American organisation too, that an American company could accelerate the development of a new competitor on the marketplace,” he explains.
To date, no US firm has taken up the offer, Zhengfei said last month.
Beyond the US and some countries in Europe, Huawei has been successful in signing up telcos for 5G.
Eleven telecom firms in the United Arab Emirates, Saudi Arabia, Kuwait, Oman and Bahrain have signed 5G contracts with Huawei, with a further 32 (out of its total of 60) coming from Europe.
In the UAE, Du’s chief technological officer Saleem Albalooshi said the telecoms giant sees no evidence of what the US government called potential security holes in Huawei’s 5G technology.
“Huawei is our partner in rolling out our 5G network... From a security perspective… we have our own labs in the UAE and we visit their labs... we have not seen any evidence that there are security holes specifically in 5G,” Albalooshi said.
John Calabrese, assistant professor, director Middle East-Asia Project at the Washington-based Middle East Institute wrote a lengthy paper in July this year, entitled ‘The Huawei Wars and the 5G Revolution in the Gulf’, as part of a series on “the increasingly vibrant and complex dynamics of contemporary Sino-Middle Eastern relations”.
Calabrese says the ban on US companies selling to Huawei “does not appear to have a national security basis”.
“This would suggest that the Huawei case is at least partly subsumed in or a casualty of the trade war - in the short term - while also a part of the larger, technology rivalry that will constitute an important dimension of US-China strategic competition in the longer run,” he says.
“Administration officials and President Trump himself have equated economic security with national security, thereby appearing to regard technological innovation as being inseparable from national security.”
Citing an article in The Economist, he says the ongoing issues could lead to a ‘bifurcation of global markets into two incompatible 5G camps’.
“Were this latter scenario to eventuate, into which camp would America’s Gulf allies be likely to fall?” he concludes.
While brand awareness is “going through the roof”, Kelly admits ‘Huawei the brand’ has been negatively affected.
“The people who are informed – the professional buyers, the carriers - it doesn’t affect so much with them because they know who we are, what we do and don’t do, and they test us independently anyway. So it doesn’t affect them so much,” he says.
“In the consumer market, it has had an impact because consumers are not very sophisticated buyers. If I get a Huawei Mate 30 as my next phone and it doesn’t have the Google Play Store, I can fix that in five minutes; I have the technology to do APKs.
But most consumers don’t understand the technology behind this stuff, so it could affect our consumer market.”
And that’s where the real litmus test will be – the upcoming launch of the Huawei Mate 30 Pro. Widely hailed as having one of the best cameras in any smartphone, it will be launched without US parts – and that includes Google apps (Gmail, Maps, etc) and its Play Store, which is home to around 2.8m apps.
Instead, it comes with Huawei App Gallery that has 45,000 apps.
As Kelly says, it’s possible to install the apps post purchase, or use some work-arounds to give access to most of the apps that people use on a daily basis, but not everyone will have that ‘know-how’.
Aside its own lobbying, Huawei is taking legal action through the US legal system. Earlier this month, it petitioned a US court to overturn the ban that prevents carriers in rural America from buying the firm’s equipment by tapping an $8.5bn federal fund.
Huawei’s petition said the ban - imposed last month against the company and its Chinese rival ZTE on national security grounds - failed to substantiate claims that Huawei was a threat and was a violation of due process, and thus “unlawful”.
“Huawei is a Chinese company. That is [Washington’s] only excuse,” Huawei’s chief legal officer Song Liuping told a news conference at the company’s headquarters in Shenzhen.
The petition to a US appeals court follows a lawsuit filed by Huawei in March that declared a 2019 US defence bill “unconstitutional” for barring government agencies from buying its equipment, services, or working with third parties that are Huawei customers.
The US Federal Communications Commission said its close ties to “China’s communist government and military apparatus”, and were thus a threat to national security.
“We’ve said to the US government forget the licences, remove the entity list restrictions; there’s no legal basis for it,” says Kelly.
“Our strategy and our preparations give us the confidence that we can work through this,” he adds. Kelly, a former communications exec with British telecoms firm flatly dismisses the spy claims.
“Three billion-plus people in the world today will use Huawei technology. The scale we operate at, if we were doing any spying, you’d know about it,” he says.
Huawei now just needs to win the PR battle, as, from rural Ireland to Downtown Dubai, the US campaign has already convinced large parts of the general public.