Telecoms

The great giveaway

Why has Huawei’s founder offered his firm’s 5G patents to competitors?

Ren-Zhengfei-w

Ren opens up: the most interviewed Chinese businessman in 2019

Advances in the world of computing and coding would happen a lot more slowly were it not for the Free Software Movement started by Richard Stallman in the 1980s. Frustrated by the silo mentality of software developers at the time, the Harvard-trained computer scientist created a source code sharing platform called GNU. He also came up with the principle of “copyleft” (as opposed to “copyright”), which required users to distribute all modified codes should they make changes to GNU-licenced software. A monument to the project’s success is Linux, the open-source kernel that underpins a raft of operating systems including Google’s Android.

Today, open source is no longer regarded as a rebellion against big software developers – and their monopoly-style ‘rents’. It has become a flourishing business itself, spawning multi-billion dollar companies such as Red Hat and MuleSoft that are coveted M&A targets. But when Shenzhen-based Huawei Technologies revealed plans to open the stack of its fifth-generation (5G) communications technology for a one-time fee, few if any observers saw the move in a purely financial light. Most consider it a tactical gambit by a telecoms giant that has been rolling with the punches in recent months after being blacklisted by a hostile US government.

In his recent interviews with The Economist and the New York Times, Huawei’s boss Ren Zhengfei emphasised that acquirers of Huawei’s 5G platform – comprising existing patents, licences, technical blueprints and production know-how – would be given the liberty to alter the source code. The implication is that no single party – including Huawei or the Chinese government – could have control over the 5G telecoms infrastructure built with Huawei’s input.

Put differently, the US and its allies could theoretically expedite their 5G development with fewer concerns over information security as the network could be constructed independently of Huawei.

(As it lacks an indigenous 5G networking manufacturer, the US currently has to rely on suppliers such as Nokia and Ericsson that sell products that are far more expensive than those offered by Huawei. The latter has ploughed over $2 billion into research and development for such next-generation technology which is viewed as strategically critical as 5G networks are set to be the backbone of the emerging ecosystem known as the Internet of Things.)

The many queries that Western media sources have raised regarding Huawei’s bold move include whether the Chinese company is sincere about sharing its tech secrets and which third party – Samsung has been mentioned – might risk stepping forward as the buyer.

“It’s like buying a house. Of course you’ll change all the locks when you move in. You can even renovate and build new walls. But you may never find all the surprises the previous owners left behind – and someone else will always have the blueprints for where you live,” Breaking Defense, a New York-based digital magazine, wrote of Huawei’s offer. It also drew attention to the high costs that Huawei’s licencees might then incur due to the need to “root out hidden backdoors” and “bring its vulnerable, buggy firmware up to Western standards”.

Ren’s olive branch came four months after the Trump administration banned Huawei and its affiliates from procuring US technology without special approvals, alleging espionage and other national security risks (see WiC453). Washington is also pressing other governments to shun Huawei, threatening the UK, for instance, that it would review its intelligence sharing policy should Huawei 5G gear be adopted in British networks.

Of the $70 billion that Huawei spent on component procurement last year, around $11 billion went to American producers. These included Qualcomm, Intel and Texas Instruments, that supply Huawei with chips; Synopsys and Cadence Design Systems, with chip-design tools; Skyworks Solutions and Qorvo, with high-end radio frequency technology; and Google and Microsoft, with software. A number of chemical companies also help Huawei indirectly to develop advanced panels and semiconductors, according to Japan’s Nikkei Asian Review. At the most recent count over 130 companies in the US are still hoping to do business with Huawei, based on the number of applications submitted to the Department of Commerce seeking approvals.

Ren expects $30 billion will be shaved from Huawei’s revenue this year due to the friction with Washington. However, he added that Huawei will avoid losses as both its networking infrastructure and consumer electronics businesses will remain operational, thanks to the alternatives it has found to the US firms removed from its supply chain.

The Singapore and California headquartered Flex International, for instance, stopped production at its smartphone factories in Changsha in July. The world’s second biggest electronics OEM (just behind Foxconn) was forced out of Huawei’s supply chain largely because of the American blacklisting. Yet Foxconn and Shenzhen-based car and battery maker BYD quickly stepped in to fill the void. According to Hunan Daily, BYD has agreed to produce 80,000 handsets daily for Huawei by the end of the year in a three-year contract that is worth over Rmb50 billion ($7.04 billion).

Huawei’s partnership with BYD is just one of the many negotiations that it has initiated as part of its contingency plans to find alternatives to US suppliers. “As soon as Meng was arrested in Canada, the company began to stockpile key components and to qualify new suppliers,” the Nikkei Asian Review commented. Meng, Ren’s daughter and Huawei’s CFO, has been detained since December, with the US trying to extradite her on charges of bank fraud, trade secrets theft and sanctions evasion in relation to Iran (see WiC435).

“Many second- and third-tier suppliers, who previously would have had no chance to enter Huawei’s supply chain, have now been handed a once-in-a-lifetime opportunity to move up the ladder,” Roger Sheng, a Shanghai-based tech analyst at consultancy Gartner, told the Japanese magazine. “Even if the US later allows Huawei to use American components, it’s never going to go back to the old days, as if nothing had happened,” he added, suggesting the shift from buying US products could outlast the trade disputes.

In the software space, Huawei is trying to popularise its self-developed Harmony operating system in order to limit the impact of being excluded from Google’s Android ecosystem. Huawei’s deputy chairman Ken Hu told reporters on Wednesday that its grand scheme is to invest $1.5 billion to grow Harmony’s developer base from the current 1.3 million to 5 million in the next five years.

It faces hurdles: the South China Morning Post quoted some programmers’ complaints that Huawei’s newly released Ark Compiler – which is supposed to make it easier to port Android apps to Harmony – “is not even half-finished” and doesn’t work well.

Huawei’s reshoring is not limited to its supply chain. On September 12 the company announced another bold plan: to issue its first onshore bonds. The first batch, in two tranches, will be worth a total of Rmb6 billion (with a potential Rmb14 billion to follow). Some brokers believe Huawei’s fundraising are sign of financial distress, even though the company is still reporting robust results. Last year it recorded a net profit of Rmb59.3 billion on revenues of Rmb715.2 billion, according to its bond prospectus. For the first half of this year, it booked revenue growth of 23% to Rmb401.3 billion as its gross profit margin improved across all business divisions. It retained Rmb249.7 billion of cash in June.


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