Huawei pivots as scrutiny reshapes business

29 November 2021 | Saf Malik

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Blocked from a growing number of telecoms networks, Huawei is changing its business model to focus on new revenue streams. Saf Malik reports.

A few years ago, Huawei was well placed to dominate both the 5G infrastructure and smartphone markets – but recent developments have crippled the company.

Huawei was well known for supplying highly customised 5G network equipment to telcos around the world and had deals in place with operators in several countries, including the UK, Australia and New Zealand.

The Chinese vendor was also on track to become the number two smartphone company in the world, ahead of US juggernaut Apple and just behind Samsung in First place.

But in 2019 the firm was added to the US Entity List. This decision restricted its access to items produced domestically and abroad and made it difficult for the company to import and export key equipment needed for 5G infrastructure.

Huawei has repeatedly denied allegations that its equipment cannot be trusted, but Rosalind Craven, research manager at IDC, notes that the US had always been reluctant to let Huawei into its infrastructure, particularly with 5G and the many innovations that it promises.

“Given all the hopes for what 5G will eventually enable – think smart cities, driverless cars and things like that, there is a sense that the security of the network deserved even more scrutiny,” she says

The concern from the US was that Huawei’s network equipment could contain “backdoors” enabling surveillance, or other types of access that could lead to sabotage.

“There isn’t actually any evidence of this,” Craven says.

“It is more of a theoretical risk, but the US decided it couldn’t live with it, and that it wouldn’t let its allies, security partners or trading partners live with it either.”

While there may not be concrete evidence, a report produced by a UK centre that aimed to evaluate the Huawei 5G technology indicated that it could give only “limited assurance” that Huawei infrastructure did not pose a threat to national security.

The centre added that Huawei was slow to fix vulnerabilities in its infrastructure, which included architectural and build issues. Alongside this, Craven acknowledges that the ongoing trade war between China and the US could have been a major factor as to why the US government made its decision.

At this point, though, Huawei has effectively been banned from Five Eyes nations the US, the UK, Australia and New Zealand, with Canada expected to follow suit at the time of writing.

Japan and Taiwan have also decided to phase out Huawei from their infrastructure, with French and German operators making their own committments.

Why Huawei?

Originally, there weren’t any rules forbidding telcos from choosing Huawei – but this has now changed, following US criticism.

Before the criticism, though, Huawei had an advantage on price, but there were several factors to consider for telcos before a final decision was made, Craven believes.

“Before all this started, there were essentially three choices for mobile network equipment: three international giants – Huawei, Nokia and Ericsson,” Craven says.

“When it came to the early days of building out 5G infrastructure, many saw Huawei as having other advantages, as it appeared to be winning not just on price, but also to have the most popular 5G equipment and solutions package,” she adds.

Huawei now supports more than 1,500 carrier networks across 170 countries and regions. The company has a presence in more than 700 cities and has partnerships with 267 Fortune Global 500 companies worldwide.

Dimitris Mavrakis, senior research director at ABI Research, agrees that Huawei was popular among network operators because it was “very advanced” in terms of technology while also being “cost-effective and customer-first”, therefore reducing capex demands for telcos.

Yet Mavrakis notes that being placed on the Entity List has had an impact not only on Huawei’s relationships with telcos across various countries but also with existing trading partners.

“Huawei could not sell to most Western markets and they have been banned from dealing with the Taiwan Semiconductor Manufacturing Company (TSMC), which has been manufacturing their infrastructure and handset chipsets,” Mavrakis says.

Mavrakis says this meant Huawei could not access foundries any more – and since the Chinese market is “way behind” in terms of the production of chipsets, the Chinese firm would struggle to locate vital 5G equipment.

The largest chipset manufacturer in China, Semiconductor Manufacturing International Corporation (SMIC), is “years behind” its rivals, according to Mavrakis, forcing Huawei to search for alternatives from other countries that will ignore US warnings.

Replacement cost

The UK had initially resisted US pressure to remove Huawei equipment, with the removal and banning of Huawei from the UK’s 5G network on track to cost £18.2 billion by 2027.

That assessment is by Assembly Research, which last year predicted that this could delay the UK’s overall 5G deployment by three years, with the UK set to lose its 5G competitive advantage and leadership position.

At the time, Assembly Research founder and principal analyst Matthew Howett said: “As a result of further restrictions on Huawei in the US, UK mobile operators are set to incur billions of pounds worth of cost stripping out equipment from their networks.

“This report reaffirms there is also an untold cost in terms of the economy and impact on productivity a delayed 5G roll-out will have, the scale of which the UK can ill afford given the current economic circumstances.”

The UK eventually agreed to remove all Huawei equipment from its infrastructure by 2027, meaning Huawei will have no involvement in 5G networks in the country.

As PP Foresight analyst Paolo Pescatore acknowledges, even while 5G is still in its infancy, it is paramount to maintain competition among network providers across the world.

He notes that, with this decision, the UK has set off a chain reaction by not selecting Huawei in its infrastructure – and other countries are following a similar path. Pescatore adds that no company should be immune to scrutiny.

And while competition is healthy, security is also vital in a world where networks are becoming software-driven – but he believes this is a precedent that should be in place for all providers.

“This domino effect is a huge blow to Huawei and a major headache for most if not all of the telcos,” he says.

And because of this, Pescatore believes that telcos will continue to struggle to replace existing network infrastructure in the coming years, incurring huge costs.

“A massive job now awaits many other telcos in stripping out Huawei and ensuring minimal disruption to customers.”

The US also has a plan in place to phase out Huawei equipment from US infrastructure as smoothly as possible.

Earlier this year the Federal Communications Commission (FCC) voted to allow carriers to apply for a share of $1.9 billion set aside to remove and replace equipment from scrutinised Chinese vendors, which includes both Huawei and ZTE.

Pescatore believes that, while this could provide an opportunity to other network vendors to pick up the pieces, “it is unclear whether they are up to the task”.

Fighting on

Despite the uncertainty, Pescatore is confident that Huawei will continue to fight on and provide ongoing support to its existing customers. He adds that there are opportunities in other areas which the company is starting to pivot towards, given the widely recognised challenges in network infrastructure.

These include cloud services via its Huawei Cloud platform and the continuation of its consumer business with the roll-out of HarmonyOS and Huawei Mobile Services.

Faced with mounting challenges, Huawei’s deputy chairman said in April: “In 2021, we will continue to find ourselves in a complex and volatile global environment.

“We remain committed to a globalised and diversified supply chain – one that doesn’t rely on any single country or region, but instead makes use of global resources to ensure supply continuity.”

Mavrakis believes that despite the US’ security concerns, Huawei’s telecoms kit will still be deployed in some markets, although revenue opportunities may be scarce given that most of these markets will not deploy 5G on a large scale.

“The geopolitical domain is much larger than Huawei and even telecoms. I would guess a strong trade agreement between the US and China needs to take place and then barriers will start to come down, butI don’t expect this to happen in the foreseeable future,” he says.

For its part, Huawei says R&D remains at the “core” of the business. Over the past decade, Huawei has invested more than CNY720 billion in R&D – and that represents about 53.4% of its total workforce.

And the firm is also enjoying success in Africa and south east Asia. “There may be some countries that move to block it, but many countries in those regions have a different political attitude towards China,” Craven says.

“Essentially, while Huawei continues to have a cost advantage it will do well in countries with low margin telecoms markets that don’t feel political pressure to reject Huawei.” She adds that Huawei has done what it
can to demonstrate separation from the Chinese state, but there will always be a limit to how much separation from the state a large Chinese company can prove, given that the state is “enmeshed” with business in China.

Despite its global problems, Craven maintains that Huawei has done a good job in preserving its regional operations and will continue to support research and existing infrastructure in countries that have not rejected it.

“It seems unlikely that Huawei will be allowed back into 5G infrastructure – certainly not in the core – but conditions may ease somewhat as the political situation and Western attitudes to China relax again,” she says.

Although, Craven admits, “I have no idea how long that might take”.