Huawei- Caught in the Cross Fire

Huawei has reported buoyant sales in 2019 despite US efforts to undermine its global market presence. Will US trade sanctions enervate the Chinese MNC?

Evolution of the Chinese MNC Giant

Huawei Technologies is a Chinese MNC that provides networks and sells, telecommunications equipment and consumer electronics. In December 2019, the company announced annual revenue of US$ 122 billion, surpassing its’ 2018 record of US$ 105 billion. Huawei Technologies was founded in 1987, by Ren Zhengfei (76), a former officer of the PLA. The Corporate headquarters is located in Shenzhen, Guangdong Province, China. In 2012, Huawei became the largest telecom equipment supplier, in the world. It is also currently, the second-largest manufacturer of smartphones, in the world (behind Samsung and ahead of Apple).

However, Huawei Technologies has been criticized; both, for receiving state-support and for cybersecurity concerns that facilitate Chinese government surveillance. The US has been Huawei’s most vocal critic, calling for a complete ban on their next-generation 5-G equipment. But, Huawei has consistently stated that its products pose no cybersecurity risk and that there was no evidence, to support US government claims. Despite the denial, the allegations by the US government, affected the company’s ability to market its products in the US, forcing Huawei to pull out of the US market, in 2018.

Analysis

In the absence of evidence, US allegations of equipment deficiencies in Huawei products, are losing credibility. On 01 Jan 2020, India announced that it will allow Huawei Technologies to participate in forthcoming 5-G trials, along with other participants. Also, in January 2020, the EU announced that it will not explicitly ban Huawei and other 5-G vendors, while issuing guidelines to member states, for mitigating security risks.

US-China Trade War

Huawei is at the heart of the current US-China trade war and the company has been restricted from doing commerce, with US companies. In August 2018, the US Government issued an arrest warrant, for the extradition from Canada, of Meng Wanzhou (47), the deputy chairperson of the Huawei board of Directors and the CFO. Meng is also the daughter of Huawei founder, Ren Zhengfei. Meng has been accused of attempting to cover-up, the sale of Huawei-linked equipment to Iran, in violation of US sanctions. Consequently, on 01 Dec 2018, at the request of US authorities, Ms. Meng was arrested by the Canadian Mounted Police, at Vancouver International Airport and is pending extradition proceedings. Ms. Meng’s defense lawyers have rejected the allegations, contending that their client did not break any US or Canadian law.

Analysis   

Meng Wanzhou’s legal team has argued that at the time of the issue of the US arrest warrant, Canada did not have sanctions against Iran. Therefore, Meng’s conduct was not illegal in Canada; and, fails the test of ‘double criminality’. Meng has since been released on bail of US$ 10 million and is required to wear electronic surveillance, at all times. The incident has soured relations between Ottawa and Beijing, with China alleging that Meng’s arrest is politically motivated.

Huawei’s Dependence on US Software Companies

Until now, Huawei has been obtaining licenses from US software companies, to use certain software services on its hardware. In May 2019, as part of the trade war, US black-listed Huawei, prohibiting US companies from issuing licenses to Huawei. While licenses can continue to function on existing devices, new Huawei products will be deprived of Google Mobile Services (GMS) which hosts apps for Android devices like, Google Play, Google Maps, and Gmail. Though in January 2020, the US signed an agreement with China, marking a thaw in the on-going trade war, there was no provision for Huawei, in the agreement. If US sanctions on Huawei continue, Google and Huawei may be forced to end their cooperation.

In June 2019, in the midst of the US-China trade war, Huawei cut 600 jobs at their Santa Clara Research Centre, California; announcing that in view of US restrictions, the center would be relocated to Canada. 

Analysis

Huawei will be at a major disadvantage if it is no longer allowed to sell new devices with US-based apps, pre-installed. It would also be embarrassing for the Chinese manufacturer, if US apps like Google, become non-functional on its exiting phones. Recently, Huawei demonstrated the HMS-40 (Huawei Mobile Services) software, as its replacement for the potentially threatened Google services. If the HMS is successful, it could become a competitor product to GMS.

Assessments      

Canada and the US share a special relationship and possibly on the basis that understanding, Ms. Meng Wanzhou was arrested, on 01 Dec 2018. However, the allegation that Ms. Meng broke Canadian law, is getting difficult to substantiate. There is now, increasing pressure on the Canadian Government, to terminate the extradition proceedings and release Ms. Weng.

By preventing US companies like Google from doing business with Huawei, the Chinese MNC has no alternative, to making competitor products. If the HMS software proves to be a worthy competitor to Google Mobile services, Google’s loss could well turn out to be Huawei’s gain!

“Meng Wanzhou should feel proud that she has become a bargaining chip between China and the US. The experience of hardship and suffering is good for her growth. When she returns to Huawei, she will retain her old job and the company will benefit from her strategic acumen.”

Ren Zhengfei, Father of Meng Wanzhou and Founder of Huawei 

 

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