The Economist - UK - 09.14.2019

The EconomistSeptember 14th 2019 Business 65

2 Even if the Chinese state gave its bless-
ing, who might be the buyer? Mr Ren says
he has “no idea”. Analysts suspect that
giants such as Ericsson and Nokia would
balk at an offer out of pride, and would
question the value of Huawei’s tech. (Hav-
ing posted losses last year, they are also
short of cash.) The technology may not
help a smaller firm compete on an equal
footing with Huawei. The Chinese com-
pany is so well entrenched with big opera-
tors, say consultants, that it would not
make financial sense for most of them to
take on a new supplier. Samsung, a South
Korean electronics giant, has deep pockets
and a smallish but growing networking-
gear business—and without rival bidders,
it could drive a hard bargain. A consortium
of buyers is possible; who would make one
up is unclear, however.
Suitors may be put off by other consid-
erations. If Huawei really is ready to trans-
fer all its technology to another company,
then, as Mr Wang points out, “it has to ac-
cept the risk of a major competitor in the
future”. But Huawei’s dominance owes as
much to technology as to its low prices and
the speed at which it can roll products out,
says Ms Sacks. Its willingness to serve
places Western firms steer clear of is also a
factor: who else besides Huawei would
wade through malarial swamps in Africa
and haul base stations up the flanks of Co-
lombian mountains? Mr Ren knows this.
Asked whether he thought that an Ameri-
can firm, with Huawei’s precious know-
how in hand, would be able to pull it off, he
said, with swagger, “I don’t think so.” But
potential buyers know it, too.
Lastly, few believe that a sale would pla-
cate America’s national-security appara-
tus, at least in the short run. A new compet-
itor would almost certainly still need to
make equipment in China, which produces
half of America’s telecoms kit. Concerns
about Chinese meddling would not go
away. And Huawei’s latest offensive is not
all charm. Last week it accused American
officials of committing infractions while
posing as Huawei workers, in order to
“bring unsubstantiated accusations
against the company”. It also accused
America’s government of targeting it with
cyber-attacks. That may sour relations.
Could Mr Ren’s proposal, then, be a sign
of desperation? Not a bit of it, he says. He
claims that Huawei has found alternative
suppliers for its network-infrastructure
business that are unaffected by its black-
listing by America. He denies that the com-
pany will make a loss in the coming year.
Nonetheless, the consumer business is
under pressure. Half of the company’s
$105bn in sales last year came from the
208m smartphones it sold around the
world. So did an outsize share of profits.
This business is in deep trouble. Phones
that Huawei sells outside China are desir-

able communication devices largely

thanks to proprietary software available ex-

clusively from Google. Android, Google’s

mobile operating system, which Huawei

uses, is open-source and freely available.

But the American tech giant’s own apps are

not. Because Google is American and its

apps are compiled in America, the Com-

merce Department’s ban on sales of Ameri-

can technology to Huawei applies to them.

Mr Ren says that Google has been lobby-

ing the Trump administration to allow it to

resume supplying Huawei with propri-

etary Android software, but so far to no

avail. Unless American policy changes,

Huawei will remain stuck with the open-

source version of Android, without any of

the apps that consumers have come to ex-

pect. The Chinese firm is in the process of

developing its own operating system, Har-

mony os, but it will be no rival to the ma-

ture Android ecosystem for years to come.

Sandboxed

This means that all new Huawei phones

will ship without Gmail, Google Maps, You-

Tube or, crucially, Google Play Store. The

Play Store is what allows Android users to

download apps like WhatsApp, Instagram

and Facebook easily. WhatsApp in particu-

lar has become a standard mode of com-

munication in much of the world outside

America. Unless its government lets up,

Huawei’s new smartphones will be little

more than decent cameras that make

phone calls. The firm will launch the Mate

30, the first top-end phone since its black-

listing, on September 19th in Munich. Hua-

wei claims its hardware features will buoy

sales. But a phone which lacks basic func-

tions is unlikely to be a hit. A weakened

consumer business would dent profits.

Huawei’s share of the Chinese smart-

phone market, where it has never relied on

Google’s apps, is growing fast. But two-

fifths of its annual phone sales, or roughly

$20bn, come from outside the country.

Though the firm’s executives repeatedly

declined to share any projections, firm-

wide revenue growth in the eight months

to August slowed to 20%, year on year, from

23% in the first half of 2019. If the Mate 30

and its successors flop, Huawei stands to

lose billions of dollars in annual revenue.

Similar supply-chain challenges affect

other parts of its business. Its coders are

busily writing software tools known as

compilers and libraries, themselves used

to create the software that powers all man-

ner of electronic devices, not just smart-

phones but also networking gear. As with

Android, Huawei would have to create its

own version of these, and a technological

ecosystem around them. Such ecosystems

take years to evolve, and there is only so

much one company can do to stimulate

this evolution, which relies on third-party

developers, with their own goals and in-

centives. Huawei’s expertise in high, hard

technology is of little use here.

And, Mr Ren’s assurances notwith-

standing, Huawei’s finances are being

squeezed. Even he concedes that its rela-

tions with large Western banks such as

hsbc and Standard Chartered have been

disrupted. Still, the firm has plenty of cash

and he says that smaller banks remain will-

ing to lend to it. The Chinese Development

Bank, which has reportedly extended cred-

it lines to Huawei and zte, a Chinese com-

petitor, in the past, may stump up if need-

ed. Mr Ren and his underlings repeatedly

claim that cashflow is “healthy”, pointing

to the firm’s furious building work. It has

just finished a 120-hectare, $1.4bn research

campus.

Huawei is being forced to transform it-

self from a company that makes and sells

hardware into one that also makes many

components that it used to buy from oth-

ers. This kind of shift strains a firm. Its cash

cow is under threat even as it has to invest

heavily to replace the suppliers and soft-

ware it can no longer get from America. Mr

Ren may hope that his mooted sale of Hua-

wei’s 5gtechnology will give him sufficient

fuel for the company to fly ever higher. But

peer behind the showy frescoes in Shen-

zhen, and his showier gesture, and Hua-

wei’s future looks decidedly hazy. 7

Embodied wisdom

Source: IPlytics

Biggest 5G patent-owners

Number of patents, December 2018

1

0 300 600 900 1,200

Samsung

Huawei

ZTE

Ericsson

Qualcomm

LG Electronics

Intel

Sharp

Realm of possibilities

Source: Company reports

Huawei, revenues

2018, yuan bn

By business

By geography

*Europe, Middle East and Africa

2

Telecom networks

294.0

Global services 74. 4

Devices

348.9

Other 3.9

China

372.2

EMEA*

204.5

Asia-Pacific 81.9

Americas 47.9

Other 14.7