Huawei is about to begin a critical period that will define its future. The last two years of battles and blacklists have taken it to the brink. Its strategy to lead the market for 5G networks is in tatters, while Google-less smartphone sales are plummeting. But, as bad as it seems, could everything now be about to change?
Sergei Karpukhin/TASS
By the end of 2021, Huawei’s software boss Wang Chenglu announced last week, the company expects 300 to 400 million devices to be carrying its HarmonyOS alternative to Android—many of which would have carried Android itself. In September, Wang described this battle with Android as a “historic moment—a Chinese ecosystem [that] can be long-lasting and thriving.”
A few weeks before Wang’s “historic moment” comments, his chairman Guo Ping had warned Google that “the world is also looking forward to a new open system. And since Huawei helped Android to succeed, why not make our own system successful—no matter how high the mountain is… we will definitely succeed… Huawei will be able to survive and take the lead even in an extremely hostile environment.”
As ever with Huawei, the devil really is in the detail. 200 million of those units are their own, while the rest will be third-party, by which they mean smart IoT devices. But if the company is to have any chance of maintaining its consumer business, then it needs to deliver against these critical plans in 2021.
Harmony “is not a copy of Android,” Wang said last week, “nor is it a copy of iOS. It is a panoramic operating system that is truly oriented to the future IoT era. This OS is different from Android and iOS, [which are] based only on mobile phones.” Clearly, this isn’t exactly true—especially for Android. But his point is that Harmony is a seamless, cross-platform OS, not a phone OS (clunkily) adapted for other uses.
There is an Achilles Heel within Huawei’s strategy for Harmony, though—the U.S. blacklist. The strategy is defined as “1+8+n,” where “1” is a user’s smartphone, “8” is their smart devices—TV, PC, wearables, and “n” is their other IoT gadgets. Everything is glued together by Harmony OS, but take away the smartphone, the “1,” and it all falls apart. And right now, the future for its premium smartphone business is uncertain.
Huawei
Huawei insists that Harmony is not a reaction to its blacklisting, “I tell everyone that this is not the case,” Wang said this week. The company insists it’s a response to a longer duration between users upgrading phones and a stabilizing hours-per-day on those phones—the ecosystem needs to expand. This led to confusion when Harmony, aka HongMeng, was painted as an Android substitute soon after Trump signed his executive order, only for Huawei to admit it was not yet a phone OS. Well, it is now.
That doesn’t remove the Achilles heel, though. No smartphones means no Harmony OS strategy, and, as things stand, the U.S. is crushing Huawei's smartphone business.
There’s a strong irony to the Trump versus Huawei story. The U.S. government set out to curtail the Chinese giant’s sales of 5G networks through a blacklist and global political lobbying. But in doing so, whether initially by accident or design, the blacklist also split Huawei from Google, decimating smartphone sales outside China, and hitting the company’s bottom line much harder than the loss of 5G equipment sales.
Huawei selling smartphones is no threat to anyone but Samsung and Apple. At the time of the blacklist, Huawei’s consumer business had become its growth and profit center, outselling networking and enterprise, on course to overtake Samsung to lead the world. When Google realized that the terms of the Commerce Department entity list meant it would need to cease licensing new phones, a seismic shock hit Huawei.
Were it not for coronavirus and America’s unprecedented domestic politics post the 2020 election, there would have been more headline analysis of Huawei’s likely fate under a Biden administration. Few analysts expect a sea change in the U.S. approach, what happens next will be all about the nuances.
We saw that this week with the U.S. Department of Defense adding a further nine companies to its own blacklist, alleging “military-civil fusion” between those companies, the Chinese government and its People’s Liberation Army (PLA). Included on the list was Huawei’s rival Xiaomi. The DoD blacklist prevents Chinese companies from accessing U.S. financing. This is different and much less damaging to the Commerce Department entity list, which blocks access to U.S. suppliers.
Huawei is on both lists, but it’s the Commerce Department one that has done the real damage, cutting its access to Google and its chipset suppliers, where any American tech has been used in design or fabrication. The twist here, of course, is that Xiaomi has been a huge beneficiary of Huawei’s blacklisting, adopting a “new Huawei” strategy to replicate its larger rival’s success in exporting smartphones to the west.
A company restricted from accessing U.S. capital can continue to function, albeit more slowly or more expensively, depending on its access to other sources. There is no reason that it should be hugely damaged operationally—but that’s exactly what has happened to Huawei through its Commerce Department blacklisting. Huawei has a strong balance sheet and yet its business has been decimated by the dismantling of its core supply chain, including access to its own custom chipsets.
And so to the Huawei paradox. There’s a rational argument for the U.S. to challenge Huawei’s 5G networking business. While the allegation that its equipment hides backdoors remains publicly unproven, it’s not unreasonable to bar a private company with complex ownership in an “adversarial” state from your critical infrastructure. But there is no such rationale for destroying its consumer business. Huawei smartphones are not a security threat, and no such claim has even been made.
Objectively, the right answer is for the U.S. to formalize the 5G restrictions on Huawei, while letting the rest of its business return to some form of new normal. This could be achieved by an agreed arrangement or a break-up into a number of mini-Huaweis. Some viewed Huawei’s sale of its Honor brand as a first step in this direction.
All eyes then on the incoming president. Biden’s administration knows that to soften on Huawei would be quickly attacked by those politicians and commentators wholly opposed to any let-up. But an agreement where Huawei accepts 5G export limits alongside other restrictions or self-selects a break-up would be a notable victory.
We have an immediate litmus test to help gauge how Biden might act. Huawei’s CFO, Meng Wanzhou, remains in Canada, detained in December 2018 on U.S. charges of wire fraud related to sanction-busting with Iran, now fighting extradition to America.
The arrest of Meng, who is the daughter of Huawei founder and CEO Ren Zhengfei, came to epitomize the battle between Washington and Huawei at its height. “It’s a question of whether you remove Meng from being a pawn in an emotional intrigue to get at her father,” Einar Tangen, a legal commentator close to the Chinese government, complained to me last year. “They don’t have the daughter of the founder to use as emotional and political leverage at that point.”
Meng has consistently argued that her rights were contravened during her arrest, alongside a wider abuse of process. This includes giving up passcodes to her (Apple!) devices when she was detained, which she says she did under the impression it was part of an immigration check and not as part of an arrest.
Meng’s legal team has challenged the basis for extradition to the U.S., given the nature of the charges and Meng’s Chinese citizenship, including claims that Trump was willing to use her as a “bargaining chip” in last year’s trade negotiations with Beijing.
Comments made last October, by Canada’s associate chief justice Heather Holmes, appeared to open the door to an outcome that would avoid extradition. Holmes said that claims the U.S. had misrepresented evidence “had an air of reality,” including the editing of a PowerPoint presentation to exclude context, meaning that evidence might be “realistically capable of challenging the reliability” of the U.S. extradition request.
There have been suggestions that a deal is being brokered to allow Meng to return to China, albeit nothing substantive and nothing confirmed. The situation is certainly not clear cut, and while Meng’s detention and extradition were totemic for the Trump administration, it is exactly the kind of issue that a new administration might seek to settle quickly, given wider priorities.
This early litmus test might give some indication as to how the new politics might shape up and whether there’s any likelihood of a respite for Huawei, at least as far as its non-threatening but highly profitable smartphone business is concerned. And if that does happen, is there a chance that Google and Huawei will reunite?
Which takes us back to Harmony—Huawei is too far down the road now to reverse direction and return fully to the Android fold. The company would also risk a change of U.S. policy, maybe with a possible new administration elected in 2024, that sent it back to square one. In reality, it would likely welcome Google apps on its phones and might even launch some form of dual OS. But Harmony is here to stay.
And so, the risk that I warned about just after the blacklist was announced—when it became clear it was smartphones that would be hit hardest, that this would loosen America’s grip on global mobile ecosystem, is now getting real.
With this in mind, the bad news for Huawei is that it might be better for the U.S. to maintain its chokehold on the company’s smartphone business to prevent its new OS from gaining ground—whether or not there are any real security concerns. No phones, no Harmony strategy, no threat to Android, no undermining of U.S. influence.
It will be some years before Huawei can rebuild its silicone supply chain, absent U.S. tech, to build its premium devices. And even if that was not the case, it will be a huge challenge to switch full-fat Android users outside China. Huawei’s get-out is making Harmony open-source, available to other (likely Chinese) smartphone makers. But while those other manufacturers, the likes of Xiaomi, Oppo and Vivo, retain access to Google, there is no incentive to move.
We assume that the highly charged rhetoric and the combative style of the last four years will now make way for a more measured engagement, but that won’t make these decisions any easier, given the reality of the Trump versus Huawei legacy. All of which means Huawei is about to enter the most critical period in its history, with no real view yet as to where it is likely to come out.
