America’s assassination attempt on Huawei is backfiring
The company is growing stronger—and less vulnerable
Ren Zhengfei, the founder of Huawei, often talks of his firm’s clashes with America in military parlance. “It’s time to pick up the guns, mount the horses and go into battle,” he said in an internal meeting in 2018. In a memo the following year he encouraged staff to tie ropes to Huawei’s figurative tanks and help drag them onto the battlefield.
The martial talk is understandable: Huawei has been under attack from America for over a decade. In 2012 the American authorities began claiming that China might use the firm for espionage. Another broadside was the indictment of the firm’s CFO (and Mr Ren’s daughter) in 2018 for violating sanctions on Iran. By 2020 America’s harrying had descended into all-out war, with most American firms barred from doing business with Huawei and foreign firms barred from selling it chips or other gear that use American technology. America also sought to dissuade other countries from using Huawei’s equipment in their mobile-phone networks.
This onslaught battered Huawei. It was forced to sell its main smartphone brand for lack of chips. More than a dozen rich countries excluded it from 5G contracts. Revenues tumbled 30% in 2021; net profits collapsed by 70% in 2022. In a memo that year Mr Ren was clear that Huawei was fighting for its life: “The first thing is to survive. We have a future if we survive.”
America’s assault continues. In May, for instance, regulators revoked a special permit allowing Intel and Qualcomm, two American tech groups, to sell Huawei chips for laptops. Yet Huawei has not just survived; it is thriving once again. In the first quarter of this year net profits surged by 564% year on year to 19.7bn yuan ($2.7bn). It has re-entered the handset business. Its telecoms-equipment sales are rising again. And it has achieved this in large part by replacing foreign technology in its wares with home-grown parts and programmes, making it much less vulnerable to American hostility in future. Having failed to kill Huawei, Uncle Sam’s attacks have only made it stronger.
Mr Ren, a former soldier, started Huawei in 1987 in his flat in Shenzhen, importing foreign telecoms gear to sell to Chinese customers. An engineer by training, he quickly started making his own equipment. As China’s telecoms market grew, so did Huawei. By 2020 it had become not only the world’s biggest smartphone maker, but also the leading provider of mobile-network gear, with a market share of 30%.
Mr Ren has never been short of ambition for Huawei. Its name is a contraction of the phrase “China has promise”. Its headquarters in Shenzhen are impossibly grand and imposing. A palatial meeting hall features ornamentation worthy of Versailles: marble columns, inlaid floors and oil paintings of bucolic scenes across the ceiling. In a nearby manufacturing city the company has built a European-style town around a lake, complete with life-size replicas of castles that serve as meeting rooms and libraries.
Mend of an empire
In retrospect, America’s blitz only briefly shook this empire. Huawei’s sales last year, of about $100bn, are twice those of Oracle, an American tech firm. It is half the size of Samsung, a South Korean phonemaker, but outspends it on research and development. In fact its R&D budget of $23bn in 2023 was exceeded only by America’s biggest tech firms: Alphabet (the parent of Google), Amazon, Apple and Microsoft (see chart 1). Last year’s profits, of about $12.3bn, put it on a par with Cisco Systems, an American communications group, and vastly exceed those of Ericsson and Nokia, its main rivals in the mobile-networks business. And whereas Ericsson and Nokia are laying off staff, Huawei’s headcount is growing. It now has 12,000 more workers than it did in 2021.
Huawei’s core business remains telecoms-network equipment, which brought in about half of its revenues last year. In recent years this division has also formed teams of engineers to take on consulting projects, helping to re-wire and so streamline all sorts of businesses, from ports to coal mines. These new initiatives have pitted it against Western rivals such as Cisco Systems, Siemens and Honeywell.
Bric-a-brac from the dead
The consumer division, which generates a third of sales, makes all manner of devices that can connect with 5G. It has begun releasing fancy smartphones again, but also makes watches, televisions and the systems that control many Chinese electric vehicles (evs). Revenue from consumer devices grew by about 17% in 2023, thanks mainly to the new smartphones.
A cloud-computing unit accounts for almost a tenth of revenues. Its sales grew by 22% last year. As Microsoft shrinks its operations in China, owing to American tech sanctions, Huawei is said to be scooping up its engineers. Another fast-growing unit focuses on energy, including EV charging networks and photovoltaic inverters, which turn the direct current produced by solar panels into the alternating sort that flows through the grid.
It is not that American sanctions have had no impact at all on Huawei—far from it. Its business has become more concentrated in China, for one thing, with foreign sales now only a third of the total, down from half in 2017. It has also been forced to focus more on innovation, to find technological fixes for its political problems. Some 114,000 employees, more than half the total, work in R&D. Most striking of all, it has become more vertically integrated, as it seeks to develop replacements in-house for components or software snatched away by Uncle Sam.
To survive existing and potential future American sanctions, Huawei has been systematically seeking substitutes for American intellectual property (IP) in its products and internal systems. Mr Ren claims the firm has replaced 13,000 foreign-made parts with Chinese ones. This has been extremely costly. By forcing Huawei to focus on this task, American sanctions have undoubtedly prevented it from investing in other areas. But the sanctions have also spurred the rapid development of Huawei’s own ip and pushed it to diversify into new lines of business. It has been able to revive sales of smartphones, for instance, by collaborating with a Chinese supplier to develop suitable chips, most of which it used to buy from foreign firms.
China’s semiconductor industry still lacks many of the components and tools needed for a complete break with the West. Some of the home-grown chips that Huawei is using are thought to cost several times more than their foreign equivalents and remain in short supply. But the fact that Huawei has been able to get round the sanctions at all in such a short time is a surprise. As a private firm whose goals dovetail neatly with those of the Chinese government, it is becoming a model for how China thinks about innovation.
About 70% of the components (by value) of the Mate60 Pro+, a smartphone Huawei released in September, are made in China, according to an estimate from Jefferies, an investment bank. It helped give Huawei a 15.5% share of smartphone sales in China in the first three months of 2024, up from about 9% during the same period in 2023 and on a par with Apple (see chart 2). This success has been a big factor in Huawei’s recovery.
The phone uses a chip made by SMIC, a state-owned foundry and one of a web of firms in the semiconductor industry with which Huawei has been collaborating. Around the same time as America issued its first export restrictions, Huawei created an investment unit called Hubble. Since then it has made at least 107 investments.
Hubble’s strategy has been to take small equity stakes in dozens of suppliers that are working on technologies that might help ease Huawei’s dependence on foreign suppliers. Take lithography machines, which carve the tiniest of circuits into wafers and pose by far China’s biggest challenge for self-reliance in chipmaking. Hubble has made several investments in lithographic lasers. Focuslight Technologies, for example, is a supplier of laser components to ASML, the world leader in lithography, and TSMC, the world’s most advanced chip foundry. Hubble invested in it in 2020. A system it created for removing imperfections from the materials on which circuits are printed has helped end a foreign monopoly on this specific function within the laser supply chain. Another recipient of Hubble’s cash, Suzhou Everbright Photonics, is building China’s largest production lines for gallium-nitride chips, which are a novel type of high-performance semiconductors used in everything from 5G gear to power grids. The market for photoresists, which are used to form a pattern on the surface of chips in the lithography process, is dominated by Japanese firms, but one of Hubble’s portfolio companies, called Xuzhou B&C Chemical, is breaking into this niche.
These investments are not creating the world’s most advanced lithography equipment. Few expect Huawei to make strides in deep ultraviolet lithography machines, the bleeding edge of the industry produced only by ASML. But Hubble’s activities are eating away at pockets of reliance on foreign tech. Part of that reliance is simply servicing foreign-made machines. Since the start of the year American commerce officials have been telling allies to stop providing help to keep advanced lithography machines running. Some of Hubble’s investments, analysts believe, are meant to build up Huawei’s ability to service and adjust components so that they work with locally made systems.
Hubble’s investment strategy is already having an impact on global markets. Take silicon carbide (SiC) chips. These semiconductors are used mainly in EVs and green-energy systems owing to their ability to operate at high temperatures. The market for them has long been dominated by Infineon, a German company. As Huawei has moved rapidly into providing technology for EVs and energy management, Hubble has invested in at least four Chinese companies that produce the materials for SiC chips, which constitutes the biggest cost in producing them. They have quickly grabbed a 32% share of the market for SiC wafers, up from almost nothing a few years ago. Huawei’s involvement in the market has been one factor contributing to the fall in global prices of this type of hardware, says Poshun Chiu of Yole Group, a chip-intelligence firm.
There are no American sanctions on SiC chips; Huawei is simply being proactive, given the risk that sanctions may be applied in future. This approach prevails throughout the company. Executives must contemplate restrictions on most components. The rescinding in May of Intel’s and Qualcomm’s licences to sell it basic computer chips has validated this thinking.
A virtual Lazarus
Hardware is only half the battle for Huawei: since 2019 American firms have also been prohibited from selling it software, forcing the company to develop substitutes for those purchases as well. Oracle, for example, had provided Huawei with a programme to manage its internal systems (enterprise resource planning or ERP, in the jargon). The restrictions forced Huawei to build an entirely new system of its own, called MetaERP. At its launch last year an executive exulted, “We have broken through the blockade. We have survived.” Some speculate that Huawei may eventually attempt to sell the system in competition with the likes of Oracle and SAP, a German company.
An even bigger hurdle has been the operating system (OS) for its consumer electronics. Huawei built its smartphone business on Google’s Android. Losing access to Android, and the vast ecosystem of applications that run on it, was one of the reasons it had to jettison most of its smartphone business.
Since 2012 Huawei had been developing an OS, called Harmony, for its watches and other gadgets. America’s sanctions on software forced it to incorporate Harmony into its phones as well. The popularity of its new models, in turn, has induced developers to make more apps that run on Harmony. The current version of the OS has been built with open-source Android code to make Android apps compatible for the time being. It is designed to be used in all Huawei’s consumer products, including watches, televisions and vehicle systems, which makes it possible to integrate functions across devices. It is said to have 700m users and 2.2m developers.
The next version of Harmony is expected to drop all Android-linked code. When this happens, Android apps will no longer work on Huawei phones. That could be harmful to business, given that there are still very few “native” apps for the OS. But the shift would also signal the OS’s total independence from the West. Harmony would, in effect, become a competitor to Android and Apple’s iOS—a far more ambitious outcome than Huawei originally planned for the software.
American sanctions have also prompted Huawei to diversify, to compensate for lost revenue. Whereas its international focus used to be network equipment, it is now expanding sales of software to firms in Africa, Asia and Latin America running databases in the cloud. An executive from Clarin, an Argentine media group, told a Huawei event in May that his firm was replacing expensive Oracle database software with Gauss, Huawei’s offering. Even two years ago, such switches often created compatibility problems with other Western software, but a recent overhaul appears to have ironed out most such glitches.
American policymakers had believed that Huawei would struggle to produce enough AI chips to sustain its own operations. In fact, it appears to have chips to spare. A Chinese voice-recognition company called iFlyTech recently revealed that its models and technology run entirely on Huawei’s AI chips. This represents the first indigenous AI system in China that has “supply-chain independence” from the West. It is also the first AI ecosystem fully built by Huawei for another company.
All this suits the Chinese Communist Party well. Xi Jinping, China’s leader, has expressed the same ambition as the company, to overcome American sanctions with locally developed technology. The state, already Huawei’s biggest customer, also supports it in other ways. To spur the development of the semiconductor industry, it provides subsidies and invests alongside Huawei. The company and the government both own stakes in Focuslight, Everbright Photonics and Xuzhou B&C Chemical, for instance.
But Huawei’s relationship with the state is often misunderstood. The firm is not trying to indigenise its supply chain to comply with government directives. Rather, for Huawei and many other Chinese companies, self-sufficiency has become a commercial imperative because it is their only means of survival. Its investment decisions are market driven. This separates it from sluggish state-owned enterprises, which formulate their business plans based solely on state policy.
No state firm has come close to the level of success experienced by Huawei over the past decade. SMEE, the state-owned lithography group, is years behind schedule in releasing advanced products. Even as state subsidies for semiconductors have increased (last month the state launched a $47.5bn fund for the industry), notes Lin Qingyuan of Bernstein, a broker, government interference is declining. The authorities, Ms Lin says, want market forces to shape investments. Huawei thus represents the Chinese government’s latest thinking on industrial policy.
America’s policymakers are also learning from their mistakes. The gradual ratcheting-up of sanctions on Huawei, and especially the 28-month gap between the announcement of the most severe measures in 2018 and their implementation in 2020, gave the firm lots of time to prepare, China hawks lament. But the bigger lesson from Huawei’s torment has not yet sunk in: that cutting the firm off from Western technology did not stifle it, but instead increased its incentives to innovate.
China is still years behind the West in chipmaking. Sanctions on high-powered semiconductors have raised costs and slowed the uptake of AI for thousands of firms, as intended. Hubble’s investments are still far from replacing Western lithography machines and other components. But if Huawei was a worry when America first declared war, it is a bigger one now. ■