Huawei’s bid for self-sufficiency extends from chips to the OS

China has been investing billions of dollars in core technologies from semiconductors to artificial intelligence to ensure it reduces its reliance on external, particularly US, vendors and patents. This has been policy for years, but the vast country will redouble its efforts in the face of current trade and national security disputes, and particularly the US sanctions against Huawei.

Huawei itself has been increasing its own technology self-reliance in recent years. With ZTE, it is the largest contributor to 5G essential patents. It has developed many key components within its HiSilicon semiconductor arm, and now has processors for servers and smartphones, plus many other chips such as 5G modems. Now, amid the climate of US hostility, it is not only increasing its investment in its own R&D, but replacing US vendors with local ones wherever possible in its supply chain – which in turn, will boost the government-backed efforts to make the Chinese components industry commercially successful.

Intel, ARM, Qualcomm and other large suppliers (or former suppliers) to Huawei will try to retain a position in the Chinese value chain through their local investments and arm’s-length ventures. But they will still see their addressable markets shrinking as the largest market for chips in some categories, and the one with the highest growth in others, turns inwards on itself.

Victor Zhang, Huawei’s head of global government affairs, recently said the firm had adopted a strategy called ‘business continuity management’ which includes finding alternatives to US component suppliers and introducing new rules to limit the levels of US technology in its products.

Zhang referred specifically to US suppliers NeoPhotonics and Lumentum, which have sold optical components to Huawei for years. Zhang said: “We have the capability to mitigate the supply chain risk. If there are components we cannot find, we need to redesign.” He added claims that Huawei’s optical solutions were “far ahead of the industry” and that “there are no risks involved for our optical solutions and for 5G solutions in future.”

Neither of these rings true, given the long term nature of some of Huawei’s supplier engagements and the acknowledged fact that China lags the USA still in many areas of advanced chip technology. But the comments show that Huawei is determined not to be dunated by US hostility, and over time, Zhang’s claims are likely to become closer and closer to reality.

Some suppliers, including the two optical specialists, are reported to be looking into the option of getting round US restrictions (whose severity in future remains unclear – see previous item), by selling products they have developed and made elsewhere. NeoPhotonics has products developed in Japan while Lumentum recently acquired rival Oclaro, which gives it Japanese and UK alternatives.

Such strategies are imperfect however – UK and Japanese firms may be pressurized to make a choice between trading with the USA or China, if there is a renewed hardening of the US line; the two firms’ US products are said to be superior to the others; and anyway, Huawei will be determined to loosen its ties altogether. A solution of non-US origin might be a useful stopgap, but the objective will certainly be self-sufficiency, even if the entity list restrictions are further relaxed.

Huawei itself plays down this and insists its preference would be to continue to build a global supply chain. Zhang said: “Even when we have our own components and our own chipsets, we still purchase from America or Japan or other countries because we believe that openness and collaboration are very important for the development of innovation.”

But while it is clearly beneficial to leverage the innovation, economies of scale and price competition of a global industry, Huawei’s number one concern will be stable supply of high quality core components. To this end, it has recently limited the percentage of US “origin content” in products made outside the USA to 25%. This directly mirrors the US export rules that state that manufacturers outside the USA are barred from selling certain products to Huawei that have higher than 25% US content – impacting large numbers of vendors which, though not American themselves, use US parts and technology.

The prospect of China becoming a technology island extends even to software, with Huawei dusting off its project to create its own smartphone operating system as an alternative to Android. When Huawei was placed on the US entity list in May, Google rushed to comply with the government’s wishes and said that it would not allow Huawei to offer Google services, such as search and the Play Store, on its Android smartphones. The Chinese company can, of course, still use the basic open source Android operating system, but without the applications that, for some users, are an important part of the mobile experience.

The deadline for activating the ban was extended to August 19, and now it is possible that Google will be able to offer its services to Huawei again, but the damage may have been done. Huawei has dusted off a years-old project to develop its own mobile operating system, complete with applications and content platform, in another bid to be less vulnerable to the whims of US trade policy.

The vendor has applied for the trademark ‘Harmony’ for its own-brand OS in Europe, while in China – where Google’s services are hardly used because of long-standing barriers – it is known as Hong Meng. Huawei has said it would prefer to continue to use Google-backed Android in markets, including Europe, where this is a popular environment, and is developing its own alternative as a contingency against future US bans. But the more it enhances Harmony, and particularly if its own OS is successful in China and other Asian markets such as India or Indonesia – where Google is less entrenched – the more it could become a major force, splitting the world’s smartphone base in half and providing new competition for other Android implementations such as Samsung’s.

Huawei is already making grand claims for Harmony. Its founder Ren Zhengfei told French media that it would be 60% faster than Android, though he acknowledged that, at present, it lacks the vital element of an apps and content store – but hinted this was under development too.

Ben Wood, head of research at CCS Insight, said: “Huawei has been working hard on developing its own App Gallery and other software assets in a similar manner to the work it has done on developing its own chipsets for phones. There is little doubt these efforts are part of its desire to control its own destiny.”

The head of Huawei’s mobile business, Richard Yu, was reported by the South China Morning Post saying: “The Huawei OS is likely to hit the market as soon as this fall, and no later than spring next year.”

In this tense environment, it is hard to tell whether Huawei or Google will end up suffering most from the climate of mistrust that has built up, sparked by the entity list action (even if that is now revoked).

The worst case for Huawei is that it remains permanently beyond the pale as far as the US is concerned (especially if Donald Trump wins re-election next year), and that it fails develop its own mobile platform sufficiently quickly, and to sufficient quality, to replace Google’s.

That would see it surrendering its recently won position as the second largest handset vendor in the world, and probably confine it to its home market and others in the region which are less susceptible to US influence and/or to Google’s services. That could include India and Russia, though some companies are eager to establish their own platforms in those huge markets, providing independent alternatives both to Android and Harmony (see separate item). For Huawei, failure outside China could equate to the loss of about $25bn in revenues by last year’s count (its estimated sales of non-Chinese smartphones in 2018).

In developed markets, Samsung would reverse its declining lead – especially if US bans, or even just operator nervousness about the possibility, extend to other Chinese competitors such as ZTE, Xiaomi and Oppo. In emerging markets, there would be a significant opportunity for Indian handset makers.

But the worst case for Google is that it loses the second biggest vendor of devices running its Android operating system and – outside China – its services. Huawei has been growing its non-Chinese smartphone sales rapidly and in these international markets, and achieved global market share of over 18% in the first quarter of this year, with 49% of these being sold outside China.

In the first quarter, almost 30m Huawei smartphones shipped outside China, which adds up to a lot of consumption of Google applications. Of course, over time, if those users are forced to replace their handsets because they cannot access their favourite applications any more, they are likely to adopt Android devices from another vendor, so Google may not be much affected.

However, Huawei supports a ‘purer’ implementation of the Google-defined applications and look and feel than does Samsung, which has tried to pursue a more differentiated user experience with its own store, payments, navigation and other options.

And if Huawei is forced to develop its own platform that would deprive the US company of a strong source of growth for its platform at the high end, where Android is most vulnerable to the iPhone. Huawei has driven its top end models significantly up the ladder and its 5G Mate flagship was expected to feature in many 5G launches, such as those announced this week in the UK. With those plans on hold, Samsung will be the beneficiary, and will gain even more market power, which brings the ability to resist Google’s attempts to bring it into line on a common user experience.

However, developing one’s own mobile OS, whether Android-based or not, has proved an uphill struggle for many companies in the past. Samsung and others have tried to foster alternative Linux-based platforms to reduce the power of Google in the ecosystem, but these attempts have failed and the likes of Tizen and webOS are now consigned to the mobile graveyard. Amazon’s development of a mobile ecosystem based on a fork of the Android OS has succeeded in tablets but not handsets.

Several Chinese companies, including Alibaba, Baidu and the operators, have tried to create differentiated mobile systems, and these have had some uptake in China, where the Google services are not available anyway, but not beyond. So the risk to Huawei is that its homegrown system would confine its smartphone activities to Greater China and a few other countries in the region, putting that $25bn of revenue in jeopardy. Operators in other markets, already nervous of dealing with the Chinese vendors, would not support an unfamiliar platform, while consumers would likely miss the Google services such as the Play store.

Huawei’s easiest option is certainly to use the open source Android route. By taking the open sourcecode, but not signing up to the specifications of the Google-driven Open Handset Alliance (OHA), companies have free rein to create their own user experiences, without having to support core Google services like search (which OHA members do need to do). Acer fell foul of Google when it adopted Alibaba’s Aliyun OS, which the US firm claimed used Android code – not because it had adopted a non-Google implementation, but because it was allegedly breaking the rules of the OHA, of which it was a member.

So there is nothing to stop Huawei splitting with the OHA and creating its own OS, while sticking with an Android base in order to tap into that platform’s huge base of applications. But it would miss out not just on the well-used Google apps but on its technical support, plus updates roll out through open source far more slowly than for the licensed version of the OS. That has implications for performance and security, while building alternatives to Google services, including app store supporters, outside China would be very tough, as Windows Phone found.

For China at least, however, Huawei would have the opportunity to reduce its dependence on Android and Google; to create a fully integrated platform, Apple-style, with its own technology from HiSilicon processor to user interface; and to feed into the Chinese government-backed effort to create a homegrown mobile platform and so sever some of the ties to western technology and patent fees.

Huawei has been reported to be working on its own Android fork since 2012 (the time of its last major dispute with the US). In 2015, it recruited an Apple designer, Abigail Brody, with one of her objectives to revamp the skin it overlays on vanilla Android to give its increasingly successful smartphones a differentiated look and feel. At the time, Brody said that she believed Huawei could become “the world’s number one, the most advanced and favorite lifestyle-centric ecosystem, and without having to copy Apple at all, ever”. However, Brody left the company after just two years as chief user experience designer, and set up her own company, Abalone, which aims to build the “world’s most integrated creative software platform yet”.