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21 February 2023

Huawei’s reinvention highlights risks of all-out US/China hi-tech cold war

Necessity is the mother of invention, so the old saying goes, and that certainly appears to be true of Huawei. Battered by US sanctions that severely restrict its access to advanced semiconductors and software, it has reinvented its business with remarkable speed, given its size and complexity.

It has defocused on its previous largest business, mobile devices, which is hardest hit by the trade restrictions, at least while it builds up its own platform – the Harmony mobile operating system and accompanying services, and its own chip designs.

It is also placing less weight on 5G infrastructure – this will remain an important business in China, and in many Asian and emerging markets that have not adopted the USA’s position on excluding Huawei from 5G networks for security reasons. But in the short term, China’s 5G build-outs are slowing as they reach scale, and many other strong Huawei markets will not roll out 5G for some years. India’s operators have not selected Huawei for their 5G networks, and many European operators are backing away, even if their governments have not introduced bans, given the risk that this policy could change in future, enforcing expensive rip-and-replace programs. The most interesting market in this context is Germany, whose operators have continued to buy Huawei equipment, and whose security agency has just approved ZTE 5G base stations (see below).

But for the coming few years at least, Huawei has reinvented itself around automotive, cloud, e-government and services businesses – segments that have limited reliance on the most cutting-edge semiconductors, or that use chips in which China has strengths already, such as auto and AI. The Chinese firm has halted the decline in its overall revenues after two painful years, and has accelerated its program to reduce dependence on US technologies.

There are, then, early signs of success for Huawei’s life-or-death business pivot, which have reportedly prompted the US government to consider extending its trade restrictions to non-5G components, related to 4G, WiFi, cloud and high-performance computing. This could effectively kill off Huawei’s handset business, but the company has already factored in further mobile device decline. In its growth areas, such as cloud,  it does use US components, but these areas have been selected partly because there are alternatives in China or friendly countries. Further bans will look rather desperate, and it is hard to see that they will achieve very much for the USA, beyond pleasing some political lobbies and further antagonizing China.

More broadly, the USA may find that its trade and technology wars with China lead to increased success in China’s long quest for technological self-sufficiency. That is already hurting the sales of US majors such as Intel and Qualcomm, which have significant Chinese revenues, as well as denying the global community access to some of China’s inventions and innovations. For now, standards organizations such as 3GPP remain global, but it is unclear how long that will be sustainable if political, security and trade tensions between the US and its allies, and China, do not abate.

Reports that Huawei has filed patents related to extreme ultraviolet (EUV) lithography (see below), highlight the risk that the US restrictions will backfire, encouraging China to develop its own islands of technology in key strategic areas. EUV is dominated by Dutch vendor ASML, which has been prevented from selling its most advanced chipmaking technology to Huawei as that would risk its contracts with US firms and TSMC, the world’s largest foundry (which severed ties with Huawei after pressure/incentives from the USA).