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28 May 2019

Special Report: Huawei in crisis

As Huawei’s predicament deepens, the industry as a whole will be the loser

The situation regarding Chinese vendors’ ability to sell network equipment is developing rapidly as political and trade tensions between the USA and China intensify. In the past week, the sanctions against Huawei and ZTE have expanded from the USA and Australia to other countries (Japan); from network equipment sales to handsets and the Android platform; and from supply of technology to procurement of US components.

Most operators continue to insist that they need freedom to choose the vendors they think best for their 5G networks – and many European governments are supporting that line, at least in the access network (the core is more sensitive to any fears about cyber-espionage). But many vendors are leaping on the bandwagon of refusing to work with the Chinese giants – usually, presumably, for fear of US retaliation, which could extend beyond US-based companies. Panasonic and ARM are two of the Japanese-owned firms which have distanced themselves from Huawei in the past week (though the ARM situation is complex – see below).

The most significant vendor to turn against Huawei is Google, which says it will refuse to let the Chinese company use its Android services such as the Play Store and search engine. That effectively robs Huawei of a full Android platform – even though it can still use the open source vanilla operating system – just at the point when it had overtaken Apple to become the second largest handset vendor in the world, and could even have been poised to threaten Samsung’s lead.

We have analyzed this situation as it has unfolded since the original US block on Chinese equipment in national infrastructure (in the Sprint LTE network back in 2010), and the escalating fight between the Trump administration and the Chinese technology industry, including the temporary bar on ZTE procuring US components, a year ago.

The situation will continue to change – and may well have done so by the time we go to press – but it is worth reiterating our view on this complex saga:

  • There are always legitimate concerns about the potential for cyber-espionage via national infrastructure equipment and these are heightened as new capabilities emerge. However, as the Wikileaks revelations of 2013 showed, this practice is not confined to China or Russia. The USA, and other western powers, spy on one another as well as their supposed enemies and presumably use digital infrastructure to do so. So instigating sanctions on companies of one country, without producing proof of misconduct, hints at political posturing and trade rivalries rather than specific security issues.
  • Many telcos have argued that it is their responsibility to protect their networks from back doors and other cybersecurity flaws, and that they have the technology to do this. Therefore, there is no need for blanket bans of vendors without specific proof of wrongdoing. The European Union and the GSMA have at least partially supported this view, and proposed a common security framework should be developed to strengthen everyone’s defences against spying.
  • The operators clearly do not want their choice of 5G macro layer infrastructure reduced to just three companies, for price competition reasons, but also because Huawei, in particular, is very advanced in some areas of 5G and the MNOs want the opportunity to tap into those advances. Even Ericsson and Nokia have said they believe a ban on Huawei in Europe would slow down the whole market. Operators would need to restart their procurement processes; work out how to migrate existing Huawei networks to 5G; and recost their roadmaps. Uncertainty about pricing, or inability to use certain Chinese technologies, could also create delays. The additional cost and time to deploy might not be as dramatic as some MNOs have suggested – the UK’s estimate was a two-year postponement of at-scale roll-out at a cost of £6.8bn. And some European operators might welcome the breathing space, if they have felt unduly pressurized by government targets to deploy 5G before they have a strong business case. Overall, however, there would be negative impact on the ability to hit early 5G targets.
  • This affects US operators too. Although the national MNOs are barred from using Huawei because their networks are deemed to be critical infrastructure, smaller regional players can still select the Chinese equipment, and about 40 do so. In April, Huawei said its US network sales for 2019 were on track to match or exceed those in 2018. The small operators have opposed a ban – James Groft, CEO of James Valley Communications in South Dakota, said he would be forced to replace a network “that is not fully depreciated” at great cost.
  • If the USA does uphold its bar on Huawei and ZTE buying US components – and indirectly extend that to non-US companies with threats of trade sanctions – there will clearly be significant ramifications for the whole industry. The two Chinese giants are significant customers of Qualcomm, Intel, ARM and other component makers which are currently freezing them out. ZTE had to suspend operations completely last year when the first procurement block was implemented, since it relies on western sources for over 80% of its chips. Huawei is far more self-sufficient, via its HiSilicon subsidiary, but still buys more than 40% of its components outside Greater China – and spends $11bn a year with US companies. So while blocks will disadvantage Huawei for a while – and could kill ZTE – they will also rob the western companies of large contracts at a time when their core markets, from Qualcomm’s smartphones to Intel’s PCs, are stagnating. In the medium term, the stand-off will drive the Chinese industry and government to redouble their efforts to create a world-class semiconductor business and to become independent of western, or Japanese and Korean, technology and patents.
  • That situation has the potential, after a period of pain, to shift the balance of power in global technology firmly to China, accelerating a process which is already underway. Huawei, ZTE and the China Academy of Telecommunications Technology have 2,081 5G patents – 31% of the total. There are two possible outcomes of that. One, China and its allies become a technology island, harking back to the days of 3G and early WiFi, when the world was split into different technology camps and the wireless industry missed out on the benefits of truly global economies of scale and standards cooperation. Or two, the western industry is forced to re-engage with China in order to access the most modern technologies and processes, but does so in a weaker negotiating position than it has now. Either way, hopes of 5G being the first entirely global wireless platform, with all the benefits of increased competition, cooperation and scale, would be dashed.
  • Finally, history shows us that bad practices are seldom put right by bullying or by freezing out the offender. Nobody denies that China has real issues when it comes to respect for intellectual property, trade practices, use of cyber-technology to infringe on human rights, and, indeed, espionage. But it is not alone in that, by any means; and it is highly unlikely to work to address these issues if it has no chance of the reward – enhanced opportunities to trade and for its companies to participate in the global supply chain and standards process. By all means, produce proof of specific wrongdoing and impose penalties – but to influence broader practice, and to create a strong industry for companies in all countries, the current US-led approach will be a disaster.

USA’s anti-Huawei crusade will shoot the whole tech industry in the foot

Since the USA upped the ante in its trade/security war with China late last year, it has been trying to strong-arm allies to follow its lead and bar Huawei and ZTE from national infrastructure, with a particular focus on 5G, because of its current topicality at the start of the investment cycle.

Last week, US president Donald Trump ratcheted up the pressure on US allies by declaring a national emergency in relation to telecoms equipment, claiming that “foreign adversaries are increasingly creating and exploiting vulnerabilities in information and communications technology and services”.

However, it remains very unclear how far the country will succeed. So far, only Australia has explicitly banned the Chinese vendors from 5G contracts, though the challenges that has presented for Huawei shop Vodafone have just reinforced most MNOs’ determination to lobby against a bar. Japan was reported to be going along with the USA but has, in fact, stopped short of a full ban.

The USA’s response to the non-compliance of its allies has flip-flopped at different times and when different executives have been talking, but the China hawks have typically threatened to withdraw intelligence cooperation from countries which have Chinese equipment in their infrastructure. This has been especially the case when dealing with the ‘Five Eyes’ intelligence alliance (the USA, Australia, New Zealand, the UK and Canada).

But governments such as France, Germany and Canada have broadly resisted a ban, though they have ordered new security reviews, while the UK government policy is that operators should make a free choice in their 5G RANs, but keep Huawei out of the core networks.

“Our perspective is not to block Huawei or any company,” said French president Emmanuel Macron. “France and Europe are pragmatic and realistic. We do believe in cooperation and multilateralism. At the same time, we are extremely careful about access to good technology and to preserve our national security and all the safety rules.”

Germany is introducing more stringent security tests for all network products but Chancellor Angela Merkel said in March: “There are two things I don’t believe in. First, to discuss these very sensitive security questions publicly, and second, to exclude a company simply because it’s from a certain country.”

India, which has introduced restrictions of its own, in the past, on using Chinese network gear, has included Huawei and ZTE in national 5G trials. Others, like Italy, have dismissed US demands altogether, partly because they want to increase trade with China.

Earlier this month, a two-day, 32-country meeting was held in Prague, Czech Republic, to address 5G security policies. All the represented governments signed a statement that warned against selecting suppliers that could be susceptible to state influence (without naming any). But Germany, France and Austria led a push, according to insiders, to ensure the statement was non-binding.

The Prague agreement does not really achieve any of the clarity which is so badly needed for any stakeholder in the 5G market now. Robert Strayer of the US State Department claimed that, if rigorously applied, the Prague statement could lead to the banning Chinese companies, and insisted his country had not lost the battle to unite its allies against Huawei and ZTE. “While we have not seen bans on any particular company, I think that’s a little premature,” he said.

Many analysts think that, if governments choose to heed the non-binding agreement at all, they will take the UK’s line and only impose restrictions in the core. The European Union’s actions will set important guidelines, but it has stopped short of a ban, and instead asked member states to assess risks to their 5G infrastructure and report back by mid-July.

If the USA fails to get Huawei and ZTE excluded from its entire sphere of influence by pressurizing governments, a more effective way may be to threaten action against the private sector.

To this end, Trump has issued an executive order on the “information and communications technology and services supply chain”. Although this doesn’t mention any particular company, it gives the government unprecedented power to restrict any US company, and even “any person in the United States” – if they are in that supply chain – from doing business with named companies. The Director of National Intelligence has 40 days to make an initial assessment of who those named companies should be, and in theory it could be any vendor or operator engaged in IT and communications, from anywhere in the world.

But given that Huawei has been put on the Department of Commerce’s ‘entity list’ – for being an alleged national security risk and for violating US sanctions against trading with Iran – it is assumed that the order is mainly aimed at Chinese firms. Being on that list would bar the Chinese firm from sourcing components from US companies. Other Chinese companies which are reported to be under consideration to be placed on the entity list include five surveillance technology firms, including Megvii.

As often happens with this administration, though, a tough edict was followed by a slight softening in the stance, breeding confusion. Trump said Huawei could be included in a potential trade deal with China – somewhat weakening his previous argument that the Chinese firm was “dangerous”.

And this week, the DoC said it would issue a temporary general license (TGL) to Huawei and its 68 affiliates, to allow some US vendors to continue to export their components to the vendor for the next 90 days. This is designed to enable continued operations of existing networks and mobile services in the USA for a limited time.

“The Temporary General License grants operators time to make other arrangements and the Department space to determine the appropriate long term measures for Americans and foreign telecommunications providers that currently rely on Huawei equipment for critical services,” said Secretary of Commerce Wilbur Ross in a statement. “In short, this license will allow operations to continue for existing Huawei mobile phone users and rural broadband networks.” While that gives Huawei a bit of breathing space, it does not solve the problem that it relies on US components for many products which are sold well beyond the USA. Even if the US government backtracks on the ban, as it did with ZTE, the threat that it could reinstate it at any time is spreading significant fear, uncertainty and doubt about dealing with Huawei.

In line with the TGL, Google also said it would continue to supply Huawei phones with Android updates until August 19.

Following the presidential order, a Huawei spokesperson said: “We are the unparalleled leader in 5G development. We are ready and willing to engage with the US government and come up with effective measures to ensure product security. Restricting Huawei from doing business in the US will not make the US more secure or stronger; instead, this will only serve to limit the US to inferior yet more expensive alternatives, leaving the US lagging behind in 5G deployment, and eventually harming the interests of US companies and consumers. In addition, unreasonable restrictions will infringe upon Huawei’s rights and raise other serious legal issues.”

It is unclear how far the supply chain would be deemed to extend and how that could affect companies that participate, alongside Huawei, in standards or open source processes, or in major events like Mobile World Congress. Certainly, industry alliances are playing it safe. The WiFi Alliance was the first to freeze out Huawei, a move which, if it becomes permanent, could deny the vendor access to important technology and certification – but could also encourage a return to the days when China had its own implementations of WiFi. The Alliance said in a statement: “WiFi Alliance is fully complying with the recent US Department of Commerce order without revoking Huawei Technologies’ membership. WiFi Alliance has temporarily restricted Huawei Technologies’ participation in WiFi Alliance activities covered by the order.”

And then Huawei was removed from the membership of the SD Alliance which – again, if the order sticks – would prevent it from using standard microSD cards in future devices.

And some individual vendors are already responding to the pressure. First, several high profile US vendors – Google, Intel, Xilinx and Qualcomm among them – announced they were suspending interactions with Huawei, and then some non-US companies, such as Japan’s Panasonic and UK-based, Japanese-owned ARM. The fear is that the USA – the biggest trading partner for many countries and companies – will impose sanctions on any company that has dealings with Huawei and ZTE.

So Google will no longer allow Huawei to offer the Play Store or the Google services on its Android smartphones – even though the handsets have never been part of the supposed cybersecurity threat (see separate item).

This, and the ARM declaration, look on paper to be the most serious for Huawei, though ARM may well still be able to deal with the firm through its hands-off Chinese unit (see separate item). Reports and analyst notes suggest that Huawei, in anticipation of a possible ban, has stockpiled 8-12 months’ worth of critical components, where it cannot rely on its own, or other Chinese, sources (not that stockpiling chips helps with software, which requires licences). Last year, its spending on inventory rose by 33% to $14.5bn.

But if the ban is implemented, and sustained, it will clearly limit the vendor’s ability to deliver networks, handsets and servers at the scale it had intended, with knock-on effects on the ability of operators round the world to stick to their deployment schedules.

It will also deprive US and international vendors of an important customer. This will be a blow for large firms like Broadcom, which supplies Huawei with switch-chips, or Xilinx with its FPGAs, and even worse for small companies. Analysts questioned whether optical specialist NeoPhotonics, whose sales are dominated by Huawei, could survive a prolonged ban, and its share price fell by 20.6% on the New York Stock Exchange on May 16. Lumentum, another optical supplier to Huawei, took an 11.5% hit.

The US pressure does not stop at vendors but can even extend to operators. China Mobile has already been denied a US licence, and now the USA is suggesting, according to Korean sources, that South Korean MNO LG Uplus should be banned from operating in areas of its homeland which would be deemed sensitive or critical, in a bid to drive Huawei out of the country.

In the worst case for Huawei, if it were unable to source enough components and had to reduce its network output by, say, 50%, the reduction of available kit worldwide would create supply shortages and rising prices, and so spark roll-out delays. Even the Chinese networks would suffer – although Huawei is far less reliant on US components than ZTE, there are a few critical elements that it cannot source in its home market. Ryan Koontz, an analyst with Rosenblatt Securities, told Bloomberg that the US ban “may cause China to delay its 5G network build until the ban is lifted, having an impact on many global component suppliers”.

When and if the ban is lifted will help to shape the fortunes of the whole telecoms industry over the coming years. Among the Wall Street analysts weighing in on that critical issue, MKM Partners rates the likelihood of a permanent ban at 50:50. “To us, the most important question is what the US government is trying to accomplish,” MKM’s Michael Genovese told LightReading. “If the answer is to destroy Huawei and slow the development of 5G networks in China, then the US-China relationship is likely headed to a dark place with major geopolitical ramifications beyond the tech sector.”

Huawei founder shows sympathy for US companies:

At a press conference in China, Huawei’s founder Ren Zhengfei was careful to distinguish US companies from their government, saying: “What the US will do is out of our control. I would like to take this opportunity to express my gratitude to the US companies that we work with. Over these 30 years, they have helped us to grow into what we are today. They have made many contributions to us. As you know, most of the companies that provide consulting services to Huawei are based in the US, including dozens of companies like IBM and Accenture.

“Second, we also have been receiving support from a large number of US component and part manufacturers over all these years. In the face of the recent crisis, I can feel these companies’ sense of justice and sympathy towards us.

“The US is a country ruled by law. US companies must abide by the laws, and so must the real economy. So you guys from the media should not always blame US companies. The blame should rest with some US politicians.”

It will be important to try to keep good public relations with US partners, to encourage them to lobby their administration to relax the restrictions. And Ren was possibly trying to imply that US companies, not Chinese ones, are at the mercy of their governments.

But he was tougher about the US government. He insisted that bans would only have a limited impact on Huawei’s performance, saying: “It is expected that Huawei’s growth may slow, but only slightly.”

And he said Huawei would not submit to US monitoring in order to save its trade deals. “We will not change our management at the request of the US or accept monitoring,” he said.

UK stands to suffer a £1.7bn impact to its economy if Huawei exits:

The possible exit of Huawei from western markets would not just affect the operators and the Chinese firm’s direct suppliers. It would have an impact on a far wider ecosystem in many countries. The UK is a good example, and a new report from Oxford Economics assesses that Huawei contributed £1.7bn ($2.13bn) to the UK economy last year, up sixfold since 2012.

The independent report found that Huawei supports the jobs of 26,000 workers in the UK, either directly or through its supply chain network. It calculated that Huawei contributed £287m to the UK economy on a ‘direct value-added’ basis. UK companies spent a further £806m on equipment from Huawei, and the company’s employees spent a further £598m in 2018, bringing the total to £1.7bn.

“Huawei has enjoyed great success helping to build the UK’s telecoms networks, and we remain fully committed to the UK.  This is one of our most important markets globally and we fully intend to help it remain a leader in new technologies,” said Sir Andrew Cahn, non-executive director at Huawei UK.

The company has pledged to spend £3bn with British suppliers between 2018 and 2022, mainly related to 5G, and it spent £900m last year alone. It is also a key backer of the country’s 5G Innovation Center at the University of Surrey, the centrepiece of UK 5G R&D efforts.

Huawei and Google will both lose if the Chinese firm develops its own OS

Google may have fought tooth and nail against restrictions from the European Union or its own government on its Android business model, but it gave in rapidly to the threat of sanctions arising from Huawei being placed on the US ‘entity list’. That listing means that, after a grace period of 90 days, companies dealing with Huawei face penalties for, in effect, doing business with an ‘enemy’ organization.

Perhaps there was an element, in Google’s capitulation, of revenge for the effective bar on its web services in China. But this is a drastic step, and it is hard to tell which of the giant companies will end up suffering the most.

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 a few others in the region. That, in turn, would 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 – which could still use the open source vanilla Android OS, but would not have Google services or user interface – 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.

Now, Google is allowed to support Huawei to provide support and updates for those users for 90 days, after which it says it will cease supplying the Chinese firm at all. Huawei said it would continue to provide security updates and after-sales services to all existing smartphones and tablets.

Of course, this is all part of the broader political and trade war in which the US government seems to be trying to make all the world’s companies and countries make a choice between trading with China or itself. This could lead, in the handset space, to the creation of two zones on the map, with different vendors active in each. For instance, it is possible that some countries in Africa and the Middle East, as well as India, will side with China in a US-China trade stand-off.

It may not come to this. At least some of the recent tactics speak of the kind of strong-arm negotiating positions that should have been taken behind closed doors, but have instead been publicized in media briefings and on Twitter. And there may be compromises and climbdowns ahead. But for now, operators and handset companies have to make decisions based on the last, best information, and operate in a climate of deep uncertainty about what happens next.

Ben Wood, head of research at CCS Insight, said that the restrictions will not affect existing Huawei devices but “until we have a clear understanding of what exact measures Google has decided to take it is impossible to second guess the impact on future devices”.

Meanwhile, even if the US stance on Huawei softens, the company is sure to be developing its own mobile platform, just as it is chips, as a contingency against future restrictions. The same may also be true of other Chinese Android device makers, which together account for a large chunk of the total market.

Wood commented: “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.”

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.

It has no choice, though, if it at least wants to preserve its Chinese smartphone business in the event of the US ban continuing. Huawei is reported to have revived a development called Project Z, which had been placed on the back burner. A year ago,

Zhao Ming, president of the Honor midrange smartphone unit, said that “there is no doubt that Huawei is capable of doing it, but for now I don’t think it is necessary”. Now, the circumstances have clearly changed.

For China at least, 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”.

A more productive area for Huawei to pursue its own device agenda may be the Internet of Things. The lines are not fully drawn there, unlike the smartphone space, and many companies will try to push their solutions as the new Android. Huawei itself has LiteOS, looking to bridge the traditional real time OS (RTOS) and the fully-fledged ‘fat’ OS of a smartphone.

ARM cuts ties with Huawei, but will its Chinese JV save the day?

When ARM was reported by the BBC to have halted “all active contracts, support entitlements, and any pending engagements” with Huawei and its subsidiaries, it seemed potentially a more serious blow even than Google’s crackdown. It showed the effect of the US decision to place Huawei on its ‘entity list’ spreading beyond US firms (ARM is Japanese-owned and largely UK-based).

And it threatened to break apart an alliance which, only weeks earlier, had been hailed as very strategic for both firms, when Huawei became the largest vendor to announce a server processor based on ARM cores. This was important to both companies – for Huawei, reducing its reliance on US giant Intel for server chips; for ARM, to inject new scale into its bid to make its architecture a mainstream alternative to Intel’s x86 and so offer its licensees new opportunities in the cloud, data center and telecoms spaces. That bid has suffered recent setbacks, notably the decision by Qualcomm to mothball its server processor range – leaving Marvell as the only tier one manufacturer of such chips with a strong commercial commitment.

At several events from this year’s Mobile World Congress to its Analyst Summit in Shenzhen last month, Huawei has stressed the strategic importance of controlling as many of the chips powering its products as possible. This is not just about reducing its exposure to US suppliers amid trade and political wars with that country; or even contributing to the broader Chinese ambition to become technologically self-sufficient.

It echoes the early days of the mobile business, when companies like Nokia and Ericsson commissioned their own chips for everything from base stations to devices in order to drive an end-to-end solution that was under their complete control. It also evokes comparisons with Apple and Samsung, whose investment in homegrown chips is driven by the economics of controlling pricing, availability and quality of components rather than being at the mercy of third parties.

Huawei and its HiSilicon semiconductor unit use ARM cores in device chips already, of course, but the 48-core server processor was a major step in a new direction, as the company looks to develop the most efficient and cost-effective platforms to power its various server-based ambitions. These include the goal of leading cloud-based 5G network deployments, which will require very high performance infrastructure; and its mission to build its own cloud business to rival that of Alibaba.

“We value our close relationships with our partners, but recognize the pressure some of them are under, as a result of politically motivated decisions,” a Huawei spokesperson told journalists. “We are confident this regrettable situation can be resolved and our priority remains to continue to deliver world class technology and products to our customers around the world.”

The ARM situation is not as simple as it might seem on the surface however. In 2017, the company said it would set up a joint venture, with local partners, in China, and last year it duly transferred a large amount of intellectual property into that. The legal relationships between this unit, the main ARM company, and parent Softbank of Japan are no doubt fiendishly complicated, and so it is impossible to tell exactly how far Huawei might be able to deal with the Chinese JV, without compromising ARM itself. But the fact remains that the venture was set up explicitly to ease the ability of Chinese vendors to access ARM IP directly, despite US-Chinese trade tensions, which were already escalating at that time.

A year ago, weeks after the transfer of IP had been completed, Softbank announced it would sell a 51% stake of ARM’s Chinese business to that JV. Local investors and partners collectively paid $775.2m for their controlling stake in the venture. At the time, Softbank said ARM would continue to receive a significant proportion of all licensing fees, royalties, and software and service revenues from the Chinese unit.

The structure enables ARM China to license IP directly to local vendors. The JV took over the licensing business, and dealings with Chinese customers including Huawei and Xiaomi, from the parent company in 2018, and became ARM’s only channel to sell its IP in China, according to Nandan Nayampally, general manager of ARM’s client line of business.

The entity can create products tailored to Chinese markets with ARM providing technical support – though that will not have been a big factor in the Huawei server chip development, since the vendor has a full architectural licence and large teams of its own engineers.

ARM already had many Chinese licensees, but a more direct relationship aimed to attract investment and help the company to be part of China’s huge bid to become a semiconductor powerhouse, without alienating customers in other markets. Otherwise, it ran the risk of being seen as an outsider, with China developing alternatives to the ARM processor, controller and GPU designs. The JV also aimed to reassure the Chinese government that it would not suddenly be denied access to essential IP because of US or European sanctions – an assumption that may now be tested to the limit by the current Huawei situation.

A local venture with direct licensing deals was also designed to help avoid difficulties caused by trade wars, not just with the USA but also the European Union. For instance, the EU Commissioner for trade, Cecilia Malmström, launched legal proceedings in May 2018 in the World Trade Organization (WTO), against new Chinese legislation that, she believes, undermines the intellectual property rights of European companies.

Softbank said in a statement at the time that around 95% of all advanced chips designed in China in 2017 were based on ARM technology, with 20% of the company’s global revenues coming from the country in fiscal year to March 2018. The statement went on: “The Chinese market is valuable and distinctive from the rest of the world. ARM believes this joint venture, which will license ARM semiconductor technology to Chinese companies and locally develop ARM technology in China, will expand ARM’s opportunities in the Chinese market.”