Huawei Technologies Co has secured its position as the most sought-after 5G telecom equipment supplier, despite the US government‘s intensified push to contain the Chinese technology giant on the geopolitical, legal and technological front lines.  Among the 91 commercial 5G contracts Huawei has inked, the largest number by any telecom gear maker so far, more than half are from Europe, where Washington has spared no effort to dissuade its allies from using the company in their 5G systems.

Analysts said the steadily growing contracts show that Huawei has won the trust of more foreign telecom operators with its technological prowess, and Washington’s groundless security accusations have failed to convince even some of its closest allies.

Ding Yun, president of Huawei’s carrier business group, said at a launch event in London on February 20th that the company’s 91 commercial 5G contracts is an increase of nearly 30 from last year. That is ahead of the 81 announced by Swedish telecom company Ericsson last week and well ahead of Nokia, which said it had secured 67 5G commercial deals as of Feb 10th. Ding said 47 of its 5G contracts are from Europe, 27 from Asia and 17 from other regions.  Huawei will invest $20 million in innovative 5G applications over the next five years, contributing to a thriving 5G ecosystem and accelerating the commercial success of 5G, officials said.

At the same event that day, Yang Chaobin, President of Huawei 5G Product Line (see photo below), unveiled Huawei’s 10 key enablers for 5G.  Those are the following:

• #1 Extensive 5G Commercial Experience to Accelerate 5G Scale Deployment
• #2 Comprehensive Portfolios to Provide Consistent 5G Ultimate Experience.
• #3 Industry’s Only Ultra-Broadband Solution, Simplifying Network Deployment.
• #4 Exclusive Blade AAU, All in One for Simplified Deployment.
• #5 Industry’s First Commercial DSS Solution, Enabling Fast FDD 5G NR Deployment
• #6 Cutting-Edge Algorithm Enables Leading Network Performance
• #7 Low Energy Consumption Makes Green 5G
• #8: E2E NSA/SA Converged Solution for Future Industry Digitalization
• #9 Unique E2E SUL to Unlock UL Experience and Latency for Industry Needs
• #10 E2E Network Slicing Solution Facilitates Industry Digitalization

Yang Chaobin Unveils Huawei 5G 10 Key Enablers in London

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Mr. Yang Chaobin said, “In the process of mobile communications development, telecom operators have been using greater numbers of antenna units as a solution for insufficient sites and poles. Now they have to deal with insufficient antenna installation space. Huawei’s unique Blade AAU, which prides itself on “ultimate simplicity,” aims to reduce operators’ TCO and investment in hardware and sites.”

According to the latest GSA update, by the end of 2019, 62 telecom operators in 34 countries had officially announced the commercial release of 5G, and 41 of them are supported by Huawei, accounting for two-thirds of the total figure.

In the 5G era, continuous large-bandwidth TDD spectrum is the optimum choice for achieving an ultimate 5G experience. However, a significant number of telecom operators only get discontinuous segments of spectrum due to satellite occupation or discrete allocation. Huawei has launched the industry’s only full series of ultra-broadband solutions, which support a maximum bandwidth of 400 MHz. With just one module, all discrete spectrum within 400 MHz can be used. It saves modules and simplifies site deployment, greatly slashing site rental and hardware cost for telecom operators.

2020 will see large-scale 5G deployment worldwide. Apart from the mainstream 5G deployment on mid-band spectrums, operators can also deploy 5G networks on sub-3 GHz FDD to achieve fast 5G coverage. For new FDD spectrum, Huawei’s suggestion is direct 5G deployment on them to significantly improve the FDD spectral efficiency with NR technologies. It is proven that NR operating at an FDD frequency can deliver an impressive improvement in user experience compared to that of LTE.

For existing FDD spectrum, Huawei’s 1 ms dynamic spectrum sharing (DSS) solution can be adopted. This technology dynamically allocates spectrum resources in milliseconds based on LTE and 5G service and traffic requirements, maximizing spectral efficiency. “In November 2019, Huawei DSS was put into commercial use in Europe. Until now, our customers have 100 million legacy FDD RRUs that can be adapted efficiently to 5G using this solution,” said Yang Chaobin.

“Huawei has undergone extensive R&D, innovation, and commercial adoption in Massive MIMO. We have the most complete product portfolios and state-of-the-art algorithms to keep our Massive MIMO performance unrivalled. In terms of software algorithms, Huawei has MU-MIMO, SRS, full-channel beamforming and more to provide optimal capacity, coverage and user experiences. In 2019, Huawei helped LG U+ in South Korea, EE in the UK, and Sunrise in Switzerland to deploy 5G commercial networks.

In the third-party network performance tests conducted by RootMetrics and Connect, Huawei helped its operators rank No.1 in user experience, with an average downlink rate of 1.5 to 2 times higher than that of competitors’ networks, which further demonstrates Huawei’s superior Massive MIMO performance in actual commercial use,” according to Yang Chaobin.

“Every new generation of mobile communications technologies is developed to offer more applications and a better experience. 5G is no exception. 5G coverage must be good enough to provide excellent experience, and 5G experience must be better than any of the previous generations. Huawei’s products and solutions are committed to carrying forward this mission. 2020 will be a key year for 5G to be put into commercial use on a larger scale. “No one can whistle a symphony, it takes an orchestra to play it.” We hope to work with global partners to continuously carry out technology and application innovations, which utilize 5G as the connection platform, together with AI and Cloud technologies, to jointly build a healthy, viable, and sustainable digital ecosystem,” said Yang Chaobin.

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Geo-Political Backdrop for Huawei:

The UK announced on Jan 28 that it would allow Huawei in the noncore part of its 5G network, with a cap of 35 percent market share. A day later, the EU announced its toolbox for 5G deployment, which does not ban Huawei and leaves it up to the member countries to make their final decisions.

French Minister of Economy and Finance Bruno Le Maire confirmed that the government will not exclude Huawei. The same view was expressed by Swedish and Italian officials, though those countries also said there would be security reviews for vendors.

Bai Ming, a senior research fellow at the Chinese Academy of International Trade and Economic Cooperation, said more European countries are taking an unbiased approach toward Huawei because Washington has never provided factual evidence to support its security accusations.  “Challenges only make Huawei stronger,” Wang said.

“More people realized that mixing politics with normal business cooperation could only delay the global deployment of 5G,” Bai said.

But analysts also warned that tougher headwinds are still ahead for the world’s largest telecom equipment maker, given media reports that the US government is planning to further restrict US technology sales to Huawei.

Meanwhile, a federal judge in Texas on Tuesday dismissed a lawsuit filed by Huawei to challenge a 2018 congressional defense bill that stopped federal agencies from doing business with the company.

Wang Yanhui, secretary-general of the Mobile China Alliance, said a broader US ban on technology sales won’t substantially harm Huawei’s telecom business, as it has already shipped US-component-free 5G base stations around the world.

The Shenzhen-based company has also been scrambling to build its own mobile software ecosystem, the foundation for its ability to continue selling smartphones in overseas markets to mitigate the fallout from US restrictions.

References:

https://www.prnewswire.com/news-releases/huawei-unveils-10-key-enablers-for-accelerating-global-commercial-adoption-of-5g-301009039.html

The White House wants U.S. tech firms to collaborate on one or more 5G infrastructure software standard(s). The plan would build on efforts by some U.S. telecom and technology companies to agree on common engineering standards that would allow 5G software developers to run code on machines that come from nearly any hardware manufacturer.

That would reduce, if not eliminate, reliance on Huawei equipment.according to Larry Kudlow, Director of the National Economic Council.  That would reduce, if not eliminate, reliance on Huawei equipment.  The U.S. contends Huawei has strong links to the Chinese military, making use of its equipment a national-security risk. Huawei has denied such links and says it operates independently of the Chinese government.

“The big-picture concept is to have all of the U.S. 5G architecture and infrastructure done by American firms, principally [1],” Larry Kudlow said in an interview with the Wall Street Journal. “That also could include Nokia and Ericsson because they have big U.S. presences.”

Note 1.:  That is highly unlikely to happen, because there are ZERO U.S. firms producing 5G infrastructure.  The only non-Asian 5G infrastructure equipment makers are Nokia and Ericsson- both headquartered in Europe.  5G network operators AT&T and Verizon are working with Cloud Service Providers, Microsoft and Amazon, respectively on integration of mobile edge computing with their 5G networks.

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AT&T, Microsoft and Dell [2] are among the companies working with the administration on the project.  “Dell and Microsoft are now moving very rapidly to develop software and cloud capabilities that will, in fact, replace a lot of the equipment,” Mr. Kudlow said. “To quote Michael Dell, ‘Software is eating the hardware in 5G.’

Note 2.:  None of those companies are now or will in the future make 5G infrastructure.  AT&T is a network operator that purchases 5G infrastructure equipment, Microsoft is primarily a Cloud Service Provider (AZURE), while Dell is an IT infrastructure company that primarily sells to enterprise data center customers.

Kudlow is likely referring to virtualization of the 5G radio access and 5G core networks when he mentioned “software and cloud capabilities that will, in fact, replace a lot of the equipment.”  Yet there’s already a lot of work that’s been done in vRAN and cloud RAN (sometimes referred to as “cloud native radio access networks.”

For open source cellular hardware, there is an OpenRAN project within the O-RAN Alliance, which involves disaggregating a cellular Base Station into its constituent components and defining interfaces between those.  The Open Network Foundation (ONF) is collaborating with the O-RAN Alliance to generate open source software for that project.  There are also several  RAN projects within the Telecom Infrastructure Project (TIP), including OpenRAN, vRAN Fronthaul and OpenRAN 5G NR Base Station.

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White House officials say they are taking the effort seriously because of the potential value of 5G technology to the broader economy. Industry boosters say the new 5G engineering standard will power an “Internet of Things” in which factories, household appliances and vehicles are connected in the way mobile phones are now. They say 5G can do for future tech startups what 4G technology did for smartphone apps like Uber Technologies Inc. and Snapchat Inc., building a foundation for future innovation.

“Talk is a good start,” said Roger Entner, an analyst for industry researcher Recon Analytics. “But in the end it needs action. More funding will accelerate everything.”

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Similar U.S. government initiatives and proposals:

The effort appears to line up very closely with a new program at the U.S. military’s Defense Advanced Research Projects Agency (DARPA) called “Open Programmable Secure 5G” (OPS-5G). As noted by Data Centre Dynamics, the program promises to “create open source software and systems enabling secure 5G and subsequent mobile networks such as 6G. The signature security advantage of open source software is increased code visibility, meaning that code can be examined, analyzed and audited, either manually or with automated tools. In addition, the portability of open source serves, as a desired side-effect, to decouple the hardware and software ecosystems. This significantly raises the difficulty of a supply-chain attack and eases the introduction of innovative hardware into the market.”

U.S. lawmakers have proposed funding research and development into open 5G software standards. A bipartisan group of senators in January proposed tapping proceeds from the Federal Communications Commission’s coming spectrum license auctions to pay for research grants into those technologies.  The administration is looking into those efforts but hasn’t yet decided whether to back them, Mr. Kudlow said.

If U.S. and European companies work separately, it could take longer to develop world-beating technology. If they work together, it could raise antitrust concerns.  However, Kudlow said he didn’t believe antitrust would be an issue, saying the companies would compete in providing 5G technology. “We’re taking a coordinating role among leading companies,” he said.

He didn’t provide a specific time frame, though others in the government have said they expect to have a system running within 18 months. Earlier, the White House considered subsidizing a new hardware competitor to Huawei or backing a government-owned 5G network but rejected both.

President Trump is squarely behind the effort, said Kudlow, who is leading the initiative as director of the National Economic Council.

“The president kept saying to me, ‘Can’t we just put it (5G) under one simple infrastructure?’” Kudlow said. “We’re trying to create an American soup-to-nuts infrastructure for 5G. He kept hearing that Huawei seems to be able to do it.”

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Huawei’s threat to U.S. and European tech companies:

Paul Triolo, head of global technology policy at the Eurasia Group, a business consulting firm agreed that Huawei has a formidable lead in 5G technology.  “The problem is you’re starting late in the game to fix this problem,” Mr. Triolo said of the U.S. effort. He added that the initiative could also threaten Nokia and Ericsson by making their machines into commodities, Mr. Triolo said.

Perhaps the most insightful proceeding on Huawei and the Chinese threat to 5G in the US is playing out at the FCC, the US government agency charged with oversight of telecom networks. That agency is considering a proposal that would bar the purchase of Huawei equipment among US companies that receive government subsidies for network buildouts in rural areas. The FCC is also evaluating its own rip-and-replace program of existing Huawei equipment in US networks.

However, unlike some of the other Trump administration efforts against Huawei, the FCC’s proceeding is being held in the open, with publicly available comments from all the companies involved in the issue.

Huawei is the world’s largest supplier of wireless networking equipment, yet it generates less than 1% of its revenue from the US market, according to research and consulting firm GlobalData.

Huawei has denied any links to Beijing, but the Chinese government is largely responsible for Huawei’s success due to the immense funding it funneled to the company and the measures it took to block competitors from impeding Huawei’s rise in the China market. As a result, Huawei became a telecom juggernaut not just in China, but all over the world. Now, the US is trying to adopt a similar strategy to promote US firms, and it wants to do so ahead of more widespread rollout of next-gen 5G networks in the coming years.

“If the US wants 5G hardware and software developed by a US or European company, the government should encourage companies to begin negotiations with Huawei to license our 5G technology,” Huawei’s US security lead Andy Purdy told the WSJ. Purdy says that Huawei’s intellectual property is integral to fast 5G deployment, and that without it, “the combined product will be one to two years behind the comparable Huawei products in terms of functionality and assurance.”

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References:

https://www.wsj.com/articles/u-s-pushing-effort-to-develop-5g-alternative-to-huawei-11580831592

https://www.lightreading.com/security/atandt-microsoft-others-get-behind-trumps-anti-huawei-agenda-/d/d-id/757286?

https://www.theverge.com/2020/2/5/21124888/us-5g-huawei-white-house-trump-china-alternative-telecom-standard

Huawei is given permission to build noncritical parts of the network, despite U.S. security concerns:

As widely expected, the UK government today decided to allow Huawei’s network equipment to play a limited role in its national 5G networks. After a security review, the UK’s National Security Council (NSC) made the decision today following a meeting chaired by Prime Minister Boris Johnson.

British officials from senior government departments held a meeting last Wednesday and made the recommendation to allow the world’s #1 network equipment vendor to play a “limited role” in national 5G networks. Today, that recommendation was made final.

Huawei is the leading 5G global network equipment vendor, with relatively few alternative providers — such as the European firms Ericsson and Nokia — none of whom are considered to offer a like-for-like option at this stage.

UK Digital Secretary Baroness Morgan said:

“We want world-class connectivity as soon as possible but this must not be at the expense of our national security. High-risk vendors never have been and never will be in our most sensitive networks.

“The government has reviewed the supply chain for telecoms networks and concluded today it is necessary to have tight restrictions on the presence of high-risk vendors.”

Huawei has been under scrutiny over alleged ties to the Chinese government, an allegation the company has repeatedly denied. The U.S. has urged the UK to ban equipment from the Chinese vendor over national security concerns and American officials issued their British counterparts with a dossier highlighting perceived risks earlier this month.

The UK has always maintained that any decision on Huawei would be evidence-led and based on its own reviews, but the result will nonetheless anger the U.S. which has been pushing for Huawei to be totally banned from 5G networks of allies.

Huawei, and other “high-risk” vendors, will face the following restrictions:

• Excluded from all safety-related and safety-critical networks in critical national infrastructure.
• Excluded from security-critical ‘core’ functions, the sensitive part of the network.
• Excluded from sensitive geographic locations, such as nuclear sites and military bases.
• Limited to a minority presence of no more than 35 percent in the periphery of the network, known as the access network, which connects devices and equipment to mobile phone masts.

Governing that Huawei has no more than 35 percent presence in the periphery of the overall 5G network is particularly interesting. This restriction ensures that if Huawei’s equipment was later compromised, or deemed too risky, around two-thirds of the UK’s 5G network would remain unaffected.

The UK is  upgrading its wireless network technology for the rollout of 5G.                                           PHOTO: DANNY LAWSON/ZUMA PRESS ………………………………………………………………………………………………………

John Strand of Strand Consult wrote today in a note to subscribers:

1. The decision relates to the use of Huawei equipment in the United Kingdom. In practice, this means that the May 2018 total ban on ZTE equipment by the UK’s National Cyber Security Centre will continue.
2. Huawei are now classified as a high risk vendor following the conclusions of the Telecoms Supply Chain Review.
3. The use of Huawei equipment will be prohibited in core networks. This means that the backbone of UK mobile networks must not contain Huawei equipment. This policy demonstrates that UK authorities recognize the risk of equipment made by entities affiliated with the Chinese government. If Chinese-made equipment was safe, Huawei equipment would not be prohibited from the network core.
4. The use of Huawei in the radio access network (RAN) will be limited to 35 percent of the active equipment. This limits the amount that Huawei can sell in the UK. It also means that UK operators will have to prioritize network upgrades in the Western part of the country where Huawei equipment is largely deployed.  In practical terms, it will not be possible for an operator to use Huawei for more than 35 percent of the equipment and then use another Chinese or Huawei-white labeled product for the rest of the network, or a portion thereof. The goal of the policy is to limit equipment from Chinese owned and/or affiliated entities, even if it is not explicitly written.
5. The use of Huawei equipment will be expressly prohibited in sensitive geographical areas in the UK, areas selected for national security reasons. Indeed, this is already practiced in France where Huawei equipment in restricted in Toulouse, home of Airbus and the European aerospace industry. A similar policy exists for Brest where French nuclear submarines are located. Read more about the French decision.

Overall, the UK policy will send a strong signal to the rest of Europe and the world that the use of Chinese equipment poses a security risk and should be limited. The UK and French decisions were developed to protect industries, institutions, and assets of national importance in specific geographical areas.

The U.S. model restricts its military from using Huawei and ZTE, regardless of location. Moreover, the Federal Communications Commission prohibits the use of its subsidies for the purchase of Huawei and ZTE equipment and is considering the requirement of removal of Huawei equipment for future subsidies.

Additional US policy restricts American firms from transacting business with Huawei for sensitive technologies. US telecom operators, noting the risk, have largely opted not for Huawei or ZTE, outside of a few exceptions. This is explained in Strand Consult’s research note The pressure to restrict Huawei from telecom networks is not driven by governments, but the many companies that have experienced hacking, IP theft, or espionage.

The UK new policy is a step in the right direction, and it underscores the need for greater scrutiny of technology from firms owned and/or affiliated with the Chinese government. The security risks are real and networks are key vulnerability. Indeed, scrutiny should extend beyond the network equipment to other vulnerable products and services; systems can be compromised by devices attached to networks as well as from software running over it. See Strand Consult’s research note “The debate about network security is more complex than Huawei. Look at Lenovo laptops and servers and the many other devices connected to the internet.”

Strand Consult expects that the security standards required for public safety networks will be strengthened and translated to commercial telecom networks. It is likely that some UK operators will claim that the new policy will be unduly expensive. Strand Consult examines such claims in the report ”The real cost to rip and replace Chinese equipment from telecom networks.”

Notably 2G / 3G / 4G equipment must be replaced anyway in the move toward 5G. Huawei is not the only vendor, and alternatives are price competitive. Moreover, when it comes to 5G, network rollout policy is far more consequential than the choice of equipment vendor. The view that Huawei is necessary for 5G is a myth; indeed, the US has taken a leadership position on 5G without using Huawei equipment.

Looking at the historical facts, it is not difficult to find operators which have swapped their networks with a new supplier. This need not come as a premium for shareholders. Strand Consult reviews the financial data and case studies from the major network swap it observed in 2010 – 2016.

The UK government, with Boris Johnson at the forefront, can improve the prospects for 5G in a meaningful way. In the UK, as in many other countries, it is both difficult and expensive to build mobile infrastructure. Strand Consult’s analysis show that the terms and costs associated with obtaining permits and leasing land for mobile masts and towers is artificially expensive. In the UK, operators have for many years and with limited success tried to change the terms.

In Denmark, on the other hand, Strand Consult has helped to create transparency so that authorities get the information they need to create the needed rollout policies. As a result,  the total rental costs for mobile operators have fallen by over 20 percent, and it has become significantly cheaper and easier to upgrade and build existing and new mobile infrastructure. Learn more about the project here ”How to deploy 5G: Best practices for infrastructure, regulation and business models.”

Huawei will likely claim that the UK decision doesn’t hurt its prospects. This is probably to save face. The fact is that Huawei will be subject to increased restriction and will not be able to enlarge its market share. Moreover, there is no change on the ZTE ban. The UK makes clear that Chinese equipment is not allowed in the core network. Moreover, when it comes to RAN, there are also strict limitations.

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In September 2018, a Canadian official argued that allowing Huawei to operate improves security. If a specific vendor’s equipment is compromised, having others in operation means less of the overall network is affected.

While Huawei will be breathing a sigh of relief at the UK’s decision – so will the country’s providers. In a statement, BT wrote:

“This decision is an important clarification for the industry. The security of our networks is an absolute priority for BT, and we already have a long-standing principle not to use Huawei in our core networks. While we have prepared for a range of scenarios, we need to further analyse the details and implications of this decision before taking a view of potential costs and impacts.”

All four of the UK’s major operators had already begun deploying 5G equipment from Huawei. Stripping Huawei’s gear and buying and installing replacements would have been costly and time-consuming.

Andrew Stark, cybersecurity director at Red Mosquito, said:

“With Huawei kit already integral to the UK 3G and 4G networks, shifting to 5G with them offers the path of least resistance and increases chances of telecom companies meeting tight roll-out targets. There are currently only two other tech players capable of providing hardware for 5G, namely Nokia and Ericsson.”

The UK says its decision was made after the NCSC “carried out a technical and security analysis that offers the most detailed assessment in the world of what is needed to protect the UK’s digital infrastructure.”

However, not all of the UK government will be so welcoming of today’s news. Conservative MP Bob Seely recently said “to all intents and purposes [Huawei] is part of the Chinese state” and involving the company would be “to allow China and its agencies access to our network.”

While UK intelligence officials clearly decided the benefits outweigh the risks, several concerns have been raised about Huawei’s equipment in recent years.

The dedicated Huawei Cyber Security Evaluation Centre (HCSEC) reported in 2018 that it could no longer offer assurance that the risks posed by the use of Huawei’s equipment could be mitigated following the “identification of shortcomings in Huawei’s engineering processes”. Concerns were raised about technical issues limiting security researchers’ ability to check internal product code and the sourcing of components from outside suppliers which are used in Huawei’s products.

A follow-up report from HCSEC in March 2019 slammed Huawei as being slow to address concerns and claimed that “no material progress has been made by Huawei in the remediation of the issues reported last year, making it inappropriate to change the level of assurance from last year or to make any comment on potential future levels of assurance.”

Just a month earlier, the Royal United Services Institute (RUSI) – the world’s oldest independent think tank on international defence and security – warned about the use of Huawei equipment: “It is far easier to place a hidden backdoor inside a system than it is to find one,

“In the likely, but unacknowledged, battle between Chinese cyber attackers and the UK’s Huawei Cyber Security Evaluation Centre, the advantage and overwhelming resources lie with the former.”

The UK’s approach to Huawei has been decided, but it doesn’t feel like the end of the debate.

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References:

https://www.telecomstechnews.com/news/2020/jan/28/huawei-reprieve-uk-government-permits-5g-gear/

https://techcrunch.com/2020/01/28/uk-will-allow-huawei-to-supply-5g-with-tight-restrictions/

https://www.wsj.com/articles/u-k-allows-huawei-to-build-parts-of-5g-network-11580213316

China’s tech champion got as much as $75 billion in tax breaks, financing and cheap resources as it became the world’s top telecom vendor

AJW Comment: This is something we’ve thought for years now, but it is not justification for accusing Huawei of spying or hacking for the Chinese government.  In our opinion, Huawei’s rise to the top in telecom was greatly aided by China government financial aid/tax breaks and policy favoring domestic suppliers of both telecom equipment and smart phones/tablets and other network connected gadgets.   Note that China’s three leading telecom network operators- China Telecom, Unicom and Mobile are state owned.   Here’s some revealing documentation:

Huawei (including the HONOR brand) leads the China smartphone market with its market share growing to 36%, reaching a record high. Counterpoint Research, Nov 26, 2019.

 “In the third quarter of this year, Huawei shipped 2.12 million tablets in China with a 37.4% market share, surpassing Apple for the first time as the country’s biggest tablet seller, according to statistics from market research firm IDC.” Nov 27, 2019.

Huawei’s Share of the Global Telecom Market Keeps Growing: “New research from Dell’Oro Group indicates that Huawei’s networking business remains almost completely unaffected by the ongoing political noise surrounding the company. Specifically, the firm found that Huawei’s market share grew from 27.7% in 2018 to 28.1% in the first half of 2019. When looking at Q2 2019 alone, Huawei’s market share improved to 29%. The figures put Huawei at the top of the heap in terms of global telecom equipment vendors. Nokia came in second with 15.7% share in the first half of 2019, according to Dell’Oro, while Ericsson was third with 13.1% share.”

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By Chuin-Wei Yap, Wall Street Journal [email protected]

Tens of billions of dollars in financial assistance from the Chinese government helped fuel Huawei Technologies Co.’s rise to the top of global telecommunications, a scale of support that in key measures dwarfed what its closest tech rivals got from their governments. A Wall Street Journal review of Huawei’s grants, credit facilities, tax breaks and other forms of financial assistance details for the first time how Huawei had access to as much as $75 billion in state support as it grew from a little-known vendor of phone switches to the world’s largest telecom-equipment company—helping Huawei offer generous financing terms and undercut rivals’ prices by some 30%, analysts and customers say.

Huawei is vying to build next-generation 5G telecom networks around the world. While financial support for favored firms or industries is common in many countries, China’s assistance for Huawei, including tax waivers that began 25 years ago, is among the factors stoking questions about Huawei’s relationship with Beijing.

“While Huawei has commercial interests, those commercial interests are strongly supported by the state,” said Michael Wessel, a member of a U.S. congressional panel that reviews U.S.-China relations, in an interview. The U.S. has raised concerns that use of Huawei’s equipment could pose a security risk, should Beijing request network data from the company. Huawei says it would never hand such data to the (Chinese) government.

The largest portion of assistance—about $46 billion—comes from loans, credit lines and other support from state lenders, the Journal’s review showed. The company saved as much as $25 billion in taxes between 2008 and 2018 due to state incentives to promote the tech sector. Among other assistance, it enjoyed $1.6 billion in grants and $2 billion in land discounts.

Huawei said in a statement that it received “small and non-material” grants to support its research, which it said weren’t unusual. Much of the support—for example, tax breaks to the tech sector—was available to others, it noted.

Wu Bangguo—who as a Chinese vice premier oversaw state-owned companies—assembled a team of auditors after tax breaks for Huawei led to accusations around 1998 that it was evading taxes. Huawei was cleared. PHOTO: XINHUA/ZUMA PRESS

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The Journal in its research made use of public records including company statements and landregistry documents. The Journal verified its methodology with subsidy analysts, including Usha Haley, professor at Wichita State University, and Good Jobs First, a Washington, D.C., organization that criticizes some tax incentives and provides widely consulted subsidy data.

State assistance for Huawei isn’t always quantifiable. In 1999, China’s central government arranged an unusual intervention to rescue the company from allegations of tax fraud, according to accounts by Chinese and other officials. Local tax breaks for Huawei drew anonymous accusations around 1998 that it was evading taxes. As the company’s business slumped, Li Zibin, then mayor of Shenzhen, where Huawei is based, said he took Huawei’s plight to Chinese then-Vice Premier Wu Bangguo.

Mr. Wu, who oversaw state-owned companies, wasn’t sure at first if he should act. He viewed Huawei as privately owned, according to a transcript of Mr. Li’s remarks at a state conference in 2012. Mr. Wu eventually agreed to assemble a team of auditors, Mr. Li said. Huawei was cleared
within weeks. Messrs. Li and Wu didn’t respond to requests for comment by the Journal.

Huawei’s official grants, disclosed in annual reports, total $1.6 billion since 2008. In the five years to 2018, they were 17 times as large as similar subsidies reported by Nokia Corp. of Finland, the world’s second-largest telecom equipment maker. Sweden’s Ericsson AB, the third largest, posted none in the period.

A Chinese flag flutters at the Beijing headquarters of China Development Bank, which has made a $30 billion credit line available for Huawei’s customers. PHOTO: FLORENCE LO/REUTERS

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In China’s southern city of Dongguan, state records show, Huawei bought more than a dozen state-owned parcels in largely uncontested auctions between 2014 and 2018 for its research campus. The company paid prices that were 10% to 50% of average rates for similarly zoned land in Dongguan, according to Chinese property value databases. The discounts saved Huawei some $2 billion, according to a Journal review. Huawei declined to comment on the estimate.  Other savings came from state policies to promote China’s tech sector. Tax deductions and exemptions helped Huawei save up to $25 billion in income, value-added and other taxes in at least the past decade, the Journal estimated. Responding to the estimate, a Huawei spokesman said the company is globally tax-compliant.

In his remarks at the conference, Mr. Li said local officials began waiving or reducing levies on Huawei, including income and value-added taxes, in the early 1990s. Financial support helped the company undercut rivals. In 2010, the European Commission found that Chinese modem exporters including Huawei had benefited from subsidies, according to a confidential report reviewed by the Journal. The commission cut short its probe after the complainant prompting it reached a “cooperation agreement” with the company. Huawei denied receiving such subsidies.

Besides subsidies, Huawei since 1998 has received an estimated $16 billion in loans, export credits, and other forms of financing from Chinese banks for itself or its customers, the Journal found.  China’s state-controlled banking system underpins cheap loans that lower costs for Huawei and its customers to buy its products on credit. State lending facilities for Huawei were among the largest in history.

Mega-lenders China Development Bank (CDB) and Export-Import Bank of China in the last two decades made available more than $30 billion in credit lines for Huawei’s customers. World Bank and official data indicate these banks were lending to the company’s clients in developing economies at some 3% in at least Huawei’s first decade abroad, around half of China’s five-year benchmark rate in since 2004.

A Huawei spokesman told the Journal that CDB’s $30 billion credit line “has seldom been more than 10% subscribed” and that customers’ use of the facility “fluctuates over time.” In 2011, Huawei Deputy Chairman Ken Hu said CDB had lent Huawei’s customers $10 billion since 2004. Huawei said that lenders—which it said were mostly non-Chinese banks—account for only 10% of the company’s financing needs as of the end of last year, funded at commercial rates, with the rest coming from Huawei’s own cash flow and business operations.

“If you’re going to buy a house, and if you are able to say you got backing of a half-million-dollar line of credit, that’s going to make you a much stronger bidder,” said Fred Hochberg, former chairman of U.S. Export-Import Bank. “What Huawei did, cleverly, is to make sure that, when
they made a bid, it came with financing terms” that surpassed those of competitors.

Official data show Swedish export authorities provided some $10 billion in credit assistance for Sweden’s tech-and-telecom sector as of 2018; Finland authorized $30 billion in annual export credit guarantees economywide from 2017. Huawei’s largest American competitor, Cisco Systems Inc., received $44.5 billion in state and federal subsidies, loans, guarantees, grants and other U.S. assistance since 2000, Good Jobs
First data show. Cisco didn’t comment.

China’s foreign ministry said in a statement that Huawei is a private company “like many others in China” whose achievements “are inseparable from a good policy environment.”

In summer 2009, Huawei pitched to Pakistan a surveillance system for its capital, Islamabad. Pakistan’s prime minister accepted, but Islamabad lacked funds and its procurement rules required competitive bidding, Pakistan court filings say.  The Chinese offered a solution. China Ex-Im would lend Pakistan $124.7 million for the project and waive most of the 3% annual interest on the 20-year loan. There was a condition, Pakistan Supreme Court filings show: Pakistan could choose only Huawei. Pakistan’s government
decided to proceed without competitive bidding.

“On the recommendation of Ex-Im Bank, the prime minister of Pakistan selected Huawei,” theninterior minister Ahsan Iqbal told Pakistan officials.
A Chinese embassy report showed Beijing’s then-ambassador to Islamabad officiating at the project’s inauguration in 2016 alongside Pakistan’s interior minister, standing before an array of glowing security monitors. “The Chinese government funded it and Huawei built it,” the embassy said.

—Matthew Dalton contributed to this article.

Original article appeared at:  https://www.wsj.com/articles/state-support-helped-fuel-huaweis-global-rise-11577280736 (on line subscription required for access)

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WSJ Addendum: Aid has included tax savings, state credit facilities, land purchases and government grants

Huawei provides relatively limited disclosures on state incentives it receives. A Wall Street Journal review showed Huawei received as much as $75 billion in state financial assistance, including tax savings, state credit facilities, land purchases and government grants.

In its methodology, the Journal sought to estimate how key state fiscal incentives, adjusted to account for changes in their scope over the years, allowed Huawei to spend more freely. The calculations compared Huawei’s tax payments with the company’s projected tax liability in the absence of such incentives.

The Journal’s review excluded other forms of policy support available to Huawei, such as salary tax benefits, property-tax abatements and subsidized raw materials. The review also excluded tax breaks arising from standard accounting policy, such as tax deductibility for expenses including research and development, business and administration.

The Journal used third-party loan databases, company records and state media reports to calculate state loans made available to Huawei. The Journal’s review was based on the face value of the loans, which aren’t equivalent to subsidy amounts.

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Related NY Times article I thought was fascinating:

At the Edge of the World, a New Battleground for the U.S. and China: The Faroe Islands have become perhaps the most unexpected place for the United States and China to tussle over the Chinese tech giant Huawei.

Ren Zhengfei wants to create a competitor for his company.

5G technology—central to Huawei’s future revenue growth—is what founder and CEO Ren said he was ready to share, in a two-hour interview with The Economist on September 10th.

For a one-time fee, a transaction would give the buyer perpetual access to Huawei’s existing 5G patents, licences, code, technical blueprints and production know-how. The acquirer could modify the source code, meaning that neither Huawei nor the Chinese government would have even hypothetical control of any telecoms infrastructure built using equipment produced by the new company. Huawei would likewise be free to develop its technology in whatever direction it pleases.

Mr Ren’s stated aim is to create a rival that could compete in 5G with Huawei (which would keep its existing contracts and continue to sell its own 5G kit). To his mind, this would help level the playing field at a time when many in the West have grown alarmed at the prospect of a Chinese company supplying the gear for most of the world’s new mobile-phone networks. “A balanced distribution of interests is conducive to Huawei’s survival,” Mr Ren says.

No kidding. A months-long assault by America has pummelled the firm, whose global networks it suspects of allowing China to spy on others. America has also attempted to press allies not to use Huawei’s equipment as they begin to build their own 5G networks. In May American companies were barred from selling components and software to Huawei on the grounds that it posed a national-security risk. Last month America restricted government agencies from doing business with it (the firm is challenging this ban in court).

At first glance, Mr Ren’s gesture has much going for it. If the sale eventually gave rise to a thriving competitor, countries such as Australia (which has banned Huawei’s gear) would no longer have to choose between, on the one hand, technology in their networks that is both cutting-edge and cheap, as Huawei’s is, and, on the other, fears of Chinese eavesdropping. They could have the best technology from an ally instead. Decisions on the purchase of telecoms equipment could then return from politicians to pragmatic boardrooms.

The gesture may also convince those suspicious of Huawei’s tech that the firm’s business intentions are hard-nosed. Mr Ren says money from the deal would allow Huawei to “make greater strides forward”. The value of the firm’s entire 5G technology portfolio, if it were sold, could run to tens of billions of dollars. In the past decade the company has spent at least $2bn on research and development for the new generation of mobile connectivity.

In saying he wants to create a fairer technological race, Mr Ren is also attempting to dissociate American security fears from those of Huawei’s market dominance. His offer is “essentially calling their bluff”, says Samm Sacks of New America, a think-tank in Washington, DC. As she points out, America’s government is working out how to create a rival to Huawei, whether by fostering American firms or helping bolster its two main global competitors, Ericsson, a Swedish firm, and Nokia, a Finnish one. Moves are also afoot to make certain components of mobile networks interchangeable with each other, to let carriers mix and match suppliers more easily. OpenRAN, a standards body, wants infrastructure manufacturers like Huawei to agree on standards for the technology in their networks that shuttles data around to ease interoperability. Huawei has so far declined to join.

Yet questions over the feasibility of the deal abound. Would China accept hiving off a core part of one of its few globally powerful corporations? For better or worse, 5G has become a proxy for superpowerdom. As Mr Ren told The Economist, “5G represents speed” and “countries that have speed will move forward rapidly. On the contrary, countries that give up speed and excellent connectivity technology may see economic slowdown.”

Even if the Chinese state gave its blessing, who might be the buyer? Mr Ren says he has “no idea”. Analysts suspect that giants such as Ericsson and Nokia would balk at an offer out of pride, and would question the value of Huawei’s tech. (Having posted losses last year, they are also short of cash.) The technology may not help a smaller firm compete on an equal footing with Huawei. The Chinese firm is so well entrenched with big operators, say consultants, that it would not make financial sense for most of them to take on a new supplier. Samsung, a South Korean electronics giant, has deep pockets and a smallish but growing networking-gear business—and without rival bidders, it could drive a hard bargain. A consortium of buyers is possible; who would make one up is unclear, however.

Suitors may be put off by other considerations. If Huawei really is ready to transfer the entirety of its technology to another company, then, as Mr Wang points out, “it has to accept the risk of a major competitor in the future.” But Huawei’s dominance owes as much to technology as to its low prices and the speed at which it can roll products out, says Ms Sacks. Its willingness to serve places Western firms steer clear of is also a factor: who else besides Huawei would wade through malarial swamps in Africa and haul base stations up the flanks of Colombian mountains? Mr Ren knows this. Asked whether he thought that an American firm, with Huawei’s precious know-how in hand, would be able to pull it off, he said, with swagger, “I don’t think so.” But potential buyers know it, too.

Lastly, few believe that a sale would placate America’s national-security apparatus, at least in the short run. A new competitor would almost certainly still need to make equipment in China, which makes half of America’s telecoms kit. Concerns about Chinese meddling would not go away. And Huawei’s latest offensive is not all charm. Last week it accused American officials of committing infractions while posing as Huawei workers, in order to “bring unsubstantiated accusations against the company”. It also accused America’s government of targeting it with cyber-attacks. That may sour relations.

Could Mr Ren’s proposal, then, be a sign of desperation? Not a bit of it, he says. He claims that Huawei has found alternative suppliers for its network-infrastructure business that are unaffected by its blacklisting by America. He denies that the company will make a loss in the coming year.

Nonetheless, the consumer business is under pressure. Half of the company’s $105bn in sales last year came from the 208m smartphones it sold around the world. So did an outsized share of profits. This business is in deep trouble. Phones that Huawei sells outside China are desirable communication devices largely thanks to proprietary software available exclusively from Google. Android, Google’s mobile operating system, which Huawei uses, is open-source and freely available. But the American tech giant’s own apps are not. Because Google is American and its apps are compiled in America, the Commerce Department’s ban on sales of American technology to Huawei applies to them.

Mr Ren says that Google has been lobbying the Trump administration to allow it to resume supplying Huawei with proprietary Android software, but so far to no avail. Unless American policy changes, Huawei will remain stuck with the open-source version of Android, without any of the apps that consumers have come to expect. The Chinese firm is in the process of developing its own operating system, Harmony OS, but it will be no rival to the mature Android ecosystem for years to come.

Sandboxed
This means that all new Huawei phones will ship without Gmail, Google Maps, YouTube or, crucially, Google Play Store. The Play Store is what allows Android users to download apps like Whatsapp, Instagram and Facebook easily. WhatsApp in particular has become a standard mode of communication in much of the world outside America. Unless its government lets up, Huawei’s new smartphones will be little more than decent cameras that make phone calls. The firm will launch the Mate 30, the first top-end phone since its blacklisting, on September 19th in Munich. Huawei claims its hardware features will buoy sales. But a phone which lacks basic functions is unlikely to be a hit. A weakened consumer business would dent profits.

Huawei’s share of the Chinese smartphone market, where it has never relied on Google’s apps, is growing fast. But two-fifths of its annual phone sales, or roughly $20bn, come from outside the country. Though the firm’s executives repeatedly declined to share any projections, firm-wide revenue growth in the nine months to August slowed to 19%, year on year, from 23% in the first half of 2019. If the Mate 30 and its successors flop, Huawei stands to lose billions of dollars in annual revenue.

Similar supply-chain challenges affect other parts of its business. Its coders are busily writing Huawei’s own version of software tools known as compilers and libraries, themselves used to create the software that powers all manner of electronic devices, not just smartphones. As with Android, Huawei would have to create its own version of these, and a technological ecosystem around them. Such ecosystems take years to evolve, and there is only so much one company can do to stimulate this evolution, which relies on third-party developers, with their own goals and incentives. Huawei’s expertise in high, hard technology is of little use here.

And, Mr Ren’s assurances notwithstanding, Huawei’s finances are being squeezed. Even he concedes that its relations with large Western banks such as HSBC and Standard Chartered have been disrupted. Still, the firm has plenty of cash and he says that smaller banks remain willing to lend to Huawei. The Chinese Development Bank, which has reportedly extended credit lines to Huawei and ZTE, a Chinese competitor, in the past, may stump up if needed. Mr Ren and his underlings repeatedly claim that cashflow is “healthy”, pointing to the firm’s furious building work. It has just finished a 120 hectare, $1.4bn research campus.

Huawei is being forced to transform itself from a company that makes and sells hardware into one that also makes many components that it used to buy from others. This kind of shift strains a firm. Its cash cow is under threat even as it has to invest heavily to replace the suppliers and software it can no longer get from America. Mr Ren might hope that his proposed sale of Huawei’s 5G technology will give him sufficient fuel for Huawei to fly ever higher. But peer behind the showy frescoes in Shenzhen, and his showier gesture, and Huawei’s future looks decidedly hazy.

This article is from https://www.economist.com/business/2019/09/11/huawei-may-sell-its-5g-technology-to-a-western-buyer

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Huawei’s 5G network equipment business:

Ren Zhengfei, Huawei’s founder and CEO, says that his company will produce more than 2 million base stations over the next 18 months, regardless of whether the US decides to remove it from the Entity List.  Zhengfei said that while the US’ decision to add Huawei to the entity list was profoundly unjust, it would have little impact on the company’s productivity – particularly with regards to its 5G network equipment.

How many more will they ship after IMT 2020 RIT/SRIT has been standardized by ITU-R in late 2020?

“First of all, please note that adding us to the Entity List was not fair. Huawei has not done anything wrong but was still placed on this list. This list didn’t have that much impact on us. Most of our more advanced equipment does not contain U.S. components, despite the fact that we used their components in the past. These newest versions of our equipment even function 30% more efficiently than before,” he said.

“In August and September, we will undergo a run-in period before we can mass produce these new versions. So, we can only produce around 5,000 base stations each month during that period. Following that, we will be able to produce 600,000 5G base stations this year and at least 1.5 million next year. That means we don’t need to rely on U.S. companies for our survival in this area,” Ren explained.

Ren Zhengfei, Huawei’s founder and CEO says the conflict with the U.S. has exceeded what he had previously thought.

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While the impact on Huawei’s network infrastructure business is expected to be minimal, being added to the Entity List does create problems for Huawei’s handset business, particularly as the company looks to reel in its rival Samsung and claim top spot in the market. If Huawei were to be permanently added to the Entity List, it would lose access to Google’s Android operating system, which the company uses as standard on all its smartphone handsets.

“I could never have expected this controversy to be so intense though,” Ren said in a recent interview with Sky. “We knew that if there were two teams climbing up the same mountain from opposing sides, we would eventually meet on the peak and we may clash. We just didn’t expect this clash to be so intense and lead to this kind of conflict between the state apparatus of a country and a company.”

Ren has reportedly sent out another memo detailing the fallout of the conflict, which does finally seem to be hitting home. Job cuts are on the horizon, with replicative staff facing the axe and a simplified management structure promised. Contracts and payments will face higher scrutiny also, to keep an eye on free cash flow, while R&D seems to have been impacted also.

Android vs HarmonyOS on Huawei smartphones:

Huawei’s preference has always been to continue to use the Android operating system on its handsets, however, the US’ latest political campaign has forced the company to bring forward the release of its own OS, HarmonyOS.

“Google is a great company. We have a sound relationship with Google. We have signed many agreements with Google over the years. We still want to use Google’s system in our devices and develop within its ecosystem. Because of this, we hope that the U.S. government will approve the sale of Google’s system to us. There are billions of Android system users and billions of Windows system users around the world. Banning one or two companies from using these systems won’t help ensure the security of the U.S. as a country, so they should keep their doors open.”

“If the U.S. doesn’t want to sell the Android system to us, we will have no choice but to develop our own ecosystem. This isn’t something that can be achieved overnight. We estimate that it will take us two or three years to build this ecosystem. In light of all this, we don’t believe we will be able to become the number one player in the device sector any time soon,” Ren added.

Conclusions:

Huawei is already the undisputed leader in optical network and cellular network equipment.  They are destined to be #1 in 5G network gear sales, independent of the U.S. sanctions and bans.  Huawei is also #2 in global smartphone sales (Samsung is #1).  And they’ve introduced a host of new innovative products like the Honor Vision smart screen.

While Americans shamefully excuse the isolation of Huawei as a wise action rooted in “national security” and an aversion to thievery, they don’t realize that Huawei has 80,000 R&D employees (mostly in China) and it spent $15 billion on R&D in 2018 alone.  Of course, the Chinese government may have directly or indirectly funded much of that R&D but it is what’s contributed hugely to Huawei’s success.

References:

https://www.totaltele.com/503659/Huawei-will-ship-over-2-million-5G-base-stations-by-2020-regardless-of-US-interference

http://telecoms.com/499224/huawei-founder-has-been-expecting-5g-conflict-for-a-decade/

https://news.sky.com/video/huawei-chief-executive-speaks-to-sky-news-11786209  (video)

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