A Different Huawei is Likely to Emerge

Summary

Huawei’s constitution will be shaped by its ability to engender trust globally and secure supplies of high-end semiconductor chips. If current challenges persist, Huawei will likely look very different in the future.

Introduction

In the past 12 months alone, Huawei has shared its views and plans on topics including:

• Open RAN
• The evolution of 5G to 5.5G
• Its strategic pivot towards software and services
• The broadening of its product focus beyond smartphones to encompass laptops, tablets, smart TVs, wearables, and other connected devices.

In many of these areas, geopolitics is a factor that cannot be ignored. Increasingly, Huawei’s business direction is tightly coupled to its ability to engender trust globally and secure supplies of high-end semiconductor chips. The trust element will play a prominent role in determining the extent of Huawei’s progress in global markets. Huawei’s product competitiveness will depend on its ability to secure supplies of high-end chips. These chips are required for 5G network equipment, premium smartphones and high-end consumer devices, supercomputers, and advanced cloud computing infrastructure. However, Huawei’s placement on the US Entity List has blocked it from procuring high-end chips from manufacturers such as TSMC that are using US technologies.

Doubtless, China will be investing billions of dollars to narrow the gap and become self-reliant in advanced semiconductor technologies. My perception is that this is very high on the Chinese government’s agenda. As of end 2020, there is indication that some progress has been made [1]. The future profile of Huawei’s business will be influenced by two considerations which are currently subject to immense speculation:

• Can China achieve technological parity with leading semiconductor foundries such as TSMC and Samsung?
• How soon can China be expected to achieve this parity (Huawei does not have the luxury of time as its stockpile of chips will eventually be depleted)?

Huawei Remains Noncommittal to Open RAN

Huawei continues to be sceptical about the potential of open RAN technologies. I believe it is not ideal to adopt this position as market dynamics are changing at a rapid clip. However, this is not fatal at this juncture.

The interest and momentum for open RAN are still mainly centred on major communications service providers (CSPs) in developed markets where Huawei has been practically locked out. CSPs in developing markets (where Huawei is traditionally strong) have largely adopted a wait-and-see approach — these CSPs tend to be fast followers rather than visionaries; and they are also concerned about costs associated with additional integration work. In addition, open RAN technologies will still take some time to mature. As such, Huawei still has some time to make up its mind on open RAN.

Questions Abound for Huawei’s 5G

Of greater concern is the impact of the disruption to high-end chip supplies on Huawei’s 5G network equipment production. This is like the sword of Damocles hanging over Huawei’s carrier business. I am sure many CSPs that are currently using (or planning to purchase) Huawei’s networking gear will be asking themselves: how long can Huawei continue to support their cellular network requirements if it continues to be deprived of high-end chips?

When Huawei’s chip stockpile starts to run low, how will Huawei prioritise its CSP customers? Will it place the needs of international CSPs above those from China Mobile, China Unicom, and China Telecom? This is a question these CSPs will have to grapple with.

Sizeable 5G capital expenditure by the three Chinese CSPs has been critical for Huawei in 2020 and it is expected to remain so for 2021. However, there will likely be increased pressure on Huawei once these CSPs’ 5G network investments start to taper off.

Huawei recently introduced three new service categories to 5G to complement eMBB (enhanced Mobile Broadband), URLLC (Ultra-Reliable Low-Latency Communications), and mMTC (massive Machine-Type Communications). The three new ones are:

• real-time broadband communication (RTBC)
• uplink-centric broadband communication (UCBC)
• harmonized communication and sensing (HCS).

Given the prevailing geopolitical climate and the high level of mistrust among some Western stakeholders (governments, CSPs, and vendors included), overwhelming support for Huawei’s 5.5G conception is unlikely. One can expect competing visions from other network equipment providers as they contest for market leadership. Even as early as July 2020, Samsung had seized the opportunity afforded by Huawei’s troubles to present its own vision for 6G [2].

There is some speculation that 5G technology bifurcation may occur. I believe the probability is very low. China may be a huge enough market to support home-grown technology standards but the saying “no man is an island” is apt in today’s modern, hyper-connected world. Cross-fertilisation of ideas is needed to spur innovation and technological progress. Striking ahead on one’s own simply goes against the grain.

A Pragmatic Pivot Towards Software and Services

Through its trials and tribulations, Huawei’s management has displayed immense objectivity, rationality, and pragmatism, and its pivot towards software and services is yet another evidence of this. Huawei certainly has the capabilities and resources to pursue this direction, and there are plenty of opportunities associated with enterprises’ digital transformation and cloud migration journey. Huawei is splitting its cloud and AI business groups into individual units as well [3].

The key question here is whether Huawei can effectively compete outside China against global cloud hyperscalers (such as AWS and Microsoft Azure) and professional services providers. While it may be difficult for Huawei to penetrate the Western and global multinational corporation (MNC) market segments (due to lingering mistrust and cybersecurity concerns), Huawei can certainly tap into developing-market opportunities (for example, in Asia Pacific). Geopolitics have complicated business matters but it would not be unreasonable to expect Huawei to maintain and increase traction in regions where China has strong influence.

Huawei is specifically targeting the automotive industry where there is strong momentum for self-driving and electric vehicles. It has established a separate unit called Intelligent Automotive Solutions (IAS) and it intends to tailor its ICT technologies to the automotive industry. It has already forged partnerships with Beijing Automotive, Guangzhou Automotive, and Changan Automobile, with the intention of introducing sub-brands [4].

It is relatively easy for Huawei to establish tightly-integrated partnerships/collaboration with Chinese automakers given the former’s market position and branding in China. However, it remains to be seen if Huawei can establish similar rapport with global automakers. Here, geopolitics may again rear its head. Trust will be vital.

Broadening the Product Focus

The disruption to its high-end chip supplies has hit Huawei’s smartphone business hard. According to Counterpoint, Huawei controlled almost 50% of the Chinese smartphone market as of 2Q 2020 but its market share fell to 15% in 1Q 2021 (this is partly contributed by the divestment of its Honor brand last year) [5]. Blocked access to the Android ecosystem has also been a contributing factor.

This explains Huawei’s decision to broaden its product focus beyond smartphones. Huawei can incorporate advanced artificial intelligence features into its products to differentiate itself. However, some product categories (for example, laptops and smart TVs) are highly competitive and commoditised, and profit margins are generally unattractive. There will be a need for premium models to provide a halo effect to the various product lines, but this will likely require high-end chips.

Huawei will clearly rely on its HarmonyOS and App Gallery platform to drive its product strategy. After all, the global consumer segment has practically become a platform and ecosystem play with Google and Apple leading the way. App Gallery is reported to have 2.3 million registered developers, including 300,000 outside China [6]. The key driver here is whether Huawei can continue to generate momentum and gain further international traction, failing which its platform will essentially become a China-centric play.

Huawei will certainly spare no effort in developing and positioning its platform accordingly. It is crucial for Huawei to promote an open and vibrant ecosystem in order to succeed. One element working in Huawei’s favour is the massive China consumer market. No foreign application developer or business entity will want to miss out on this.

What the Future Holds for Huawei

It is unlikely that the US government and its close allies will ease up the pressure on Huawei anytime soon. In the US, the negative sentiments against China are bipartisan in nature and the US has labelled China as a strategic competitor.

The challenges arrayed against Huawei are formidable but they are unlikely to sound the death knell for the company. Huawei certainly has the agility, resilience, resources, and capabilities to reinvent and reposition itself. It is vital for Huawei to acquire leading-edge customers globally as they are the ones who can push Huawei to further raise its performance level and be at the leading edge of innovation.

In the coming years, the following are possibilities:

• Huawei may become a more regionally-focused company given the geopolitical hurdles
• The China market will assume a far greater strategic importance to Huawei
• Huawei’s product portfolio may undergo a dramatic transformation.

Huawei can be expected to:

• Invest more in cloud computing technologies, artificial intelligence and data analytics to enhance its platform and solutions capabilities
• Further intensify its push towards self-reliance particularly where critical technologies are concerned.

Painful but valuable lessons would have been learned by Huawei. Although this is not the intent of Huawei’s opponents, the experience will surely prepare the company well for new challenges ahead. As the German philosopher, Friedrich Nietzsche, once said, "That which does not kill us makes us stronger."

References

[1] China moves closer to self-reliance in 7nm chip production, PR Newswire

[2] Samsung’s 6G White Paper Lays Out the Company’s Vision for the Next Generation of Communications Technology, Samsung Newsroom

[3] Huawei splits cloud-AI business group, Mobile World Live

[4] Huawei bets on Automotive – 3 Partnerships Announced, Mobile Geeks

[5] Huawei is even struggling in its domestic smartphone market, telecoms.com

[6] Reasons to be appy: Huawei flashes figures for its App Gallery platform, The Register