Program Director, Mobile Phones, EMEA
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Last week the mobile phone industry became thickly entangled in President Trump’s political plays in his cut and thrust attempts to force a trade deal out of China. The Trump administration on Thursday officially added China’s Huawei Technologies to a trade blacklist — the entity list — which bans the company from buying from US firms without approval from the US government. The move applies to both hardware and software, and Google on Sunday announced that it would be restricting Huawei’s access to anything beyond the public access source code of Android with any new smartphone models, though existing ones would not be affected and would continue to receive Android updates, as well as having access to the apps suite including the apps store and Gmail.
The details of the ban were not totally clear, and may not be for some time, and some backtracking already appeared to be underway by Friday, when the US Commerce Department said there might be some easing of the restrictions through a 90-day licence that gave Huawei network gear users time to adjust to the ban. That backtracking was made broader on Monday, according to the Financial Times, with an extension by President Trump of the 90-day waiver to software used on consumer devices — i.e., Android — as well.
Whenever the ban might come about, for the consumer smartphone operations, the rising star of Huawei’s business and now responsible for half of its turnover, the ban is very bad news — contagion from the US-waged war on Huawei as a 5G network provider, which up to now had been only that, a matter which concerned governments and mobile operators but not consumers.
A Key Pawn in Trump’s Powerplay
Why Trump chose to expand his attack on Huawei may have much more to do with his faltering attempt to force the Chinese into a trade pact than anything to do with Huawei smartphones in particular. The ban and then 90-day reprieve sounds a lot like a ploy to concentrate Chinese minds on finally agreeing a big trade deal.
Up to now consumers in most countries seem to have thought the 5G infrastructure risk was nothing much to do with them, and have been buying Huawei smartphones in increasing droves. Our feedback at IDC in conversations with mobile operators in Europe with extensive retail operations was that consumers did not seem fazed by what they were hearing about Huawei and operator retail was still backing Huawei as the smartphone industry’s rising star.
The argument seemed strong; though there have been instances of Chinese smartphone makers appearing to be gathering information from users of their phones, this has palled as a consumer risk against the scandal around Facebook’s data-gathering policy and its at times careless attitude to data protection, and the regular success of hackers in breaking into the subscription and payment profiles of major websites.
This time it is different — headlines like the BBC’s “Huawei’s Android Loss: How It Affects You” can only be negative to Huawei’s smartphone sales prospects in the next few months. Consumers may not care much about the abstractions of 5G networks, but they certainly care about their Gmail, access to the Google store and probably quite a lot about Android updates as well.
Chinese Faced With Their Own Weakness in Operating Systems
Huawei has been working on its own OS, but realistically Trump has played a move that hits the Chinese company where it is vulnerable and where it has no chance of making a rapid recovery. Recently snubbed by the Chinese when he seemed on the brink of doing the deal he wants, he has played, pun unavoidable, one of his trump cards. And not just where Huawei is weak, but the whole Chinese smartphone industry.
There is after all no competitive Chinese OS in smartphones, and building one up could take years. The Chinese may develop autonomy in semiconductors in a few years — that seems a reasonable ambition — but the Chinese, insular in apps sitting behind their Great Firewall, are unlikely to develop the user-friendly interfaces and addictive applications that US corporations have mastered so well and that have worldwide popularity. China is approaching the expansion of its influence at state level very much in that image. Its Belt and Road initiative is targeting transport and other infrastructure that radiates out across neighbouring countries.
A Year Ago ZTE was Stopped in its Tracks
At the general level of components, the BBC reported on Tuesday that Huawei has said its core suppliers include 33 US companies. The industry will look back at what happened with Huawei’s smaller Chinese rival ZTE last year, hit with a similar ban. In April 2018 US firms were told summarily to stop working with the company, as ZTE was accused of flouting a previous agreement and going around US sanctions with Iran. This move stopped ZTE’s phone production in its tracks. Within three months the Chinese had pretty much capitulated — a deal was carved out that lifted the ban but at the price of a very humiliated ZTE, which had to pay $1 billion as a fine, put a further $400 million in escrow and change its board. The deal even stipulated the presence of a compliance team, chosen by the US and reporting to it, which would oversee ZTE playing straight in future.
Since its production ramped up again towards the end of 2018, the stuffing has pretty much been knocked out of ZTE’s position as a smartphone manufacturer. The company has failed subsequently to get any momentum into its sales: before the US action, ZTE had around 2% of the global smartphone market — afterwards, it is trailing at 0.4%, according to IDC data. In the US, the earlier figure was often 10% and ZTE was gaining. Now its share is not much more than 1%.
It must have been very humiliating for the Chinese to accept the deal imposed on ZTE, harking back as it did to the sort of “treaty port” deal that was imposed on China back in the mid-19th century (by the US along with European powers) — the memory of which lies behind a lot of Chinese determination not to be at anyone’s industrial hock in the future.
Huawei Faces Other Accusations in the US
The new US ban on Huawei is not related to such a specific case as that with ZTE. But there are other accusations against Huawei pending in the US that may lead to a very similar set of charges. The ongoing US requested extradition proceedings in Canada against Meng Wanzhou, daughter of Huawei founder Ren Zhengfei, centres on her role in a company called Skycom, which the US claims Huawei ran as a front to circumvent sanctions with Iran — not so different at all from the case against ZTE. There are also unresolved investigations in the US ongoing into alleged technology theft by Huawei of robot technology from T-Mobile.
So even if Trump gets the trade deal he wants out of China — a big if — it may be politically difficult for him to drop proceedings against Huawei completely, especially in a case linked to evading US sanctions on Iran. If ZTE was cut down to size, why not Huawei?
But much more competition seems less likely in the US. ZTE was delivered a blow in 2018 with short-lived US sanctions from which it is finding it difficult to recover. Huawei is not welcome as a telecoms gear maker, and pressure has been put on the mobile operators to keep its phones out too. The New Wave Chinese brands have so far been wary of making more moves there, with only niche player OnePlus making much of an entry. That is all before the current crisis in US and China trade relations and its difficult to predict outcome.
Though a way off being China’s largest company, Huawei’s technology position makes it one of the most important, and China might baulk at the implications of a similar imposition on a technology champion. For the Chinese not to accept a deal over Huawei would prejudice the rise of a company that is on its way to being the key player in a key global industry and which, according to IDC data, had export earnings in smartphones of $58 billion at retail before tax in 2018, of which nearly half was exports.
How do the Koreans Say Schadenfreude?
I am not sure whether there is a word for schadenfreude in Korean, but the big winner out of Huawei’s political problems is likely to be Samsung. It still has a lot of market dynamism behind it, and in general it has held its place in the global industry as Huawei has risen, leaving the smaller Android players to feel the heat. They, meanwhile, will all be very grateful for whatever breathing space a hobbled Huawei leaves them in what has recently been in many parts of the world a rapidly consolidating market.
The other Chinese New Wave players — Xiaomi, OPPO and vivo — will probably have mixed feelings about less competition from Huawei. They will be afraid of a further contagion, of consumers seeing all Chinese smartphone brands as vulnerable to the foibles of an unpredictable US president who might one morning decide to cut them out of access to Android updates as well.
And the longer the Android issue goes on, the bigger the danger to the Huawei brand. The parent company created a second brand, Honor, in part to overcome some of the drawbacks of being an infrastructure player as well as smartphone maker. Up to now Huawei had managed to overcome most of those disadvantages, but a new one is looming very large — political risk.