Huawei – Olive or thorns?

Huawei extends an olive or thorn branch?

• No one is sure what to make of Huawei’s offer to license its 5G technology to a Western (read American) player and I think it likely that this innovative attempt to solve its problems will not go anywhere.
• In an interview with the Economist (see here), Ren Zhengfei, founder and CEO of Huawei has offered a one-time license to all of Huawei’s 5G technology.
• Mr. Ren envisages that this would involve a one-time payment and offer perpetual access to Huawei’s 5G patents, technical blueprints, production know-how and most importantly, source code.
• The licensee would have the ability to modify the source code in any way it sees fit meaning that any backdoors or pieces of code that the licensee doesn’t like can be removed and replaced.
• Effectively this would enable the creation of a Western version of Huawei’s basestation business that could go and compete against Nokia, Ericsson and even Huawei itself.
• Huawei is clearly very confident of its scale advantage and holding onto that because no company in its right mind wants to enable competition that will put pressure on its prices and drive margins down.
• Presumably, this competitor would be North American which with the demise of Nortel, Lucent and Qualcomm’s infrastructure business has no base station vendor.
• Hence, it would have access to the lucrative North American, Australian and potentially EU markets where Huawei is currently not able to compete.
• If, and that’s a big if, this is accepted it could go along way towards reducing the suspicion with which Huawei is currently viewed, resulting in a resumption of supply of the Google ecosystem to its handsets (see here) as well as the ability to compete in markets where it is currently barred.
• I suspect that is the main reason behind this move is time as waiting for the USA and China to conclude a trade deal could involve a very long wait indeed.
• Huawei is the entity that is taking the most damage from the current stand-off and while the USA can hang around for the best deal, Huawei clearly cannot and needs to do what it can independently.
• This deal also says a few things about Huawei’s 5G position:
  • First, standard-essential intellectual property (SEP). This offer is a tacit admission that despite claiming to have the strongest and most important patent position for 5G, none of it is essential to the 5G standard.
  • If Huawei’s IP was standard-essential, then everyone would have already licensed it as, by definition, one would not be able to make a handset or a base station without it.
  • This move strongly implies that Huawei’s IP is all about how the standard is implemented, which may be no less valuable, but it is far more difficult to prove its value.
  • It also implies that Huawei’s strength remains in taking technology created by others and making it smaller and cheaper.
  • This runs contrary to the image that it has been trying to create over the last few years.
  • Second, despite the bravado, Huawei is in pain: Huawei put a pretty brave face on its H1 19 results as increases in market share in China offset a steep drop off in the rest of the world but the seriousness of the situation will become obvious in H2 2019.
  • Falling revenues overseas is almost certain to push Huawei into heavy loss-making territory when it comes to smartphones, meaning that it will have to start making cuts.
  • In order to avoid this, it needs to recover its market share position before irreversible damage is done which means a rapid solution to its problem of not being able to source software from Google.
• The hawkish end of the spectrum will say that even having source code will not help much because there is so many lines of code that looking for backdoors will be like looking for a needle in a haystack.
• Furthermore, I doubt that anyone will pay the $10s of billions that Huawei seems to be expecting.
• It says that it has invested $2bn over a number of years in developing this IP but how this is suddenly worth 5x what Huawei paid for it is a bit of mystery especially as none of it is essential to the 5G standard.
• With the sacking of John Bolton, the White House may now take a less hawkish view of China and Huawei but even then, I think Huawei may have difficulty in getting anyone to take it up on its offer.
• This is because I have long believed that Huawei is the focus of sanctions because the USA wants to use it as a bargaining chip in its much wider trade dispute with China.
• Hence, anyone who undermines that position may find themselves being tarred with the same brush as Huawei and suffering similar consequences.
• This is an innovative idea from Huawei but I don’t think it is going to go anywhere.