Gearing up for Huawei’s second act

Washington’s wielding of strategic export controls has seriously blunted Beijing’s technological ambitions, so much so that Huawei founder Ren Zhengfei warned in a recently leaked memo that his company’s goal is simply to “survive.” Nevertheless, policymakers would be wise to remain vigilant given indications that Huawei is adapting its business model and circumventing U.S. restrictions to maintain persistent access to American networks.  

The U.S. government’s regulatory assault on Huawei has been undeniably stark. Starting in 2019, Trump-era rule-changes prohibited the company from selling its wireless gear in the U.S. or purchasing American-produced semiconductor chips, which supported its then-highly profitable consumer business. This order was expanded in 2020 to prevent foreign chipmakers, such as TSMC in Taiwan, from supplying Huawei. To Ren’s credit, two years passed before these bans significantly impacted Huawei’s production of smartphones, PCs and tablets. One reason: Huawei stockpiled U.S. chips before the bans went into effect, with the goal of shielding the company from a crackdown. 

Eventually though, Huawei’s network and consumer businesses wilted under Washington’s pressure. In 2021, Huawei’s annual revenue plunged 28.6 percent — the first time on record that the company reported such a decline. For the next 18 months, Huawei reported double-digit quarterly revenue drops. Huawei’s financial health became so dire that Yan Xuetong, dean at China’s prestigious Tsinghua University, warned that, “If Huawei cannot survive,” China “will have no hope for rejuvenation.” 

But, something unexpected happened last month: Huawei posted a revenue increase of 1.4 percent as its enterprise unit, which oversees cloud and business services, reported record sales. Meanwhile, Huawei’s research and development headcount ballooned by 10,000 engineers when compared to 2018 levels. Huawei, it appears, has bounced back from the brink. But, how?

Simply put, the company adapted to address chip supply constraints and evade market access bans. 

For the former, Huawei reengineered its supply inputs to shift away from foreign-made chips, using less-powerful domestic alternatives for its communications products. For the latter, Huawei pivoted from selling network equipment, used by telecom companies to build out public networks, to selling enterprise solutions, used by individual companies and governments for their internal, private use. These solutions, which range from cloud computing to operating on-premises 5G networks, are far less regulated and garner little public attention. Ironically, most organizations that deploy these private 5G networks — ports, transit authorities, and universities — do so because of concerns over weaker 4G and WiFi security. Now, many are at risk of relying on companies linked to China’s government to safeguard their communications and data storage. 

Huawei’s enterprise revival replicates the same bid-below-cost strategy that enabled it to dominate 5G markets by undercutting its Western rivals. It also reflects Beijing’s evolving model of state capitalism, which recognizes that China’s great-power ambitions hinge, in part, on technological integration and structural inter-dependence with the West. That explains why Huawei established new verticals that mirror Beijing’s priorities in four revolutionary market segments: customs and ports management; data management; smart highways and vehicles; and smart photovoltaics, or power production.  

Unsurprisingly, these emerging fields presently operate beyond the bounds of Washington’s current restrictions on Huawei. And, by targeting individual companies and government agencies as its customers, Huawei can avoid the strictest scrutiny applied to public network solutions. 

Huawei’s resurgence serves as a warning to policymakers seeking to reduce America’s reliance on Chinese technology and supply chains. And, where Huawei is leading, other Chinese start-ups will follow unless Washington takes action. 

Removing Huawei equipment from American networks, including those near sensitive military installations, will cost $3.4 billion more than Congress authorized in 2020. There is, however, a revenue-neutral option to address this shortfall: Congress could appropriate additional funds to help U.S. providers immediately “rip and replace” untrusted equipment from their networks and then recoup those costs in subsequent years by allocating proceeds of upcoming mid-band spectrum auctions. Through executive order, the administration could also pilot a new outbound investment screening mechanism that curtails American investment in China’s tech sector, one that could serve as a model for comprehensive reform aimed at severing China unfettered access to U.S. capital markets.  

The U.S. also need not wait for Huawei’s new verticals, operating under different names, to achieve market dominance through standard setting and early mass adoption. To neutralize this threat at its inception, President Biden should direct the Commerce and Treasury departments to levy additional export controls and licensing restrictions on these Huawei affiliates. Advisory notices regarding Huawei’s latest offerings should also be issued to corporate stakeholders, as well as state and local governments. 

If enacted, these and other measures will do more than simply protect U.S. networks from Chinese infiltration. They may also prove that Ren’s fears about Huawei’s survival were right all along. 

Jonathan Pelson is a former telecom executive and the author of Wireless Wars: China’s Dangerous Domination of 5G and How We’re Fighting Back. Craig Singleton is a senior China fellow at the non-partisan Foundation for Defense of Democracies.