Huawei or the Highway

The China trade war story has more twists and turns than a reticulated python. Following the brief exuberance of last weekend's G20 meeting in which we were led to believe that U.S. and Chinese leaders had made a framework for a trade deal, we slowly learned that details where thin and that there may in fact be no deal at all. Markets sold off hard.

Then, all hell broke lose. Media outlets on Thursday reported that Canadian officials had arrested the Chief Financial Officer of Huawei, Meng Wanzhou, on December 1 with the intent to extradite her to the United States on unspecified charges related to the Iran embargo. Wanzhou is the daughter of Huawei Founder and President Ren Zhengfei, who is a billionaire and one of China's most prominent entrepreneurs.

Huawei has denied that it violated the Iran embargo, unlike another Chinese company ZTE, which was briefly shut down after the United States banned suppliers from doing business with it. ZTE agreed to a series of steps with the U.S. government to lift the ban.

Where does that leave us? At a major impasse. We have arrested one of China's most prominent executives and embarrassed the Chinese just days after telling the world we were friends again.

Huawei's Rise to Power

All trade deals now lead through Huawei. That's because the company is a symbol of China's rising technology power.

In 2002 I stumbled upon Huawei at a trade show, when it was a small company, probably with less than $1 billion in revenue. At Light Reading, where I was an editor, we published one of the first stories alerting folks about Huawei's entrance into the U.S. market through subsidiary Futurwei. Back then, Huawei was mostly known for selling knockoffs of Cisco's routers. It seemed cute at the time. But Huawei developed into a global power and reinvested all its money in R&D and engineers. It milked lucrative relationships with the major Chinese telcos and found a market for its gear on many of the world's emerging markets, in addition to Europe. Now it is one of the largest networking and telecommunications manufacturers in the world with nearly $100 billion in revenue.

Huawei makes everything from high-speed optical switches and smartphones to surveillance cameras. It spends more than twice as much as Cisco on Research & Development (R&D), and ships more smartphones than Apple. It's making massive investments in artificial intelligence technology, including its own chip, which was detailed at the recent Huawei Connect show in Shanghai in September, which I attended. It's been interesting to watch its evolution from a "fast follower" to a technology leader.

The Huawei story is an amazing one, whether you like Huawei or not.

(Full disclosure: As an analyst I have done client work with Huawei in analyzing technology markets. Huawei has paid for some of my trips to China. Not expecting much business in the near future.)

Of course, there is long-running animosity between Huawei and many American companies, most notably Cisco, which has accused it of copying its products and technology. China and Cisco have engaged in a long-running feud, including lawsuits. Cisco and Huawei eventually settled their legal wranglings.

It's all complicated by the fact that Huawei operates in a country run by a totalitarian government. Founder Zhengfei was a former member of the People's Liberation Army (PLA), where he worked as a military technologist. This leads many folks to believe there's still a deep connection between Huawei and the Chinese government, which Huawei denies.

Pressure Ratcheting Up

All of this has changed recently with an escalation of trade tensions.The United States government has long advised U.S. service providers not to use Huawei's equipment because of security risks, but other Western countries have recently hopped on the wagon.The Australian government has banned Huawei, and BT recently said it was dropping Huawei products from a key part of its network after many years of use.

It's hard to see what happens next. Without some kind of diplomatic solution, things could get much worse quickly, and that would further damage markets. China is angry about the arrest. The solution to the current dilemma will define the technology landscape for decades. Meanwhile, China's emergence as a global technology leader, as demonstrated by Huawei and other Chinese tech giants such as Alibaba and Tencent, can't ignored. Tencent is said to be adding 2,000 servers per day to its cloud. U.S. companies want access to China's massive growth. Many tech empires, including the bulk of cloud and communications technology firms in Silicon Valley, have been built on the partnership with Chinese suppliers.

Let's carefully watch the next step in this political imbroglio. How the West treats Huawei will be seen as a major litmus test in the relationship. It may be Huawei or the highway.