The Improbable Rise of Huawei

How did a private Chinese firm come to dominate the world’s most important
emerging technology?

BY KEITH JOHNSON, ELIAS GROLL-APRIL 3, 2019, 1:00 PM

A decade ago, in 2009, the Swedish phone giant Teliasonera set out to build one
of the world’s first fourth-generation wireless networks in some of Scandinavia’s
most important—and technologically savviest—cities. For Oslo, Norway,
Teliasonera made an audacious and unexpected choice of who would build it:
Huawei, a Chinese company with little presence outside China and some other
developing markets.
The same year, Huawei landed an even bigger and more unexpected contract to
completely rebuild and replace Norway’s mobile phone network, which had first
been built by the global standard-bearers: Ericsson of Sweden and Nokia of
Finland. The Chinese upstart eventually completed the world’s most ambitious
network swap ahead of schedule and under budget.

To many in the wireless industry, it was a coming-of-age moment for Huawei, and
for China. Huawei was no longer just another Chinese catch-up clawing out
market share thanks to cut-rate pricing or thriving on stolen intellectual property.
Suddenly it had cutting-edge technology of its own and was elbowing aside
established European giants like Ericsson and Nokia in their own backyard.
“For the first time, people realized Huawei was not just the cheap option but
could compete on quality and price,” said Dexter Thillien, a telecommunications
analyst at Fitch Solutions.

Fast-forward to now. In less than a decade, allegedly thanks in part to billions of

dollars in support from the Chinese government, the privately held Huawei has
become the world’s largest telecom equipment company, last year posting more
than $107 billion in revenue from operations in some 170 countries.

More important, Huawei has, by most accounts, taken the lead in the race to
develop one of the modern world’s most important technologies: fifth-generation
mobile telephony. Unlike its various predecessors, which simply offered
consumers the ability to send texts, then to surf the web on their phones, and
finally to stream video, 5G promises to revolutionize the entire global economy.

And for perhaps the first time in China’s modern history, Huawei’s growing
market share and technological prowess are putting a champion of the Chinese
government in a position to dominate a next-generation technology. 5G will offer
hugely faster data speeds than today’s mobile technology, which is important for
consumers. But 5G will also be the technology that ensures artificial intelligence
functions seamlessly, that driverless cars don’t crash, that machines in automated
factories can communicate flawlessly in real time around the world, and that
nearly every device on earth will be wired together.

5G will be, simply put, the central nervous system of the 21st-century
economy.5G will be, simply put, the central nervous system of the 21st-century
economy—and if Huawei continues its rise, then Beijing, not Washington, could
be best placed to dominate it.

Huawei’s startling ability to gatecrash what has been until now an exclusive
bastion of the developed world has sent shock waves not only through the
industry but also through Western capitals. Its success has turned Huawei into a
target for the U.S. President Donald Trump’s administration—which is warning
that the company’s growing role in global telecommunications networks could
enable Beijing to use its control of the world’s digital plumbing to spy on rival
nations or steal their commercial secrets.

“5G is turning more into a geopolitical battleground between the United States
and China,” said Tim Ruhlig of the Swedish Institute of International Affairs, who
researches 5G technologies.
And that raises a key question that remains unanswered: Who is Huawei really
working for? While it prides itself on being a private company, Huawei was
founded in 1987 by Ren Zhengfei, a veteran of the People’s Liberation Army’s
engineering corps, and the Chinese army was an early and crucial customer for
the fledgling firm.

Late last month, a critical report by Britain’s 5G watchdog also raised fears that
Huawei might prove to be a high-tech Trojan horse. The report concluded that
“underlying defects” left the company’s software and cybersecurity systems open
to hackers, posing “significant” security issues. Even so, the report mainly blamed
sloppy engineering and found no evidence that the vulnerabilities had been
introduced at the direction of Chinese authorities; it also stopped short of
proposing an outright ban.

Indeed the Trump administration—which has more often than not managed to
alienate its longtime allies—is already faltering in its global campaign to isolate
Huawei. While a few U.S. allies, such as Australia and Japan, have followed
Washington’s lead and already banned Huawei technology, many others are still
considering it. The United Kingdom, like Germany, is still weighing the geopolitical
implications of purchasing Huawei equipment. Others such as Thailand and South
Korea are pressing ahead and letting Huawei launch 5G projects. India, which the
United States hopes to use as a counterweight to China, is resisting American calls
to exclude Huawei from its networks.

And behind all these fresh worries over Huawei’s seemingly sudden dominance is
a simpler question: How did a modest, private Chinese firm that started out three
decades ago importing basic telecoms equipment emerge as the arbiter of what is
arguably one of the world’s most important technologies?

There’s no single explanation that accounts for Huawei’s success or recent

technical prowess. A cost advantage helped, of course. So did state backing,
government protection from foreign competitors, and a huge local market, which
led to massive and swiftly multiplying revenues. And it could hardly have been
mere coincidence that Huawei’s founder, Ren, was a PLA veteran, and Huawei’s
first customer proved to be the People’s Liberation Army.
In the end, however, Huawei’s meteoric rise was the result of a broad mix of
different policies and decisions—helped along by a few missteps from its Western
rivals.

Huawei Revenue (USD Billion)201420152016201720180306090120$42.9

billion$42.9 billion$58.8 billion$58.8 billion$77.6 billion$77.6 billion$89.8
billion$89.8 billion$107.3 billion$107.3 billionSource: Huawei 2018 Annual
Report, based on the April 2 exchange rate

QUALITIES

2014 4,287.2%

2015 5,876.1%

2016 7,758.9%

2017 8,979.4%
QUALITIES

2018 10,728.6%

One theme is clear: Throughout its history, Huawei appears to have benefited
from state support not available to the company’s Western rivals, though the
exact nature of that aid is difficult to quantify, as is the broader relationship of
any private Chinese firm to the government.

Because the company is privately held through a complex employee ownership

scheme, it doesn’t have the obligation to publish detailed financial reports as
publicly listed firms do. But European investigators have found evidence that
Huawei may have received a massive $30 billion line of credit from the China
Development Bank, among other well-timed financing.

“State-backed finance was crucial in Huawei’s growth.”“State-backed finance was

crucial in Huawei’s growth,” said Matthew Schrader, a China analyst at the
Alliance for Securing Democracy at the German Marshall Fund. It helped Huawei
sew up the domestic market, which in turn enabled it to expand overseas by
offering deep discounts.

Huawei denies receiving direct state aid. Nonetheless, Ren has been upfront
about the importance of Chinese industrial policy as key to the company’s
growth. Without Beijing’s policy of protecting Chinese companies from aggressive
foreign competition at home, “Huawei would no longer exist,” Ren has said.

Huawei’s rise might thus be seen as the latest test in the struggle between two
forms of capitalism: open, privatized Western markets versus state-assisted,
Chinese-style ones, though this time with an ideological twist, as Huawei is not
officially a state company.

Whatever the Chinese government’s role, Huawei was clearly shaped by Ren’s
personal vision and ambition. After leaving the army at the age of 39 and working
for a state-owned company, Shenzhen Electronics Corp., for four years, Ren
secured an $8.5 million loan from a state bank and started Huawei on his own
with 14 staffers, the Far Eastern Economic Review reported in a 2000 profile of
the company.

He began as an importer of telecommunications switches, a basic networking

technology. In 1990, the company started work on its first switch—but rather
than partner with a foreign company, which was standard practice in the Chinese
telecommunications industry at the time, Ren made massive investments in his
company’s research and development wing to build his own products. In the early
1990s, the company is reported to have had 500 research and development staff
and 200 working in production—a lopsided ratio—according to an examination of
the company’s business history by the analyst Nathaniel Ahrens.

By 1993, the company released the new switch and picked up the army as a
client, providing it with its own telecom network. That contract gave the company
an important boost over its rivals, according to the Far Eastern Economic
Review. A year later, Ren managed to secure another form of protection from the
state. He met with Jiang Zemin, the Communist Party general secretary, and told
him that a country without a domestic telecoms switch industry was like a
country without a military. “Well said,” Jiang replied, according to Ren’s account
of the meeting.

By 1996, under Ren’s prodding, the Chinese government shifted its industrial
policy to favor domestic telecommunications companies, keeping foreign
competitors out.

In subsequent years, a freed-up Huawei embarked on a ruthless campaign of

domestic expansion, signing up local government clients, often in rural areas. The
company sold its technology at rock-bottom prices to eliminate its rivals and
sometimes even offered its services to government entities for free. By 1998, the
company had matched the market share of its principal rival, Shanghai Bell, a
foreign joint venture.

Throughout its rise to domestic dominance, Huawei has also thrived in

international markets by offering its products at a significant discount compared
to its competitors. Access to a huge pool of engineering talent willing to work for
lower wages than Huawei’s Western competitors translates into discounts of up
to 20 percent for customers. Today, Huawei controls 29 percent of the global
telecom equipment market. In the Asia-Pacific region that figure is 43 percent,
and in Latin America it’s 34 percent, according to figures provided by the Dell’Oro
Group, a market research firm.

And while Huawei’s history has been marred by several cases of technology
theft—such as an infamous instance in the early 2000s of stealing Cisco code for
router software—experts credit Ren with building Huawei into a research and
development powerhouse from the company’s first days.

“I think “A lot of their technical expertise as of late is because they have a lot of
smart people.”a lot of their technical expertise as of late is because they have a
lot of smart people,” said Mike Thelander, an industry analyst and the founder of
the Signals Research Group. “You can say a lot of bad things about Huawei, but
you don’t throw the baby out with the bathwater.”

Today, Ren says that being a privately held company gives Huawei the freedom to
plow more money back into R&D—some $15 billion to $20 billion per year. Some
80,000 people, or nearly half Huawei’s workforce, are dedicated to research and
development; tens of thousands alone work at Huawei’s huge corporate campus
in Shenzhen.

And in its focus on turning research into marketable products, Huawei compares
favorably to Cisco and Google, said Henning Schulzrinne, the former chief
technologist at the U.S. Federal Communications Commission. The company’s
research organization “is well integrated into the development process,” allowing
Huawei to quickly turn research findings into sales, Schulzrinne said.

Huawei is also vertically integrated. Unlike its principal competitors, Sweden’s

Ericsson and Finland’s Nokia, Huawei designs nearly every component of 5G
technology, including the defining technology of the internet economy: the
smartphone. The company is the second-largest maker of smartphones in the
world, behind South Korea’s Samsung. By designing chipsets and the handsets
they talk to, experts argue, Huawei may have an edge in getting 5G products to
market more quickly.

When 3G and 4G networks were being built, Huawei was playing catch-up to its
established rivals, licensing much of their technology. To some extent, that lured
Ericsson and Nokia, which today are Huawei’s main rivals in the race to develop
5G, into a state of complacency, said Thillien of Fitch Solutions. They had invested
a lot of money into what were then cutting-edge technologies and sought to
squeeze the most they could out of them rather than racing ahead to the next
stage, making their own developments obsolete. At the same time, they felt they
had little to fear from what was then regarded as a nonthreatening Chinese firm.

Now, the situation is reversed. Huawei has more 5G-related patents than any
other firm, according to IPlytics, a German-based company that tracks intellectual
property development. That means other companies will have to pay Huawei to
use key bits of 5G technology.

Top 5G Standard Essential Patent Owners03206409601,2801,600Huawei

(CN)Nokia (FI)ZTE (CN)Ericsson (SE)Qualcomm (US)LG (KR)Intel (US)China
Academy of…Sharp (JP)Guangdong Oppo…Fujitsu (JP)InterDigital (US)Sony
(JP)MediaTek (TW)Apple (US)Industrial Technol…BlackBerry (CA)KT (KR)NEC
(JP)Electronics and Tel…Innovative Technol…Sisvel (IT)HTC (TW)Optis
(US)15291529139713971208120881281278778774474455055054554546846811
81182020181814141313121210109988773322111111Source: IPlytics

Company Number of Patents

Huawei (CN) 1,529

Nokia (FI) 1,397

ZTE (CN) 1,208

Ericsson (SE) 812

Company Number of Patents

Qualcomm (US) 787

LG (KR) 744

Intel (US) 550

China Academy of Telecommunications (CN) 545

Sharp (JP) 468

Guangdong Oppo Mobile Telecommunications (CN) 118

Fujitsu (JP) 20

InterDigital (US) 18

Sony (JP) 14

MediaTek (TW) 13

Apple (US) 12

Industrial Technology Research Institute (TW) 10

BlackBerry (CA) 9

KT (KR) 8

NEC (JP) 7

Electronics and Telecommunications Research Institute (KR) 3

Innovative Technology Ltd. (UK) 2

Sisvel (IT) 1

HTC (TW) 1

Optis (US) 1
Partly as a result of that technological arsenal, Huawei has been able to shape the
rules of the road for 5G in a way it never could with earlier mobile
technologies.Huawei has been able to shape the rules of the road for 5G in a way
it never could with earlier mobile technologies. Over the past few years, telecoms
engineers have regularly gathered every few months to hash out the evolving
technical standards that will govern all aspects of 5G. And Huawei has simply
flooded the zone, sending more engineers to those meetings than any other
telecoms company and making more technical contributions to the still-evolving
standard than anyone else, IPlytics found.

Along the way, Huawei has notched an ever-growing tally of technical

breakthroughs that no other single company has matched. It has field-tested its
5G technology in lower frequencies (good for coverage) and higher frequencies
(better for high data speeds). Earlier this year, it debuted its own, in-house-
designed chipset and devices that will make 5G a reality. Huawei says it currently
has 30 contracts to build 5G networks around the world, with dozens of other
countries close to signing on.

With a Chinese company building the network through which huge volumes of
data—phone calls, emails, and business transactions—will flow across the globe,
U.S. officials fear that infrastructure could be subverted for espionage, allowing
Beijing’s intelligence agencies to gather huge volumes of communications.
Even more dire, Washington fears that Beijing will replace it as the world’s
premier intelligence power and perhaps even deny it access to the networks that
make global commerce and the projection of military power possible. For
decades, U.S. intelligence agencies have capitalized on the central role of U.S.
companies in global telecommunications networks to spy on adversaries and
gather crucial intelligence.

And now, whether by design or luck or some combination of the two, the Chinese
Communist Party may have the means to overturn that disadvantage—especially
because the United States itself, despite the prominence of Silicon Valley, doesn’t
have a national champion of its own developing 5G. Consolidation and mergers in
the telecommunications industry have made European, not American, companies
the leading Western makers of the boxes, antennas, and beam-generating
equipment that will serve as the backbone of 5G technology.

Top Companies Making Technical Contributions to the 5G

Standard02,4004,8007,2009,60012,000Huawei (CN)Ericsson (SE)Hisilicon
(CN)Nokia (FI)Qualcomm (US)Samsung (KR)ZTE (CN)Intel (US)LG (KR)CATT
(CN)NTT Docomo (JP)MediaTek (TW)NEC
(JP)114231142310351103517248724868786878449344934083408337383738350
235022909290923162316213521351482148213461346Number of technical
contributions (Source: IPlytics)

Company Number of Patents

Huawei (CN) 11,423

Ericsson (SE) 10,351

Hisilicon (CN) 7,248

Nokia (FI) 6,878

Qualcomm (US) 4,493

Samsung (KR) 4,083

ZTE (CN) 3,738

Intel (US) 3,502

LG (KR) 2,909

CATT (CN) 2,316

NTT Docomo (JP) 2,135

MediaTek (TW) 1,482

Company Number of Patents

NEC (JP) 1,346

“If you’re the government of China, you have a couple of choices: You can
duplicate what the U.S. did and build a multibillion-dollar signals intelligence
network, or you can fund Huawei—and that’s a lot cheaper,” said James Lewis,
the director of the Technology Policy Program at the Center for Strategic and
International Studies.

Foreign production of advanced communication networks “will challenge U.S.

competitiveness and data security,” and as American data increasingly flows
across those networks, that will increase “the risk of foreign access and denial of
service,” Dan Coats, the director of national intelligence, warned in his annual
assessment of threats facing the United States.

As a result of these fears, Washington has essentially banned Huawei equipment

inside the United States. Last December, the Justice Department also ordered the
arrest of Meng Wanzhou, Huawei’s chief financial officer and Ren’s daughter, on
charges of trying to steal American technology and lying about the company’s
business in Iran. She is currently fighting extradition to the United States from
Canada.

But Washington may be fighting a losing battle in frantically trying to get its
Western allies to swear off Huawei as well. So dominant has Huawei already
become in building telecom networks globally and vying to set the world standard
for 5G that the Trump administration finds itself somewhat isolated, even among
its closest allies.

Despite U.S. pressure, the European Union has opted against barring the Chinese
firm, and even close U.S. allies such as Britain and Germany, which are still
deciding which companies will participate in building their 5G networks, are
unlikely to ban Huawei altogether. The reason is simple: For many European
countries that already use Huawei equipment in their 4G networks, it would be
costly to switch horses in midstream.

U.S. policymakers have leaned especially hard on Germany, even warning Berlin it
could lose access to U.S. intelligence sharing if it includes Huawei in its network.

“Europe is very much a battleground, and Germany is a battleground within the

battleground.”“Europe is very much a battleground, and Germany is a
battleground within the battleground,” said Thillien of Fitch Solutions.

Yet the Trump administration has done a poor job, by most accounts, of
convincing European allies of the security risk posed by the company—a problem
exacerbated by the president’s constant sniping at his counterparts across the
Atlantic. Washington has never publicly presented evidence backing up its
assertions that Huawei equipment plays a role in Chinese espionage operations,
and there are doubts that it has shared much evidence in private either.

According to Schrader of the German Marshall Fund, if U.S. intelligence officials

truly had clear evidence that Huawei was helping China to spy, they would be
more “forward leaning” in sharing that information with allies.

With the American campaign faltering, U.S. intelligence officials are already
beginning to prepare for a world in which Huawei dominates next-generation
telecommunications networks. “We are going to have to figure out a way in a 5G
world that we’re able to manage the risks in a diverse network that includes
technology that we can’t trust,” saidSue Gordon, the principal deputy director of
national intelligence, in remarks last month. “You have to presume a dirty
network.”

Huawei executives argue the U.S. allegations are irresponsible, and the company’s
founder has said he would defy Chinese law on intelligence gathering to maintain
his company’s independence. It is a claim China experts find laughable.

“The bigger a company in China gets, the more it needs to align its business goals
with the party’s political goals,” said Schrader. “The mere fact that Huawei is able
to publicly take a position so at odds with the actual reality of China speaks to the
degree of party support it enjoys. ‘Normal’ businesses in China cannot get away
with saying they don’t abide by party dictates.”

To satisfy the demands of law enforcement, telecommunications networks are

typically built to enable some type of wiretapping function. Such abilities have in
the past been subverted by intelligence agencies to snoop on calls and scoop up
data, so using Chinese-designed equipment for such networks practically
represents an invitation to Beijing to spy, “since the infrastructure itself is
designed to support such meddling,” argued Nicholas Weaver, a senior researcher
at the International Computer Science Institute.

In an interview with Foreign Policy, Andy Purdy, Huawei’s chief security officer in
the United States, pointed out that U.S. espionage activities documented by
National Security Agency whistleblower Edward Snowden have created a
fundamental attitude of distrust in the telecommunications industry. The
Snowden disclosures exposed how American companies were forced to
cooperate with U.S. intelligence activities.

“The U.S. fundamentally believes that China would use Chinese companies—even
private ones—for the same kinds of things that the U.S. uses American companies
for,” Purdy said.

Huawei executives have even begun to taunt Washington over Trump’s warnings
that the United States is falling behind in 5G technology. “The U.S. is lagging
behind,” Huawei rotating chairman Guo Ping told reporters earlier this year. “His
message is clear and correct.”

At the same time, many experts say security fears singling out Huawei equipment
are overblown, as nearly all the big telecom equipment makers use Chinese
factories to churn out their components.
“The whole Huawei security discussion as it is now is kind of silly and misses the
point,” said Ruhlig of the Swedish Institute of International Affairs. “It’s fair to
assume that China could hack into 5G anyway, whether you have Huawei
equipment in place” or that of another manufacturer, he said. “Banning Huawei
will not by itself provide additional security.”

That line of thinking has Huawei officials asking Washington to have another look
at its technology. “Let’s talk about proven risk mitigation mechanisms so that we
can have a chance to do business in the United States,” Purdy said. The U.S.
government, however, has yet to respond to that overture.

Experts are also still debating whether Huawei is as dominant as some officials in
Washington fear. Some telecoms executives with experience operating Huawei
alongside equipment made by other manufacturers say that it has established the
lead, especially in the bread-and-butter technology of transmitting large amounts
of data through radio networks.
“From a technology point of view, our view is that specifically in [radio access
networks] we see Huawei with a big advantage, a couple of years ahead of any
other provider,” said one Western executive who operates a major national
mobile network.

Others say Huawei’s purported technical lead may be much smaller, and in any
event is hard to measure when so many companies are making progress in
different pieces of the 5G puzzle. 5G networks are made up of many different
technologies, many of which remain in a nascent stage of development.
Engineering task forces are still determining the standards—the technical
language different devices will use to talk to one another and exchange data. That
means determining who is ahead in the market is more art than science.

“What is meant by being ahead?” said Thelander of the Signals Research Group.
“I’m not sure how you define being ahead.”

The previous shift in mobile communications technology—from 3G to 4G and

beyond—powered the creation of the current app-based technology. Streaming
services such as YouTube and Spotify, which deliver high-fidelity content into
users’ smartphones, rely on the technology, as do networked car-hailing services
such as Uber. But that transition was more an evolution than a revolution; 5G,
while building on existing cellular technologies, represents a breakthrough in the
amount of data that can be transmitted, and especially its speed and reliability.

These improvements in speed and reliability are required for the kinds of
innovations that technology executives tout as the next phase of the internet
revolution. For self-driving cars to become a reality, they will require reliable high-
bandwidth connections and near-instantaneous data transmission to be able to
react to changing road conditions in milliseconds. Advances in artificial
intelligence and machine learning likewise require huge datasets to function as
intended.

And whether Huawei is a year ahead of its peers, or a few months ahead, or
roughly at the same level may not be the biggest question. 5G is still being
developed, and commercial rollout in a limited fashion won’t begin in earnest
until next year; the first true 5G networks, which will deliver all the whiz-bang
features the technology promises, probably won’t arrive until 2025 at the earliest.
Huawei’s leading role in shaping the most important new technology standard
will likely pay dividends in terms of billions of dollars in license fees and could give
the Chinese firm an advantage as countries around the world scramble to build
5G networks.

“Whoever sets the standard is going to grab higher market share,” said Ruhlig of
the Swedish Institute of International Affairs. That’s already on display in parts of
Asia, Africa, and the Middle East, where Huawei rules. “In the developing world,
China is internationalizing Chinese technology standards,”“In the developing
world, China is internationalizing Chinese technology standards.”he said.

Indeed, as countries around the world scramble to start building advanced

telecoms networks, and despite the U.S. campaign against the company,Huawei is
becoming an even more entrenched player. Asian countries including Malaysia,
Vietnam, and U.S. ally Thailand are all considering Huawei for their 5G networks.
So are European and NATO allies of the United States such as Spain, Portugal,
Italy, and Hungary, while Germany and the United Kingdom are unlikely to ban it
altogether.
For almost 200 years, China has largely been on the receiving end of technology
developed elsewhere. Today, it is reasserting, in the most demonstrable way, the
technological leadership it enjoyed long ago.

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP

Elias Groll is a staff writer at Foreign Policy. Twitter: @EliasGroll
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