Amid the glitz and glamour of the CES consumer electronics show in Las Vegas last week, one piece of news struck a particularly sour note for Chinese phone-maker Huawei. Despite months of preparation, the giant US mobile carrier AT&T announced last Monday that it was pulling out of a deal to sell Huawei’s smartphones.
The decision was taken as a result of political pressure on AT&T by American politicians, who had written to the telecoms regulator the Federal Communications Commission (FCC) – which must approve the sale of phones and other devices in the US – saying they had “long been concerned about Chinese espionage in general, and Huawei’s role in that espionage in particular”. Richard Yu, chief executive of Huawei’s consumer division, was obliged to go through the motions at CES of introducing his new Mate 10 phone, having seen planned marketing spending of $100m and assurances of no government interference turn to ashes.
For Huawei, it is a wearily familiar story. Although its $75bn annual revenues make it the world’s largest maker of telecoms equipment, including mobile masts and phones, Huawei has been repeatedly rebuffed in the US over suspicions that its Chinese origins make it untrustworthy. In US politicians’ eyes, the fact its founder Ren Zhengfei was once a Red Army officer is a stain that cannot be washed away. Australia, too, has banned it from providing network equipment.
But Huawei is not alone. Earlier this month, the committee on foreign investment in the United States (CFIUS), which can block overseas acquisitions, stopped Chinese firm Ant Financial’s $1.2bn purchase of US money transfer business Moneygram. CFIUS was not convinced that US citizens’ data would be safeguarded.
Last autumn, the US Department of Homeland Security told government departments to stop using Kaspersky Lab, the Moscow-based company which provides antivirus and cyber-security products, on the basis it was “concerned about the ties between certain Kaspersky officials and Russian intelligence and other government agencies”. It is too soon to say whether this is a pattern under the Trump administration, whose leader has repeatedly said China is ripping the US off, but then retreated from any action.
Whether the US would seek a quid pro quo – where Huawei might be allowed in if Google, Facebook and Twitter can sell their services (via advertising and social networks) inside China – is unclear.
The tenor of the actions, though, seems more protectionist than bid-opening. Ben Thompson, who runs the Stratechery technology analysis newsletter, thinks that the Chinese-American tensions are “the first salvo of what is likely to be one of the biggest stories in tech in 2018”.
Last week’s rejection by AT&T really matters to Huawei, because it could drastically curtail its future. It is already banned from selling its telecoms equipment in the US following a 2012 report from the US house intelligence committee (HIC), and had multiple takeovers blocked. But it had hoped to make up some ground in smartphones, which the 2012 report did not block.
Though it is the world’s third-biggest smartphone maker and the biggest in China, the world’s biggest market, growth there has slumped with saturation: everyone who wants one has one.
But the US, the world’s second-biggest market, was effectively untapped; selling through AT&T, the carrier that originally offered the iPhone in 2007, could have kickstarted a new era and fulfilled Huawei’s ambitions to overtake both Apple and Samsung. Instead, it reaffirmed that the old rules remain in place. Non-carrier sales in the US are less than 10% of the overall 170m a year total, which is part of the reason why Apple and Samsung have 70% of the market: they are sold by all the carriers.
The frustration for Huawei may be amplified by the success it has had in the UK. When British officials expressed concern about Huawei providing network equipment for BT, on the basis that it might contain “back doors” that would allow China to carry out remote spying, or even shut systems down, in November 2010 the company set up an office called “The Cell” with oversight from GCHQ where devices and software code could be examined in minute detail for any flaws. So far, that has salved concerns.
Meanwhile, itHuawei is the second-biggest smartphone supplier in a number of European countries, including Finland, Italy and Spain, where its lower-cost models are seen as better value than Samsung’s.
The company is not giving up, though. In a statement after the AT&T decision, Huawei said: “While the Huawei Mate 10 Pro will not be sold by US carriers, we remain committed to this market now and in the future. US customers need a better choice and, as a leader in technology and innovation, Huawei is prepared to fill this need.”
Yu addressed the topic directly at that frustrating Mate 10 launch. Standing in front of a slide reading “Something I Want to Share”, he told the audience that in six years the company had gone from nothing in terms of smartphone sales to No 3 globally, with more than 70 million customers. Yu has previously stated his ambition is to overtake Apple and Samsung to become No 1.
He will have to hope that the next six years will see Huawei overcome the political obstacles as it overcame technical obstacles. But five years on from the 2012 HIC report, it is clear they are not going away.