Huawei sanctions – truth and consequences, Part 1
June 6 2019
by Eric Hanselman, Brian Partridge, John Abbott, William Fellows
The global technology market is scrambling to understand and act on the latest volley in escalating trade hostilities between the United States and China. The most recent action escalates beyond tariffs and recommendations with an explicit ban of trade with one of China's largest technology companies, Huawei. There is significant confusion about the nature, goals and impacts of the cumulative sanctions, and we will explore the various truths and their consequences around the globe. This first of a two-part series will look into the market and the nature of the sanctions directed at Huawei.
The 451 Take
While there is active debate about the claims that the US administration is making about the risks presented by Huawei's products, the sanctions that have been put in place have quite real impacts that are cascading across the global IT landscape. Its addition to the Bureau of Industry and Security (BIS) Entity List has partners, providers and even academics pulling back in their relationships. Concerns are also damaging stock performance across the technology market, in anticipation of the impact of lost sales. It's a market with complex interconnections, woven together in ways that aren't always intuitive. Understanding what happens when parts of that fabric are torn requires a deeper understanding of the forces at play. There will be long-term effects that are difficult to accurately identify today.
To gain a deeper understanding, it's worth digging into some of the background on Huawei and the markets in which it operates. Huawei is the world's leading telecom equipment supplier by revenue, the world's second-largest smartphone provider measured by handsets sold, and at least the third- or fourth-largest supplier in IT product categories such as storage, servers and enterprise networking gear. In telecommunications, it competes with the likes of Ericsson, Nokia and startups like Altiostar. Huawei is a large consumer of technology, being a licensee of the Android operating system for its phones, a buyer of Intel and AMD processors for its servers, and an Arm licensee for the processors in its phones and telephony equipment. It offers cloud services to support telecom operations and has significant internal capacity that hosts supporting systems and software for its handset business. It also operates a network of subsea cables for both its internal use and commercial offerings.
The US government has been expressing concern about Huawei's role in telecommunications for a number of years. While concerns about 5G network infrastructure have been grabbing the headlines, Huawei plays a major role in supplying existing 3G/4G technology around the globe, including networks in the US, although only in smaller providers. Congressional inquiries were underway in 2012, and have continued sporadically since, but have all been along similar lines, with a concern that Huawei could act under the direction of the Chinese government to either intercept communications, attack critical infrastructure or shut down portions of the national telecommunications network. The Chinese state government in 2017 passed the National Intelligence Law, stating that all state institutions and individuals are legally compelled to comply with support for intelligence operations (espionage) at the request of China's intelligence agencies. The UK and Australia have both enacted laws that require technology providers to provide access to systems and data to aid intelligence services without notice to users. The UK's Investigatory Powers Act of 2016 is under legal challenges that have not been resolved. Australia's Assistance and Access Act was passed in December 2018.
Huawei has come under scrutiny for the theft of intellectual property and export control violations, and this has been conflated with security issues in some of the arguments about its intent. In 2004, Huawei settled a Cisco lawsuit in which a neutral expert identified that Huawei had copied router software. Senior Huawei officials are accused of selling equipment to Iran via affiliates, which runs afoul of international sanctions originally imposed on Iran in 2012. The CFO of Huawei, Meng Wanzhou (who is the daughter of founder Ren Zhengfei) is currently held on related charges in Canada, with extradition requests to the United States pending.
In an effort to strengthen the impact of its concerns, the US administration has been asking various nations to limit or block the use of Huawei equipment, with varying levels of success. In 2018 Australia banned Huawei equipment from both national broadband networks and 5G projects. Germany and the United Kingdom have decided to allow Huawei gear as part of their 5G efforts. Huawei had taken the additional step of creating a secure lab in which Britain's GCHQ security arm could evaluate its software. An extended study revealed poor coding practices, but no explicit spying or control mechanisms. The German assessment identified that protective measures within their networks could mitigate any risk that the Huawei equipment presented.
What's been done?
The recent action by the US government has been the most dramatic to date – adding Huawei and many international subsidiaries to the Department of Commerce BIS Entity list. This action, accomplished through a national emergency executive order, prevents the export of goods and technology without a license from the BIS. The BIS has created a temporary general license that allows trade until August 19. The executive order cites 'activities that are contrary to the national security or foreign policy interests of the United States' as its basis. Another Chinese telecommunications provider, ZTE, was added to the list in 2016, but enforcement was similarly suspended, and it was removed from the list in 2017 after paying a $1.19bn penalty. Importantly, the order also applies to foreign companies that incorporate substantial intellectual property originating from the United States.
The order has caused Huawei's partners and suppliers to scramble to determine the impact on their businesses. Google, Microsoft, Arm, Intel, Qualcomm, Broadcom and others have indicated that they will comply with the order. The nature of that compliance varies for each of them. Google has said that it will discontinue Huawei's Android license, but will continue to support existing phones with its Play app store. The Play store and other Google services have not been available to Huawei phone users in China, but do serve customers internationally. The UK's EE network operator has decided not to offer Huawei phones in its upcoming 5G service offering. Vodafone appears to be considering a similar move.
Microsoft hasn't made a formal announcement, but Huawei products no longer appear in listings of equipment for its Azure Stack on-premises cloud offering, and Huawei laptops are no longer available in Microsoft's online store.
In an internal memo to staff, Arm cited 'US origin technologies' within its licensable processor core IP as its reason for complying with the US Commerce Department's order that US companies cease to supply products to Huawei. This was a surprise, not least because Arm had for many years sold itself to international OEMs as a safe alternative to US technologies that might in the future be subject to export restrictions. However, a quick look at Arm's acquisition strategy over the past two decades shows how US technologies were added to its offerings, including Palmchip in 1997, Artisan in 2004 and many smaller buys since. Over that time, the Cambridge, UK-based company (now owned by Japanese SoftBank) has established sizable operations in Austin, Texas, and in Silicon Valley, where licensing negotiations are carried out.
It's being reported that Huawei is selling a controlling stake in its subsea cable venture, Huawei Marine Systems Company, to Hengtong Optic-Electric Company, part of the Hengtong Group, based in Suzhou, China. The speculation is that this action may be in response to US requests. Huawei Marine has built cable systems across Asia, Africa, the Caribbean and the Mediterranean.
What's the risk?
A block on trade of this severity carries as many risks to the technology market as it aims to mitigate in security. The potential for information interception in any technology provider is quite real. As part of the information revealed through the Edward Snowden disclosures, it was shown that the NSA's Tailored Access Operations arm diverted equipment from Cisco and Dell bound for international destinations in order to insert monitoring capabilities. The accusations against Huawei claim that similar activities could be taking place through the manufacturer. There are claims that risks like these could be mitigated, as the German government assessment believes, but there are significant challenges to doing this successfully while still keeping operational complexity at a manageable level for service providers and network operators.
The risk to technology markets is that the disruption it causes may not have near-term fixes. This is already impacting stock prices, and could deal a body blow to companies that may not have alternatives. Part two of this spotlight will look into the potential consequences of these actions and how the technology world could find a way forward.