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Huawei and China-US tensions: Where do we go from here?

China's tech champion has been caught up in escalating political tensions, but it's determined to maintain and even boost its success on the international stage.

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This story is part of Generation China, CNET's series exploring the nation's technological ambition.

Until a couple of years ago, if you'd heard of Huawei -- and that's a big if, depending on where you live -- you probably knew it only as a maker of phones, an upstart rival to reigning phone giants Apple and Samsung. But lately Huawei has been making headlines for different reasons altogether.

Concerns that have been around for over a decade about the company's links to China's ruling Communist Party have meant it's become embroiled in the escalating trade war between the US and China. As well as selling phones, it's also a key supplier of telecommunications equipment to our cellular and broadband networks, but it's now finding its ability to do business with US companies, citizens and allies increasingly constrained.

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This is part of a CNET series looking at the technological ambitions of China. 

First, in 2018, came the demise in partnerships with carriers and retailers all but eliminating the sale of Huawei phones. That was followed by an executive order in May 2019 that prevented the company from offering Google services -- including the Google Play app store on its phones -- a ban on 5G equipment and sanctions forbidding it from using US chip technology.

Last week, the UK followed in the footsteps of the US in banning Huawei from playing any part in its 5G networks. It's the latest blow to the publicly owned tech company, which in the minds of many Western lawmakers and officials is an extension of the state. Japan and Australia have banned the company's equipment as well.

The actions against Huawei have ramped up under Donald Trump's presidency, but are part of broader questions surrounding Huawei for more than a decade. The concern is that the Chinese government will exploit Huawei to gain access to Western telecom networks, either to eavesdrop or to commit other nefarious acts. The intelligence communities in the US and abroad have testified publicly about this risk, although there's no evidence that any equipment sold to Western countries has been tampered with.

The company takes an entirely different view of itself and the situation in which it's tangled. In striving for a global brand, Huawei doesn't want you to see it as a Chinese company. It's spent the last decade trying to prove itself and establish its reputation on the international stage.

Now it's at a key juncture in its relationships with countries outside of China.

Origins and expansion into Europe

Huawei was founded by Ren Zhengfei, a former technologist in the People's Liberation Army, who worked his way up in the army, left in 1983 to become a tech entrepreneur and still acts as the company's CEO.

In its very earliest days, the company built telephone switches reverse-engineered from Western designs, but quickly switched its focus to developing novel technology. Huawei has held a reputation for its emphasis on R&D to this day, and last year alone it reinvested $18 billion, over 15% of its annual revenue, into R&D projects.

Huawei CEO Ren Zhengfei

Huawei's CEO and founder, Ren Zhengfei.

Qilai Shen/Bloomberg via Getty Images

When it comes to the mobile market, Huawei has achieved what every mobile company hopes to -- breaking into the top five of smartphone manufacturers globally. In fact, it's gone further and broken into the top two, and at times has held the top spot. It hasn't done this by succeeding in China alone, but crucially, and unlike Samsung and Apple, it has done so without selling phones in the US.

Instead, it has focused its attention on Europe. In an interview with CNET, Huawei's UK managing director, Anson Zhang, acknowledged that growing the brand so that its product would be well received among Europeans has been a "big" and "difficult" task. The real shift, he said, came around the middle of this decade, when he noticed a large increase in the marketing budget allocated to reaching consumers across the continent.

It's no coincidence that the company's P series and Mate series flagship phone launches have all happened in Europe. 

"Huawei's success has been based on the fact that they've made a sustained long-term investment, which is not just coming into a market and just rocking out with a big checkbook and trying to secure some share," said CCS Insight analyst Ben Wood. "They invested billions of dollars over a decade and built a brand to invest in delivering fantastic products."

The investment wasn't just in marketing. The company has adapted its products to meet the needs of the European market, said Andrew Garrihy, Huawei's global brand officer, who added that the research from Europe informs the Chinese company's global offering.

 "It's kind of the perfect mix of East and West," said Garrihy in an interview.

Trade wars and security risks

Huawei has long been viewed with suspicion by the US. In 2012, the House Intelligence Committee urged businesses against buying equipment from Huawei. A year later, Sprint, under pressure from regulators, nixed a deal to work with the Chinese company. 

But President Trump has raised the antagonism to a new level, resulting in sanctions barring Huawei from buying US equipment.

Huawei, meanwhile, believes it has been swept up in a trade war designed to prevent Chinese companies from succeeding in the global marketplace. In a statement following the most recent round of US sanctions, the company said Washington's "pernicious" and "arbitrary" rules threatened to undermine the global semiconductor industry and undermine trust in international companies.

"This is not about security, this is about trade," said Huawei's UK communications director, Ed Brewster, speaking on the BBC's flagship current affairs show Newsnight last week after the country announced its 5G ban. "This is a US campaign focused on attacking our business and attacking our technology, and that's because the US is behind in terms of the technology."

Huawei is one of the leaders in 5G equipment (it has over 3,000 patent applications for the technology), with many countries around the world likely to choose it to accelerate them into the next phase of the digital age. According to Brewster, the current actions by the US amount to a "coordinated campaign of attack," designed to lock Huawei, and China with it, out of the global technology supply chain.

Indeed, the US is still assessing the ramifications on its ability to keep pace with things like 5G technologies. Huawei's domination in this area of tech took the country by surprise when it realized how widespread the company's gains were, said Adam Segal, an expert on technology and national security at the Council on Foreign Relations. "They really hadn't thought very long and hard about what that might mean for US competitiveness and US security."

But critics say there's a trust issue that countries can't ignore. There are incidents like one that happened in 2013, when two Huawei employees tried to steal a robot arm from a T-Mobile testing lab, that serve as self-inflicted wounds. Or the continued detainment in Canada of Meng Wanzhou, chief financial officer of Huawei and the daughter of Ren, over allegations of Iran sanction violations. 

"They are clearly not a completely trusted partner, which poses a security risk," said Segal. "It makes sense to limit the role of the company in core networks, if not exclude them from most networks."

These concerns are not new -- Huawei has long been considered a high-risk vendor. In the UK, where it has been selling equipment for over 10 years, it has been subject to extra checks and scrutiny for this very reason.

No evidence that Huawei kit might be used for surveillance has ever been found, although UK intelligence agency GCHQ has complained that the company has been slow to patch flaws. "For a decade, the UK security services have been taking apart Huawei kit with a screwdriver and found nothing other than some sloppy coding," said Matthew Howett from Assembly Research. 

A credible threat?

The security threat posed by Huawei is largely hypothetical. It hinges on a mechanism in Chinese law that obliges all companies to comply with all requests from the Chinese government to assist in intelligence gathering.

"It's not something that's unique to Huawei. It's company law in China," said Howett. He believes that's being used as a "carte blanche" excuse for countries not to work with the company.

The US sanctions against Huawei 14 months ago, under which the company is no longer allowed to use US technology, have heightened the perception of risk, according to officials and lawmakers. The sanctions were presented as the deciding factor for the UK when it announced last week it would be going ahead with its own ban.

"The UK can no longer be confident it will be able to guarantee the security of future Huawei 5G equipment affected by the change in the US foreign direct product rules," said Oliver Dowden, the country's digital minister.

To manage this risk, the government has now issued new advice on the use of Huawei in UK telecoms networks -- banning the purchase of all kit after the end of this year, and ordering all existing Huawei equipment be ripped out by 2027.

That puts Huawei in a bind, because there's no easy way to defend itself over something that hasn't yet happened, and might not ever happen. The added uncertainty over the sanctions make it harder still. "They're part of a game where there are no clear rules," said Howett. "There are new tactics being deployed every other week."

"The real issue in the end comes down to: Can you trust the provider, and what is the relationship with the government?" said Segal. "That Huawei has never adequately addressed. And the context has changed dramatically under [Chinese President] Xi Jinping and the National Intelligence law in particular."

Huawei's Ren has vehemently and consistently defended his company against the allegations leveled against it, as well as denying that any risk exists. After long shying away from speaking publicly and to the press, he's become more vocal in recent years. In an interview last year with the BBC he even said that Xi's administration has made it safer for him to speak his mind, whereas in the past it would have been "dangerous" for him to do so.

"The Chinese government has clearly said that it won't ask companies to install backdoors," he told the publication.

"Huawei will not do it either. Our sales revenues are now hundreds of billions of dollars. We are not going to risk the disgust of our country and our customers all over the world because of something like that. We will lose all our business. I'm not going to take that risk."

Reputation in crisis

Ren is unsurprisingly protective of the company he has built from scratch -- a company he sees not just as Chinese success story, but as a global one. Within China, the company is a subject of much national pride as a homegrown business making it in the international marketplace.

Zhang estimates that 60% to 70% of Huawei's revenue comes from customers outside of China. It's been the mission of the company from its earliest days to be an international business, he said. "That is the structure we settled on a long, long time ago."

But according to Segal, viewing Huawei as a global company instead of a Chinese company is "no longer possible."

Lack of trust in Huawei's security has been compounded by the deteriorating relationship between the rest of the world and China in relation to COVID-19, the unrest and the recent introduction of a new national security law in Hong Kong and Beijing's treatment of China's Uighur Muslim population, added Howett.

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Huawei's image hasn't just taken a knock in the US, but also in Europe, says Adam Segal, an expert on technology and national security at the Council on Foreign Relations. 

Omar Marques/SOPA Images/LightRocket via Getty Images

Here lies the crux of the company's problem: For many, Huawei is totally indivisible from China itself. Huawei isn't a nation-state, never mind a hostile nation -- it is an employee-owned company. But often when politicians are talking about Huawei, they will refer to it interchangeably with the word "China."

Whether you view the company as a reluctant pawn in the standoff between the US and China, or as an extension of the Chinese state, it's undeniable that the company is fully in the eye of the storm. "Huawei's reputation and brand image has certainly been negatively affected by its association with China," said Quing Wang, professor of marketing and innovation at Warwick University, over email.

Huawei did itself no favors, said Segal, when company representatives at the House Intelligence Committee hearings in 2012 said things that were easily disprovable. It should have been honest and more transparent about the exact nature of its relationship with the government, he said -- there was no need to obfuscate over the fact that it received government subsidies and had early links to the Chinese military.

"[These factors are] just true of telecoms everywhere around the world," he said. "But the Chinese either denied it or distorted it, and so it just makes it harder to in the end assume that they're going to be a trusted party."

Huawei's image hasn't just taken a knock in the US, but also in Europe, said Segal. The growing mistrust of China has "started to turn the tide for Huawei in a lot of the European markets where, a year ago, I would have been pretty confident that they would continue expanding," he said.

Howett believes Huawei could have done a better job of distancing itself from the Chinese government. 

Last week on Newsnight, Huawei's UK nonexecutive director Andrew Cahn defended Huawei while openly agreed that Western countries had to be cautious about dealing with China. But the following day on the same program, Brewster refused to be drawn on whether the company condemned China's actions in Hong Kong or against its Muslim population.

Howett praised Cahn's relative openness, but noted: "It's maybe coming a little bit too late in the game."

Huawei's future

You might assume that with Huawei's reputation taking a bashing that its finances might have followed suit. But that doesn't appear to be the case, according to the company's financial results for the first half of 2020.

"They've had an extremely good last few months, considering the pressure that they're under," said Wood. "They're doing extremely well in other markets -- in their home market, they're pretty much obliterating every other Chinese manufacturer."

Home market advantage is one thing, but the company will still need to deal with whether other countries will follow the US, the UK, Japan and Australia in banning Huawei equipment. Then there's the upcoming US presidential election, which could result in a shift in the country's China strategy, as well as impacting attitudes. 

Huawei said last weekend it was told by UK government officials that the country's 5G decision was largely geopolitical, and it hopes the decision may be reversed if Trump fails to win a second term.

Huawei would also love the opportunity to come back to the US, said Garrihy, the global brand officer. "Until that takes place, we'll continue to serve our consumers in Europe. And we'll continue to help people understand Huawei one consumer at a time."

But even if there is a shakeup in the White House in November, that won't necessarily mean an end to Huawei's woes. "It's probably going to be a prolonged period of this," said Howett. "China's role on the world stage is rightly under scrutiny."

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The company may need to work out whether it's possible to distance itself politically from its home nation, he added. "It's going to take something structural to put to bed this issue of being a part of the Chinese Communist Party."

Huawei isn't the only company stigmatized for its association with China. Many suspect TikTok is next in line for a bumpy ride -- rumors circulated online earlier this month that the social app was about to be banned in the US. But although security experts in the US are worried about TikTok, said Segal, they aren't clear on exactly what the security risks are. There have been concerns that TikTok might be sending US user data back to China, but there's no proof of this, and the data is stored on servers outside of China.

Keeping the customers happy

On the consumer side of the business, there are more glimmers of hope, especially in restoring the harm done by preventing Huawei from using Google services and instead using its own operating system, called Harmony OS, and its AppGallery. "It's clear that Huawei is making a lot more progress than people have realized on building out the collection of apps that people actually want," said Wood. "There's no shortage of ambition or investment." 

It's no easy feat building out an app ecosystem -- Microsoft and BlackBerry both ultimately failed to reach the same critical mass as Google and Apple. But Huawei has beaten the odds before when it comes to catching up with the top two players in the mobile market.

"There is no doubt that our situation is creating challenges for us -- challenges we'd rather not have," said Garrihy. "We would love to continue working with Google, we've been great partners with Google for many years. Unfortunately, that's not a decision we can make."

It's working to burnish its reputation for offering world-leading consumer electronics -- which could be Huawei's best bet for riding out this storm. It has long been able to rely on the quality of its flagship phones to do the talking. (Take, for example, last year's P30 Pro, which we said in our review had the "absolute best camera on any phone.")

"Had Huawei not got caught up in this whole global trade standoff between China and the US, they would be giving Samsung a hell of a rough ride at the moment," said Wood. He also sees Huawei's vision focused firmly on the future -- not just the immediate future, but much farther down the road, where the company's ambitions stretch well beyond 5G into AI and a world of ambient computing and connected products.

"They take a long-term view, they don't go from like quarter to quarter -- they'll be saying, we are building a new platform for the next three to five years, not for next quarter," said Wood. "A lot of the companies who feel they can fill Huawei shoes haven't really understood the scale of the investment that they need to make with regards to building a brand like Huawei. It's gonna be a long time before we see a company that has the kind of the impact Huawei does."