How the Huawei Fight Is Changing the Face of 5G

US sanctions targeting China's telecommunications giant Huawei Technologies have crippled the company, effectively forcing it out of the global smartphone market and now threatening its domestic phone business as well. They have also shrunk Huawei's market for fifth-generation wireless network infrastructure around the world.

Huawei chairman Eric Xu said last week that the company's smartphone revenue will drop by $30 to $40 billion in 2021 from the $136.7 billion reported last year, adding that there are no prospects for recovering that money in the next few years. Xu had said earlier that the company's goal now is to simply survive.

Xu's latest comments came as the US dropped its extradition battle over Meng Wanzhou, Huawei's chief financial officer and daughter of the company's founder, who had been trapped in Canada for three years. That led to the release two Canadian citizens who had been held hostage in China as a result. But it may also signal a de-escalation of the pressure Washington has brought to bear on the Chinese company now that Huawei is on its heels.

What's at stake is control of international 5G networks, which are expected to transform global communications.

Three years ago, Huawei was on the cusp of dominating the world's 5G infrastructure with equipment priced far below competitors. That alarmed the US, which equated Huawei's dominance with Chinese-control of global telecommunications—under a 2017 Chinese law all domestic companies are compelled to help the Chinese intelligence services on demand. Huawei has said it would not comply with such a request and believes that it cannot be legally forced to do so.

Washington embarked on an intense campaign to block Huawei, and Ms. Meng's arrest on fraud charges was widely seen as part of that campaign.

Huawei has long been regarded as a rogue player in the international telecoms market with deep ties to the Chinese Communist Party. It was founded in 1987 by a former People's Liberation Army officer and Party member and got its start reverse engineering telephone switching equipment from Hong Kong. By the mid-1990s, China was promoting it as a 'national champion' in the country's effort to build up industrial giants that could compete on the world stage.

In subsequent decades, the company was accused of stealing Western intellectual property, supplying sensitive telecoms equipment to North Korea and Iran, and expanding its global market share by undercutting Western telecom equipment prices by as much as a third. Huawei benefits from various Chinese government policies that act as subsidies to its operations.

“Huawei is slow in fixing their vulnerabilities. It's very difficult to tell the difference between sloppy programming and deliberate backdoors."
—Roger Entner, founder of Recon Analytics

Most explosively, Huawei is accused of installing backdoors in its software that could allow China to monitor data flowing through its international networks or even shut networks down in the event of a war. Huawei denies doing so, but as a result, the U.S. has pressured allies to exclude Huawei equipment from their 5G networks.

"Huawei is slow in fixing their vulnerabilities," said Roger Entner, founder of Recon Analytics, a telecommunications research company. "It's very difficult to tell the difference between sloppy programming and deliberate backdoors."

The global adoption of fast, high capacity 5G is expected to usher in a new era of smart devices, extending AI deep into the Internet of things, including autonomous vehicles. AI models in the cloud that are too large to reside on an edge device, such as a phone or security camera, will be able to receive and process data from those devices through the network in near real time. 5G devices, meanwhile, can connect directly to each other through radio networks forming an "edge cloud" of their own.

"Data is going to travel along that edge at the speed of light," said a former US official involved with the issue. With 5G, he said, "the edge is not distinct from the core" in the way that it has been for previous generations of wireless technology.

That's a problem for all governments connected to the network.

"If you can't trust the company that's providing you that infrastructure, even if you tried to push it out to the edge, you're still attaching it to the network," said Gilman Louie, a commissioner on the National Security Commission on AI and a former chief executive of the intelligence community's venture arm, In-Q-Tel, speaking on a podcast.

The National Security Agency, the CIA and other US intelligence agencies have determined that if Huawei equipment is embedded even at the edge of 5G networks, China could write in code, siphon data and cover their tracks minutes later by writing out that code. There would be no way to track it. As a result, the US banned American companies from using Huawei equipment, but it had trouble convincing allies to do the same.

Part of the problem was a lack of alternatives. Few companies could supply 5G network equipment for the middle band of the radio spectrum, between 3 gigahertz and 4 gigahertz—or between three billion and four billion electromagnetic waves per second. That frequency has greater reach and better penetration through solid objects than higher frequencies.

“If you can't trust the company that's providing you [with] infrastructure, even if you tried to push it out to the edge, you're still attaching it to the network."
—Gilman Louie, commissioner on the National Security Commission on AI

In most of the world, the frequencies between 3 GHz and 4 GHz, called mid-band, were not being used extensively, while in the US they were used by satellite communications providers and the military. This allowed Chinese manufacturers to build 5G equipment for their vast domestic use and export it internationally.

Huawei—like Ericsson, Nokia, and the rest of the big equipment vendors—highly customizes its networks for each operator. So once a country or company starts with Huawei, it's very difficult to change. To switch vendors, they have to rip out the entire network and start again, which is a very expensive proposition. This fact has allowed Huawei to expand its already formidable 4G market share into 5G, as it had many carriers already locked into the Huawei equipment universe.

In addition, Huawei benefitted from the economies of scale that came with a massive home market. As a result, many companies around the world began building 5G networks using Huawei equipment.

But holes found in Huawei's hardware and software could allow the company—or the Chinese government—access to the data of users on the network. A Huawei spokesperson, Glenn Schloss, says that its employees would only have access under strict supervision by the network operators, and that Huawei employee keystrokes are recorded for verification.

In 2018, a U.K. center set up to evaluate the Huawei's 5G technology reported that it could give "only limited assurance" that Huawei's infrastructure equipment didn't pose a threat to national security. The next year, the center found "critical, user-facing vulnerabilities" that it asked Huawei to fix. Last year, it reported that it had found a vulnerability "of national significance" and said Huawei had failed to instill confidence that such vulnerabilities would be addressed.

Also last year, a decade-old confidential report from Dutch telecommunications company KPN, leaked to the press, claimed that China could eavesdrop on the conversations of anyone using its Huawei-built network. Both KPN and Huawei deny that any data has been stolen, but the disclosure rattled the country. Huawei has since been blocked from 5G networks in the Netherlands.

Meanwhile, the US had put Huawei on a blacklist, forbidding US companies and citizens from doing business with the company, and in 2020 tightened those sanctions, barring vendors worldwide from using US technology to produce components for Huawei.

The U.K. had been resisting US pressure to remove Huawei from its networks, but the tightened sanctions were the final straw. The country banned new 5G equipment purchases from the company beginning this month and ordered that existing equipment be removed by 2027.

With the UK's ban, four of the countries in the Five Eyes intelligence-sharing network—Australia, New Zealand, the UK, and the US—have now formally blocked Huawei from 5G networks. The fifth member, Canada, has effectively done so, forcing its telecom companies there to seek other vendors. Other countries are following suit, though Huawei still has a stronghold in Africa and Southeast Asia.

The troubles quickly spread to Huawei's smartphone business. With US companies barred from doing business with Huawei, Google could no longer license its Android operating system—the operating system that runs most of the world's phones—to Huawei. So the U.S. search giant stopped Huawei from offering Google-run services, such as Gmail, YouTube and carrying Google's Android app store, Google Play.

As a result, Huawei, which was briefly the largest smartphone supplier in the world, has dropped out of the top five.

Worse for Huawei, the tightened sanctions cut Huawei off from TSMC, the Taiwanese semiconductor foundry, which manufactured Huawei's 5G chips. In the run-up to the April 1, 2020 ban—the US gave Huawei several months notice—the Chinese company furiously stockpiled 5G chips.

How many chips Huawei was able to collect has been a matter of debate, but a series of statements and actions by the company indicate that it is running out. It sold its low-end Honor phone business last year, and in July this year it released the P50 series without 5G capability—using instead 4G chips that the US has allowed Qualcomm to sell to the company. This month, Huawei released two more smartphones without 5G, the Nova 9 and Nova 9 Pro.

Meanwhile, the outlook for Huawei's fabless semiconductor company, HiSilicon, which designs and packages Huawei's 5G chips is increasingly dim. Without a manufacturing partner it cannot produce its flagship 5nm, 5G-enabled Kirin 9000.

Huawei has delayed the release of its high-end Mate 50 smartphones. They are supposed to be powered by the Kirin 9000.