HUAWEI, A CHINESE a company emblematic of the breakdown of Sino-American relations, makes it a perfect business case study. Less than two years ago, the company, based in the booming southern city of Shenzhen, had not only overtaken Nokia and Ericsson, its Nordic rivals, to become the world’s leading supplier of telecommunications infrastructure. It had also overtaken Samsung to become the biggest seller of mobile phones. Like all good case studies, it has living characters, from its founder, Ren Zhengfei, a former army officer and engineer, to his daughter, Meng Wanzhou, who has just freed herself from a leading role in the first one. Technological Cold War prisoner exchange drama. . It is a revolutionary company. Like Sony of Japan in the 1980s, it helped change the perception of its home country from a cheap knockoff to an eye-catching innovation. And its very future may be in jeopardy. With the long arm of US law enforcement around his neck, he’s strangled by a lack of access to cutting-edge technology, such as 5g smartphone chips.
The question is, what should Huawei do next? Should we toughen US sanctions and hope, as Victor Zhang, its global vice-president, that its research and development activities (R&D), a whopping $ 21.8 billion last year, can it “fertilize” a new range of business activities that will redefine its future? Or should it rather quietly separate, dispersing an army of 105,000 engineers to sow a flurry of new business? In short, should there remain a large poppy or let a hundred small flowers bloom?
It’s a safe bet that Huawei will take the first option. After all, it is a company owned by its employees with fierce self-confidence. He has a corporate culture that never says anything; its vendors are notorious for drinking anyone under the table looking for a deal. He could become a national champion of President Xi Jinping’s mission to make the country more technologically self-sufficient. And the Beijing government would hate the idea that it was fading under pressure from Uncle Sam.
The hard approach is fraught with difficulties, however. Since the US government marked the Huawei 5g threatens national security in 2019, and a year later restricted the company’s access to chips made with American equipment, its smartphone business, which in 2020 generated more than half of revenue, has collapsed. Sales have grown from more than 60 million units in the last three months of 2019 to around 15 million units in the third quarter of 2021, according to Dan Wang of Gavekal Dragenomics, a research firm. In China, its latest phones lack 5g connectivity.
Although Huawei remains the world’s largest supplier of telecommunications equipment, its sales and market share are declining as U.S. allies ban it from their 5g networks and other customers are concerned about its long-term viability. Huawei nevertheless displays a courageous face. It is in its “second start-up phase,” in Mr. Zhang’s words. Each year, she pays at least a tenth of her income into R&D (in 2020 the share reached almost 16%). This, Zhang adds, will help create new grassroots businesses. It is expanding into areas ranging from making smarter cars and helping coal mines become semi-autonomous to infrastructure for cloud computing and power regulation in markets of energy. None of these opportunities depend on advanced semiconductors.
Promoting this startup culture internally can work. But the new efforts don’t generate anything like revenues from Huawei’s smartphone and network businesses. One analyst describes the coal company as “a dying business meets a dying industry.” A better and bolder path would be to adopt the Schumpetarian credo of “creative destruction”: to let the old company die so that new ones can emerge, dispersing capital, ideas and talents.
Silicon Valley sets a striking precedent. In 1957, the “eight traitors” left the Shockley Semiconductor Laboratory to found Fairchild Semiconductor. The ‘Fairchildren’ have become the backbone of the region’s high-tech and risk-taking culture, establishing Intel, a chip giant, and dozens of other companies, including venture capital veterans like Kleiner Perkins. Huawei engineers at HiSilicon, its chip design unit, could do something similar. This could further China’s growing ambitions in the chip industry, exemplified by the October 19 unveiling by tech giant Alibaba of a new, state-of-the-art server chip.
Huawei has no plans to spin off HiSilicon, Zhang said. The company’s tactical retirement from the smartphone industry illustrates what it can and cannot do. Last year, it sold Honor, a niche smartphone brand, to give it the freedom to evade US export controls. Honor’s new phones now have access to US chips and software and services from Google, a US tech giant, which Huawei still does not have. Despite the support of the Shenzhen government, which invites questions about Honor’s entrepreneurial spirit, the industry’s reaction to the divestiture has been “really positive” both inside and out. from China, reports Ben Stanton of Canalys, a telecommunications research firm. Plus, he believes, Huawei’s top smartphone engineers have moved on to Honor, keeping the old company’s engineering and sales culture alive.
Large poppy syndrome
Unsurprisingly, Honor has also drawn the attention of hawks in US foreign policy, including Marco Rubio, a Republican senator who on October 14 called him “an arm of the Chinese Communist Party” and a foreign policy threat. and urged President Joe Biden’s administration to blacklist him. It is a reminder of how difficult it will be for any company in Huawei’s shadow to shake off such accusations, whether they are true or not. Better that its engineers move freely instead. They are likely to be more creative within small groups than within a company – especially if what Wang calls “China’s Sputnik moment” spawns a national innovation explosion. . Huawei’s liberated brain boxes could then also teach America a lesson in how instinctive technonationalism can be counterproductive. ■
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This article appeared in the Business section of the print edition under the title “May a Hundred Flowers Bloom”