Huawei’s sanctions-beating strategy
The firm has parried America's punches and just doubled profits. How'd it do it?
Welcome to a/symmetric, published by Force Distance Times. Each week, we bring you news and analysis on the global industrial contest, where production is power and competition is (often) asymmetric. To receive issues over email, subscribe here.
This week:
Huawei’s sanctions-beating strategy: Washington boasted that it had “dealt a direct blow” to the firm. Instead, Huawei parried America’s punches and just reported its biggest-ever jump in profits. How’d it do it?
Weekly Links Round-Up: retrofitting ships, port security concerns in Poland, and the US and EU eye Chinese legacy chips. Plus: how to fix the construction industry.
Huawei’s sanctions-beating strategy
“The rise of…Huawei is a disaster for the multinationals.”
So wrote The Economist in…1998.
Whether the magazine’s prognostication of ruin has come to bear is debatable. What’s certain is this: Huawei has continued its rise, in spite of US efforts to sanction it out of existence.
Last week, Huawei’s announced that its profits more than doubled in 2023—the biggest such jump since it started reporting comparable figures in 2006. Its cloud computing business grew 22%; its intelligent automotive solutions unit (which we recently wrote about) expanded 128%. The results capped off a remarkable year in which Huawei shocked the US with the launch of its Mate 60 phone powered by a cutting-edge Chinese-made chip.
This is far from a company vanquished. How did Huawei manage to pull off this business coup while being heavily sanctioned?
Spotty, surface-level sanctions
One reason for Huawei’s survival is the fact that while US sanctions targeted surface-level threats, they left largely untouched the deeper industrial ecosystem that Huawei relies on and collaborates with.
Take Quectel, a leading Chinese manufacturer of wireless IoT communication modules and a longtime strategic partner of Huawei. The two have worked closely together to develop IoT modules based on chips from HiSilicon, Huawei’s chip unit. Yet Quectel has remained unsanctioned. It wasn’t until this January that US lawmakers called for the firm to be blacklisted—five years after the Chinese government explicitly designated it as a national champion to be supported in its bid to seize global market share.
Then there are all the exemptions that allowed US technology to continue flowing to Huawei, even after it was placed on Washington’s entity list in May 2019.
To name a few: both Intel and Qualcomm were allowed to continue selling vast quantities of chips to Huawei, and today Qualcomm continues to power as much as 80% of Huawei phones. And as of last year, Huawei still relies on US semiconductor firms including Texas Instruments, Broadcom, Xilinx, Onsemi, and Analog Devices for its macro base stations.1
An early lesson in technology chokeholds
Huawei got an early taste of a technology blockade in 2012, when Samsung reportedly crimped supplies of OLED smartphone screens to the company. Huawei resolved to never let that happen again.
That year, Huawei had launched its Ascend P1 phone to robust demand. But within months, the phone was nowhere to be found on shelves. People flocked to online forums: had the phone been sold out? Had production ceased?
Yuan Jiandong, a former 13-year veteran of Huawei who oversaw supply chain operations, writes in his book Huawei Supply Chain Management Practice,2 published last year:
“Why did Huawei P1 suddenly fail? Many people in the industry believe that at that time, Samsung thought Huawei P1 threatened its own product Samsung S2 and the upcoming S3, so it restricted the supply of Huawei P1 Super AMOLED screens, resulting in no screen being available for Huawei P1, which had to be discontinued.”
Four years later, in 2016, Huawei reportedly faced another supply crunch when Samsung limited sales of its screens for Huawei’s Mate 9 Pro. Yuan writes:
“Not long after [the Mate 9 Pro’s] launch, its development momentum was blocked by Samsung's ruthless supply chain in market competition...Since then, Huawei…has made great efforts to transform and upgrade its supply chain…After experiencing the bottleneck of Huawei Mate 9 Pro, Huawei decided to break through Samsung's restrictions and not be restricted by others.”
These two episodes likely strengthened Huawei’s years long resolve to ensure it has what it dubs a “spare tire:” key materials and components developed in-house that it could turn to if partners cut off supplies.
This Plan B effort dates back to at least 2001, when Huawei founder Ren Zhengfei gave an internal speech urging everyone to prepare for a day when “the company's sales declines, profits decline, or even go bankrupt.” And when Huawei set up its semiconductor subsidiary HiSilicon in 2004, it did so with an eye to preparing for the possibility that “one day, all advanced chips and technologies from the US would be unavailable.”
Betting big on domestic semiconductor capacity
As Huawei directed billions towards R&D, it has also invested heavily in homegrown semiconductor players. In 2019, it established the fund Hubble Technology Investment Co., Ltd. with a clear mandate: reduce China’s dependence on the US.
“Hubble Technology Investment was specially established in the context of Huawei being sanctioned by the US,” then-rotating Huawei CEO Guo Ping said in 2020.
Since its launch, Hubble has invested in nearly 90 companies. The bulk of its investments have been in semiconductors. In particular, it has placed bets on companies in Wuhan’s Optics Valley—which also happens to be the site of a key Huawei research and production hub.
Huawei’s Optics Valley bets have included Wuhan Yusheng Optoelectronics, which makes optical devices and optical chip processing technology; Wuhan Huaray Precision Laser, whose lasers products can be used to cut silicon wafers for chips; and Wuhan Changjin Photonics Technology, which offers laser cutting solutions.
As a recent analysis put it: “The fact that it is Huawei leading China’s chip charge underscores the degree to which US strategy is missing the mark.”
A single “direct blow” isn’t enough
In 2020, then-secretary of state Mike Pompeo declared that the US had “dealt a direct blow to Huawei” with further restrictions on the company.
Yet Washington’s static one-and-done approach to sanctions has allowed Huawei to blunt the sanctions’ impact by updating its strategy. It did so by doubling down on R&D; investing in domestic chip firms; and concentrating on new revenue drivers like automotive solutions, cloud computing, and AI computing centers.3
“Huawei believes that transformation is not a one-time occurrence but a routinized project,” write the authors of the 2020 book, The Management Transformation of Huawei. The company has proven very capable of iteratively transforming itself under the pressure of sanctions.
For the US, the challenge lies in updating its own strategy to keep up with a quickly evolving competitive landscape. In the case of Huawei’s comeback, at least, it seems like China is moving faster.
Weekly Links Round-Up
🖇️ The US Coast Guard turns to vintage ships. It has deployed a retrofitted, 40-year-old vessel to the Pacific to shore up America’s presence as it competes with China in the region. The reliance on these older ships amid shipbuilding delays, which are also afflicting the Navy. (WSJ, Defense News)
🖇️ Polish port security. A Hong Kong-based company operates a key container terminal in Poland’s Gdynia port, raising national security concerns. The company, Hutchison Port Holdings, reportedly refused to facilitate the unloading of US military equipment last summer when the ship’s bow protruded into Hutchison’s zone. (Politico)
🖇️ The US and EU eye Chinese legacy chips. Washington and Brussels are considering joint measures to address what they say are distortionary and non-market practices that are driving Chinese dominance in mature node semiconductors. “For consumers, the importance of legacy technologies outweighs that of advanced chips like AI," says market research firm TrendForce analyst Joanne Chiao. (Deutsche Welle)
🖇️ Construction projects are often over-budget and over-run. The problem, argues Todd R. Zabelle in his book Built to Fail, is that the industry focuses too much on project management to the detriment of operations management. (Force Distance Times)
The linked source, Caijing Eleven, was first cited in this February 2024 paper by Hosuk Lee-Makiyama and Robin Baker of the European Centre for International Political Economy.
袁建东. 《华为供应链管理实践》(人民邮电出版社, 2023)
The bulk of China’s government-led AI computing centers, for example, is currently powered by Huawei’s Ascend AI chips, according to tallies by Chinese brokerages.
Really interesting read 👍