Huawei, the crown jewel of China’s tech industry, is reeling from a financial one-two punch delivered by US chip sanctions and a campaign aimed at slashing international markets.
But with Huawei rapidly expanding into new markets and the Chinese government investing heavily to gain technological independence from the West, that leverage may not last long.
The US government has attacked Huawei for alleged espionage and ties to the state, claiming the company’s 5G wireless equipment poses a security risk. The rise of Chinese companies is seen by many in the West as linked to the power of the Chinese government and its kind of techno-authoritarianism.
Huawei’s latest financial report, released on Wednesday, shows the financial costs of the US campaign. Revenue growth slowed to 3.8 percent last year, from 19 percent in 2019; international sales fell sharply, especially in Europe.
The company’s smartphone sales have taken a big dent. Huawei was second in global shipments behind Samsung in 2019, but fell outside the top five smartphone makers by the end of 2020, according to research firm Canalys.
“The US has managed to stifle Huawei’s overall growth, but it’s doubtful that it will crush it as a global technology power,” said Peter Cowhey, dean of the School of Global Policy & Strategy at UC San Diego and a former American government. officially.
The US has banned Huawei network equipment from domestic 5G networks and has persuaded other countries, including the UK, Canada and Australia, to impose similar restrictions. Last year, the US also imposed export controls to cut off supplies of high-end chips to Huawei and advanced chip-making equipment to China, effectively crippling Huawei’s ability to make high-end smartphones.
“The supply constraints on our smartphone business have had a major impact on us and we have not been able to see a clear picture in the delivery of our smartphones,” said Ken Hu, a deputy chairman of Huawei, at a news conference at the company’s headquarters. in Shenzhen on Wednesday. “We think this is a very unfair situation for Huawei and it has caused us a lot of damage.”
Microchips are China’s Achilles heel, as it lacks the domestic capacity to create the nanoscale features found on the most advanced and powerful of these components. Chinese chip makers such as SMIC produce chips for cheaper products, including Internet-of-things devices.
The only companies capable of producing high-end chips today are located in Taiwan, South Korea, and the US. China has spent decades and billions building its chip-making capabilities, but the most advanced companies are still several generations behind.
Now the Chinese leaders are putting a renewed push. Beijing’s Made in China 2025 plan, announced in 2014, calls for China’s dominant position in chip-making by 2049. The country’s latest five-year plan, announced in March, calls for increased spending on research and development at 7 percent per year for the next five years, with a special focus on increasing technological independence in semiconductor manufacturing and other emerging technologies.
This week, the Chinese government also announced cuts in the import tax on raw materials for domestic companies producing high-end computer chips. This follows a wide range of tax breaks for semiconductor companies announced by the government in July 2020.
China has sufficient capital, raw materials and technical talent, and companies like Huawei, Alibaba and Baidu are able to design advanced chips. But China also lacks expertise specific to advanced chip manufacturing, as well as the highly specialized equipment needed to make the latest chips.
A report released in January by the Brookings Institution think tank concludes that China’s increasingly vibrant domestic chip industry is likely to grow at a faster pace as a result of sanctions and the increased decoupling of the US and China.
Another report, published in September 2020 by the Eurasia Group, a consultancy, suggests that the pressures China faces in making chips will encourage Chinese companies to explore new chip architectures.
Cowhey, who studies the intersection of telecommunications and governance, says Huawei’s size and scope help it break into new areas.
“Network equipment [sales] have come to a significant standstill, and it is true that the mobile phone division is in trouble,” he says. “But the growth of laptops, smartwatches and other things really speaks to the continued strength of the Internet of Things.”
An important question for policymakers in the US and other countries is how to most effectively counter the threat from Chinese technology and influence and challenge the country on important issues such as human rights.
This story originally appeared on wired.com.