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Charting Huawei’s approach to innovation, growth, and the geopolitical divide on 5G
Most consumers today associate Huawei with its sleek, Leica camera-equipped smartphones, and the geopolitical controversy surrounding its 5G connectivity infrastructure.
From humble origins as a purveyor of phone switches during China’s ‘reforms and opening up’ period in the 1980s, Huawei has now become a global brand with one foot in consumer markets and the other driving growth across industries.
“Huawei, as most people are familiar with today from a consumer perspective, makes phones,” says Huawei Chief Digital Officer and Executive Consultant Michael MacDonald. “When I joined, that wasn’t really the case at all.”
Speaking with Jumpstart ahead of the Corporate Innovation Summit 2020, MacDonald, who’s a Huawei veteran of almost a decade, shared the story of the company’s technological evolution, and his vision for Huawei’s role as a leader, not a follower, in the global tech industry.
White-label manufacturer to technological heavyweight
The company, now a major manufacturer of smartphones and a brand name that is inextricably linked to the build-out of global 5G connectivity, once made its name in the electronics space by being a white-label phone developer for operators to market as their own. This gave Huawei an immediate advantage after choosing to develop its own phones, an advantage that is still paying off today.
According to Huawei’s 2019 annual report, the company’s consumer business made RMB 467.3 billion (around US$68.8 billion) in revenues in 2019, a 34% year-on-year increase and 54.4% of total revenues. The carrier business, Huawei’s old standard, made RMB 296.7 billion (US$43.7 billion), a 3.8% YoY increase.
In spite of the consumer arm doing most of the revenue generation, MacDonald emphasizes that Huawei’s value creation has been on the carrier side – building network infrastructure such as IP routing and switching equipment, and more importantly, the 4G and 5G systems that have caused international consternation.
5G, which offers revolutionary improvements in the latency – the speed of information transfer – of mobile Internet connections, promises to bring exponential advances in fields like Internet of Things (IoT), healthcare, and smart city technologies.
Chinese companies are close to dominating the 5G race, Huawei among them, but the company has met with setback after setback in terms of deploying 5G internationally, primarily linked to U.S. allegations that the company is installing ‘backdoors’ that would allow the Chinese state to use the technology for surveillance. Being subsequently added to the U.S. “Entity List” has also prevented Huawei from preinstalling Google services on its phones, thus affecting the company’s consumer-facing operations as well.
U.S. allegations of Chinese state surveillance have been repeatedly and categorically denied by Huawei. However, other international incidents, including the ongoing extradition to the U.S. of Huawei Vice-Chairwoman and CFO Meng Wanzhou, who was arrested in 2018 and indicted on charges of conspiracy, theft of trade secrets, and racketeering, have escalated the controversy surrounding the company.
For its part, Huawei and its Founder Ren Zhengfei have continued to insist that they have not built in any such backdoors that would allow for data leaks to the Chinese Communist Party. Ren, in a rare interview with international media, said that the company had never received and would ‘definitely’ deny any government requests for access to ‘improper information.’
MacDonald, meanwhile, commenting on the ongoing controversy around Huawei, believes that while there is likely to be some sort of revenue hit, the company’s innovation engine is likely to come out on top. Huawei’s R&D spending is one of the highest in the world, and growing at a pace that outstripped all but Amazon in 2018. This, along with the company’s agility and responsiveness to global tech trends, has set the company up to weather this storm.
“This could actually be a positive thing,” says MacDonald. “Clearly, there will be a little bit of a revenue hurdle that we’ll have to get around, but it will force us to be more independent, rely less on some of our American technology partners and unlock our own development capability.”
This in turn, he adds, will hopefully prevent Huawei from becoming similarly embroiled in political brouhaha in the future.
“If anything, it’s actually going to help stabilize our supply line, and make the company much more diverse as far as where our technologies go,” he says.
Though losing ground on the 5G contracts front to Western competitors Qualcomm, Nokia, and Ericsson, Huawei has continued to build out its infrastructure where possible, most recently engaging in a Thai project involving a THB 475 million investment into a 5G ecosystem innovation center.
And if a revenue hurdle is expected, it clearly has yet to land; in 2019, according to Huawei’s annual report, the company made US$8.9 billion in net profit.
In the day-to-day, MacDonald says, the company remains focused on its two main markets: carriers and businesses, and individual consumers.
Driving innovation for a large and diverse business
As a company that’s still primarily enterprise-facing, Huawei’s approach to driving innovation in carrier products is linked closely to standardization. According to MacDonald, the way carrier products are developed today is largely by way of creating blanket standards to apply across the industry. To that end, Huawei is involved in many major standards development organizations, including The 3rd Generation Partnership Project (3GPP).
Ultimately, he says, driving innovation in this space is relatively intuitive – relatively minor improvements like getting more bits into one hertz of bandwidth.
“I wouldn’t say carrier technology is making quantum leaps in terms of innovation,” he says. “Rather, the innovation is more about the application of the technology to new vertical markets.”
Carriers, MacDonald explains, no longer want to be seen simply as utilities. For them, 5G connectivity is an opportunity for them to be seen as more innovative, more comprehensive service providers.
“So, for example, instead of just selling a large-medium enterprise network connectivity, carriers can also sell cloud services and even specific applications based on the vertical,” MacDonald explains.
“If it’s retail, maybe there’s an opportunity for a point of sales and an inventory management system. If it’s healthcare, maybe we can use video conferencing and collaboration for doctors and patients and even AI for CT screening,” he adds.
In short, as a result of 5G, carriers are now willing and able to get a bigger piece of vertical industries beyond just connectivity. And subsequently, he says, Huawei has launched a number of products for vertical markets to support this shift in carriers’ business priorities.
The difference for internal company operations lies in the sales channel: Huawei’s carrier-focused arm works on positioning emerging technology solutions for carriers to sell to their customers, while the company’s enterprise group works to directly sell these products.
As perhaps expected, given the overlap involved between the carrier- and enterprise-facing business units, the challenge for Huawei lay in marketing these offerings separately, so as not to cannibalize its own business.
“What I was finding was one week, I’d be in a sales process with our carrier team. And then the next week, I’d be in a sales process with our enterprise team, into the same end customer, that was actually pitching against the other solution that we had previously pitched,” MacDonald says.
In part, this was because there was no senior engineer or CTO role at the time that offered perspective on applying the right Huawei solutions to the right segments. The first five years of MacDonald’s tenure at Huawei were spent positioning himself to take on this role, and become able to market across the various segments under Huawei’s umbrella.
“The idea of trying to normalize our solutions across the teams probably is not really practical,” he says. “Instead, what we try to do is identify it more from a business goals perspective. So, who is the ultimate shareholder?”
Answering this question isn’t always a cut-and-dry process, but this hasn’t stopped Huawei from delving into localized problems around the globe and developing targeted technological solutions that also offer value – both commercially, and to the end-user.
HarmonyOS and other sweeping projects
Part of Huawei’s sales discovery process is finding applications of its technology that can benefit several stakeholders at once, and offering clearer visibility on emerging technologies to its enterprise clients.
To this end, R&D teams have their fingers in multiple pies across highly-localized fields – for instance, providing real-time tracking devices for motorcycles to tackle the problem of motorbike theft in Thailand.
“Tracking motorcycles, for example, here in Thailand is something that’s quite successful because they’re an easy item to steal. Now a lot of motorcycles have an IoT sensor in them allowing both the owner and an insurance agent to track them,” says MacDonald.
He goes on to explain that this motorcycle tracker presents a three-sided benefit: the telecommunications operators earn service money through the tracking infrastructure, the end-user benefits from being able to monitor several metrics about their bike in real-time, and Huawei, of course, sells the devices.
“A big hang-up with a lot of technology use cases is that the solutions benefit the telcos and enterprises only. To get wide scale adoption, you need to also appeal to the end user. It has to be something that provides a real end-user benefit,” he adds.
This kind of holistic, end-to-end view of a product and its stakeholders is something MacDonald says that up-and-coming tech talents need to understand, and another thing that is likely to be enabled and made cost-effective by the build-out of 5G connectivity. Young developers, he says, need to be able to recognize the biggest upcoming technological shifts and up-skill accordingly to take advantage of them.
One of these upcoming big shifts is the HarmonyOS mobile operating system developed in the wake of losing access to Google apps. Announced in August 2020, HarmonyOS is open-source like Android to encourage adoption across all kinds of devices, even those of Huawei’s rivals.
“There’s a significant portion of the world’s handsets that are made in China,” MacDonald explains. “If you imagine that overnight for some legal reason, they could no longer use Google and they had to use a different operating system, it’s possible that two, three years from now, a large percentage of the phones in the world [could be] running a Huawei operating system.”
“I just want to reiterate that what we are trying to build is not a Huawei-only ecosystem; the intention is to build solutions that can be developed, supported and implemented by multiple parties,” he says.
With an escalating trade war, publicly-traded Chinese stocks threatened with delisting by a slew of new U.S. regulations, and rampant talk of ‘decoupling’ the two economies – thus completely reshuffling global supply chains and production lines – this vision for HarmonyOS as a viable challenger to the Android hegemony could become a reality sooner than expected.
Altogether, Huawei, like many other Chinese firms, is caught between two feuding giants. But the company’s technology, tried-and-tested approach to working with telco carriers, and bloated R&D budget are all factors that may allow this controversial company to define technological standards for the next generation, and into the unknown future beyond.
Header image courtesy of Huawei.