Huawei, Patent King, Preps for Long Trade Battle

Chinese technology giant Huawei Technologies Co., after being blacklisted by Washington in May, is reportedly calling for Verizon Communications Inc. (VZ) to pay over $1 billion in licensing fees for its patents, according to a recent letter sent by the company reported on by The Wall Street Journal.

Huawei has remained at the center of the U.S.-China trade war. President Trump has used the Asian conglomerate as a bargaining chip in the volatility-inducing trade war. Earlier this year, Trump banned domestic firms from buying equipment from “companies posing a national security threat,” including gear from Huawei, which has been criticized for its ties to the communist government in Beijing.

Chinese Smartphone Maker Demands Licensing Fees

Now, the trade war has dragged in Verizon, as Huawei accuses the New York City-based communications provider of violating 238 of its patents, according to anonymous sources close to the matter speaking with The New York Times. Huawei, which overtook Apple Inc. (AAPL) as the world's no. 2 smartphone maker last year, has 56,492 active patents worldwide, according to the research firm AcclaimIP. They cover telecom, networking and other high-tech areas. Last year alone, Huawei received 1,680 U.S. patents.

Huawei’s letter to Verizon was followed by several emails, phone calls, and a recent meeting in New York, per the NYT. The two people familiar with the matter indicated that Huawei’s claims are a way for the company to generate revenue from American companies after years of being shut out of the key U.S. market.

Huawei Expectations Lower on Trump Ban

Outside of the U.S., Huawei has seen its leadership position in the smartphone market soar, with it now selling to 170 nations. Trump’s latest executive order, which bans U.S. firms from doing business with the company, will weigh on Huawei significantly as it is no longer able to buy crucial software and hardware from American companies. This includes software from Alphabet Inc. (GOOGL), posing a major issue for Huawei’s smartphones, which rely on the Android operating system and require regular software updates for apps like Google Maps and Gmail. 

The ban is likely to result in 40 million to 60 million fewer international smartphone shipments for Huawei in 2019, according to Bloomberg. The world’s largest supplier of networking equipment is also weighing the option of pulling the latest model of its marquee overseas label, the Honor 20, according to people close to the matter. The decision will rely on how well the device sells as it hits the European market, where it is already experiencing weakness in France.

Huawei founder Ren Zhengfei has confirmed that smartphone shipments outside of China have fallen a whopping 40% over the past month. He added that the company foresees overall revenue to decrease by roughly $30 billion in two years, thanks to Trump’s latest sanctions.

Broader Geopolitical Implications

Verizon spokesperson Richard Young noted that while the company would not comment on the letter, “these issues are larger than just Verizon… Given the broader geopolitical context, any issue involving Huawei has implications for our entire industry and also raise national and international concerns.”

Huawei is suing the federal government, arguing that the ban is based on an unfair and incorrect claim that the company poses a security threat. Beijing has indicated that tech giants like Microsoft Corp. (MSFT) and Dell will face retribution if they follow Trump’s new order.

Looking Ahead

Drastically lower estimates for global iPhone shipments from Huawei demonstrate just how crippling Trump’s trade war may be for the networking behemoth, which is a symbol of Beijing’s growing technology prowess. Despite Huawei’s continued statements denying any involvement in Chinese espionage, the Trump administration’s history of action suggests the war against the Asian tech giant is unlikely to come to a halt any time soon.

In order to hedge against Washington’s offensive battle and reduce reliance on foreign technology, Huawei is planning to double down on developing its own chip and software technology in the long-term and continue to expand its hold over the Chinese market.

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