Why Huawei Is in the Middle of the U.S. China Trade War

The Chinese telecom giant, Huawei Technologies, until recently was known well only to investors who were familiar with the fast-expanding global telecom equipment and services industry. That's changed dramatically in the past year. Huawei (pronounced "wah-way") today is a centerpiece in the escalating trade dispute between the U.S. and China. The resistance that Huawei is facing in the U.S. is part of a broader battleground in which the Chinese telecom giant is tackling rising opposition from many foreign governments and customers concerned about Huawei's links to the Chinese government.

Those concerns are important because of Huawei's reach. Last year, Huawei became the second-largest global seller of smartphones, surpassing Apple, Inc. (AAPL) for the first time, coming in behind number one Samsung Electronics Co. Inc.

Below is a look at what Huawei Technologies is and does, followed by the major issues facing the company.

Huawei Technologies: An Overview

Huawei Technologies is a private company that was founded in 1987 in Shenzhen, located in southern China. The founder and current CEO of Huawei, Ren Zhengfei, was previously an officer in China's People's Liberation Army (PLA), the armed forces of the Communist Party of China. The company got its start by manufacturing phone switches and then expanded in the 1990s when it built a series of telecommunications networks both in China and abroad. Since then, the company has mushroomed in size from a regional player into a "leading global provider of information and communications technology (ICT) infrastructure and smart devices," according to Huawei's website. The company focuses its efforts across four domains: telecommunications networks, IT, smart devices and cloud services.

According to the company website, Huawei generated annual revenue equivalent to more than $104 billion in U.S. dollars last year. The company reported "robust" results for the first half of 2019, but journalists pointed out that trade restrictions had a big impact on Q2 sales.

Espionage Allegations

Huawei has become so big that it now sells millions of smartphones annually, prompting several countries to grow concerned that the company may use its technology to spy on customers. The fact that CEO had been a member of the People's Liberation Army has added to concerns of individuals and governments who already are inclined to mistrust China's political leadership. Huawei has insisted that it has no ties to the Chinese government and that it acts as an independent company.

Espionage allegations first surfaced in 2012. A U.S. congressional panel concluded that both Huawei and ZTE Corporation, a rival Chinese telecom company, could pose a security threat. In early 2018, a Senate Intelligence Committee hearing warned about potential national security threats and discouraged American companies from conducting business with Huawei and ZTE. U.S. intelligence agencies have alleged that Huawei equipment could contain "backdoor" applications which would allow the Chinese government to spy on customers internationally. As of this writing, no evidence of these secretive tools has been released publicly, and the company has repeatedly denied these allegations.

Since 2012, other countries have also grown suspicious that the Chinese government may be spying on customers through Huawei products. In July of 2018, the U.K. government released a report indicating it had "only limited assurance" that the company's telecommunications equipment would not pose a threat to the country's security. Australia and New Zealand followed by excluding Huawei and ZTE from their 5G networks.

US Restrictions

On May 15, President Trump issued an executive order banning all U.S. companies from utilizing information and communications technology from any party considered a national security threat. The order also declared a national emergency related to this matter. Although the order did not explicitly mention Huawei, it was largely seen as being focused on the Chinese company. The U.S. Commerce Department also added Huawei and 70 of its affiliates to its existing "Entity List." This blacklist bars anyone on it from purchasing parts and components from U.S. companies unless they have prior government approval.

On May 20, the U.S. government eased restrictions on Huawei by granting it a temporary license to "provide service and support, including software updates or patches, to its handsets that were available to the public on or before May 16, 2019." This means Google will be able to provide critical software updates and security patches until the license expires on August 19.

In June, the president promised he would allow companies to request special licenses to sell to Huawei and Commerce Secretary Wilbur Ross said he received 50 such requests. However, Bloomberg reported that the government is "holding off on a decision" about licenses because China has halted state-owned firms buying U.S. farm products. The Trump administration has also complied with a defense bill signed in 2018 and banned federal agencies from buying equipment and obtaining services from Huawei and two other companies. Huawei has sued the U.S. government over its ban on Huawei products in federal agencies.

Arrest of Huawei CFO

Last December, Canadian authorities arrested Huawei's Chief Financial Officer and vice-Chairwoman, who also is the daughter of the company's CEO. Meng Wanzhou was charged with "conspiracy to defraud multiple international institutions" based on allegations that Huawei had violated sanctions against Iran by misrepresenting a Huawei subsidiary as a separate company in order to evade sanctions. Meng was released on bail following her arrest, then formally indicted by U.S. prosecutors in January of 2019 on counts of fraud, obstruction of justice, and misappropriating trade secrets. As of this writing, the extradition process is ongoing, with Canadian, Chinese, and U.S. officials all involved. In response, Meng also has sued Canada over the handling of her arrest.

Meng's arrest came at a crucial moment in the evolving trade tensions between the U.S. and China in which both countries have instituted tariffs on various trade goods. U.S. suspicions regarding Huawei predated the current trade dispute, but the legal battle over Huawei's CFO may have aggravated tensions between the nations' two leaders, U.S. President Donald Trump and Chinese President Xi Jinping.

Looking Ahead

All of this puts the future of Huawei in doubt. But it's very clear that that its future may be determined by the outcome of the trade conflict between the U.S. and China.

Huawei for its part launched its own open-source operating system called HarmonyOS on August 9. The Android alternative will be first used on "smart screen products" and over the next three years will appear in other devices.

CEO Ren Zhengfei has said that he expects the firm to take a $30 billion revenue hit in 2019 and things to improve by 2021.