Why Huawei’s idea to license 5G might make sense in a free global market

Matt Hamblen

There is no trade issue more important in the long run than the U.S. relationship with China, especially for electronics companies.

Yes, a drone attack on oil fields in Saudi Arabia could drastically affect the price of gasoline at the pump. But consider China with its economy rivaling that of the U.S. There are issues between the two countries of vital concern that will be with us for decades: intellectual property protection; cyberterrorism and nation-state spying; and -- here’s the granddaddy --advances in quantum computing.

The nation that wins on quantum computing research could learn to break advanced encryption as we know it and own cybersecurity, thereby gaining the ability to attack any missile guidance server or credit card database. Such an outcome would make U.S. concerns that Huawei is national security threat seem miniscule by contrast. 

Set against this grandiose set of concerns, the U.S. has imposed trade tariffs on Chinese goods coming to the U.S. and placed the Shenzhen-based telecom equipment giant on an Entity List, deeming it a security threat. U.S. chipmakers and others in tech sold $11 billion in goods to Huawei in 2018, but the U.S. blacklisting could dry up that revenue stream.

Microsoft is upset about the Entity listing publicly while at least 130 other companies are quietly seeking special permission from the U.S. Commerce Department to get around the blacklist to sell U.S. goods to Huawei. “Pretty much every major U.S. tech company wants to continue selling to China,” said Leonard Lee, an analyst at neXt Curve who has been researching and advising companies on U.S.-China trade in technology for years.

With this U.S. government regulation of China trade and companies like Huawei, it was especially ironic to learn recently that Huawei wants to skirt its problems with the U.S. with the bold idea of relying on the free market. The bold idea is to sell or license Huawei’s 5G technology to a Western buyer or buyers. Ren Zhengfei, chief executive of Huawei, told The Economist in an interview that his goal would be to create a 5G competitor to allay concerns over Huawei’s 5G market dominance.

Doing so would also help Huawei blunt the U.S. argument that its hardware is a spying apparatus, which Huawei has denied repeatedly. Under Ren’s scenario, the company or companies acquiring the Huawei technology would be able to modify source code so that neither Huawei nor the Chinese government would in theory be able to control the telecommunications infrastructure built with equipment produced by the new company.

Ren’s idea relies on free market economics, seemingly out of reach (and the imagination, apparently) of the U.S. government regulatory framework. It isn’t clear how the government of China would react to Ren’s idea, but Huawei executives have repeatedly stated in recent months that they aren’t owned by the Chinese government and exist to serve customers in more than 180 countries. Executives at Huawei have stated they would rather close Huawei down than spy on customers for China.

“Ren’s idea of licensing Huawei’s 5G technologies is actually a quite brilliant idea to deal with the current trade and geopolitical situation,” Lee said. “Licensing businesses are high-margin and a great way for Huawei to decouple their carrier business from their hardware business. Huawei would ironically become an IP-oriented business. The move would also have the potential to significantly disrupt the internet and communications tech industry by fragmenting the vendor landscape. Small and mid-tier players licensing Huawei technology [could] emerge globally to challenge the very few remaining big hitters such as Ericsson, Cisco and Nokia.”

Ren talked about licensing 5G technology to outside companies in one-off transactions, rather than in annual payments, according to a transcript of his interview with The Economist. Buyers would have a permanent right to use the technology and IP.

Huawei would also benefit. “Licensing 5G to other companies would allow Huawei to get some money,” Ren said. “It’s just like adding more firewood to fuel our scientific research efforts.” At the end of the interview, The Economist asked if Ren’s idea for licensing 5G technology was meant to give up Huawei’s lead in 5G and to create a technology race “if America will go for it.” In response, Ren said, “That’s right.”

Under that scenario, Huawei could keep manufacturing equipment for China telecom companies and use the China market as a test ground for research and innovation, Lee said. “That is a game changer and could disrupt the status quo.”

Backing off from Huawei specifically, many other analysts and business leaders don’t hold out much hope for trade peace between the U.S. and China anytime soon. Talks are still set for October. The waters are tumultuous. Even so, many business leaders clearly hope for a long-term free (or at least open) trade posture between the two countries, even if these business leaders don’t come out to say so publicly. Cooperation on computing research between companies and universities could reap long term rewards as well.

Unfortunately: “The trade disputes will likely continue,” Lee said. “There is too much face to lose on both sides.”

In my opinion, there is far too much benefit for electronics companies in both China and the U.S. to be at odds continually. Clearly, the U.S. needs to be vigilant about national security and loss of IP, but the two countries have been down the road of working together on chip and component production for decades already. For the Trump Administration to now seek out ways to be more isolationist would be a big reversal. To handle theft of IP, there are the courts and legal means. U.S. attorneys have prosecuted corporate spying, including a recent criminal case against a Chinese professor with ties to Huawei.

Ren’s idea to sell off 5G technology might seem outrageous as first, but it is also a free market challenge. I’m no market or trade expert, but maybe a group of U.S. investors should take the bait.