A Huawei Ban May Not Be The Answer

The U.S. ban on Huawei products may not be the best way to handle the national security concern the issue has raised. That’s because a ban on hardware doesn’t necessarily prevent surveillance through software and other components that are a part of other network components and when connecting with Huawei supported networks outside the country, say security experts and academics.

“The internet, after all, is about the interconnection of disparate networks; keeping Chinese hardware out does not translate into keeping Chinese-originated digital code out,” Robert Williams (NYSE:WMB), director of the Paul Tsai China Center at Yale Law School, and Tom Wheeler, former FCC Chairman and now a visiting fellow at the Brookings Institution and a fellow at the Harvard Kennedy School.

“The U.S. government should push for multi-stakeholder efforts to develop common approaches to supply-chain diversification, to ensure an open and transparent international 5G standard-setting process, and to promote voluntary agreements on security standards,” they said in their Lawfare piece.

It’s true that the security risks are real, given that each Chinese company is required to cooperate with and turn over information that may be required by the Chinese government under the country’s 2017 National Intelligence Law and the 2014 Counter-Espionage Law. But putting in checks and balances to ensure that such tapping of information can’t take place is a better alternative, according to experts. Huawei of course agrees.

“We are hoping the government will talk to us,” Andy Purdy, CSO for Huawei Technologies USA, says. “Right now, we believe we could come up with risk mitigation mechanisms. We are not yet in those conversations.”

Particularly because, under the current restrictions imposed by President Trump, American companies, including those providing security, have been asked not to transact with the company. This would force Huawei to use products developed internally or by others that may not be as good, with the possibility of weakening network security.

Also, while the U.S. alert has brought reactions from Australia, New Zealand and Japan, others like Russia, Germany and the Netherlands are likely to go ahead and use Huawei technology in 5G networks. India, which is likely to be one of the largest 5G markets, is also considering whether to continue using Huawei equipment or not.

Huawei is one of the most significant 5G innovators, so it might be difficult to ignore it or keep it out of industry standards, especially given that it is one of the leading innovators in the space. And some might consider it a pointless exercise anyway because whatever network you deploy in its place could have the same problems, whether declared or not.

Some industry players are taking note however: The Institute of Electrical and Electronics Engineers (IEEE) for one is no longer using Huawei employees to peer-review its journals. The SD Association and Wi-Fi Alliance have also restricted Huawei participation. Semiconductor industry body JEDEC has suspended Huawei’s membership. (via FT)

Huawei Is Feeling the Pain

The company now expects international smartphone shipments to decline 40-60%, according to Bloomberg. A lot of the weakness is in Europe, where Alphabet’s (NASDAQ:GOOGL) withdrawal has been the key factor. Without the Google Play Store and other apps, the phones just aren’t that attractive. Some carriers have already dropped plans to sell the device and the company plans to stop shipments, including of its latest model marquee overseas smartphone, the Honor 20 if sales are materially below expectations.

Huawei has said that it will make up the loss in international by boosting domestic market share from the current third to a half and analysts think that a 45% share could even be achievable this year. The company is already making some of its chips and it has an OS in the works. But getting this off the ground may be easier said than done because the app ecosystem takes time to build.

But as far as telecom equipment is concerned, Huawei has several agreements and has stocked up on components for about a year. It has to get its act together by then.

Management says that it has been prepared for this eventuality and has been laying plans for the future.

U.S. Companies Are Also Feeling the Pain

Huawei uses its own Kirin chip, so one company that will be quite happy with these developments is Qualcomm (NASDAQ:QCOM) . However, Broadcom (NASDAQ:AVGO) will be in deep water and the company has already said that its inability to sell to AVGO will have a $2 billion impact on its 2019 sales. One company that could be indirectly hurt is Apple (NASDAQ:AAPL) , because there is bound to be a nationalistic backlash from Chinese customers and the government.

Huawei has said that the ban will hurt about 1,200 U.S. suppliers.

Finally

Trump has indicated that Huawei negotiations could be made part of the trade deal, but security experts are against it. They feel that needlessly politicizing the matter will detract from the real security concern.

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