Can Huawei survive an onslaught of bans and restrictions abroad?

MENG WANZHOU did not seek the spotlight. The daughter of Ren Zhengfei, founder of Huawei, one of China’s biggest technology firms, she started as a receptionist and worked her way up over 25 years to become chief financial officer. In a culture which makes celebrities of businesspeople, she has kept a fairly low profile.

But on December 5th the spotlight found her. Canadian police said she had been arrested four days earlier in Vancouver, en route to Mexico. The Canadians were acting on behalf of the American authorities, who accuse Ms Meng—and other Huawei staff—of fraud connected to dodging sanctions on Iran, and are seeking her extradition. Both Ms Meng (pictured above) and Huawei deny the charges. On December 11th a court in Vancouver granted her bail, subject to electronic monitoring.

Justin Trudeau, Canada’s prime minister, and Robert Lighthizer, America’s most senior trade official, have both insisted that Ms Meng’s arrest is purely a criminal justice matter, part of an investigation into Huawei and its trading partners that has been running for several years. Politics is intruding nonetheless. China has demanded Ms Meng’s release, and threatened Canada with “serious consequences” for carrying out the arrest in the first place. Donald Trump, America’s president, undercut Mr Lighthizer when he announced on December 11th that he might be tempted to intervene in the case (presumably on Ms Meng’s side) if it would help America’s ongoing trade talks with China.

Huawei has long caused anxiety. It has grown rapidly from a small maker of cut-price electronics into the world’s biggest supplier of telecoms gear. Its sales have increased from 93.8bn yuan ($12.8bn) in 2007 to 603bn yuan today, putting it in the same league as firms like IBM and Microsoft. It recently overtook Apple as the second-biggest seller of smartphones.

With its plan to dominate the market for the back-end kit necessary for telecom firms to offer “fifth-generation” (5G) mobile-phone networks, Huawei is a key part of the “Made in China 2025” initiative to create leaders in cutting-edge industries. As a consequence both of its success and its ambitions, it sits at the heart of a tangled web of Western worries about national security and China’s economic clout.

Its route to the top was not easy. At first China’s government favoured a state-owned champion, ZTE. Huawei was one of hundreds of private hopefuls that rose from Shenzhen, a capitalist hub. That lack of mollycoddling, says Dan Wang of Gavekal Dragonomics, a research firm, drove Huawei to develop more competitive products and to seek customers overseas.

China is Huawei’s biggest market, accounting for half its revenues. It has also enjoyed success abroad, signing contracts for network infrastructure from Denmark to India and wolfing market share (see chart) from firms such as Ericsson, a Swedish company, and Nokia, a Finnish one.

Code Red

As more and more data flows over mobile networks and as Huawei has become more ubiquitous in them, governments have grown uncomfortable. Soon after Ms Meng’s arrest, Andrus Ansip, an official at the European Commission, said people were right to worry about Huawei, warning of the possibility of malicious code built into its products that might funnel information back to Beijing—or even grant access to state-sponsored hackers.

Some countries, especially America’s allies, have therefore been resisting the firm’s expansion. Australia has banned it from selling equipment to local firms, as has Taiwan. Just before Ms Meng’s arrest an initial request by Spark, a New Zealand-based firm, to buy 5G gear from Huawei was rejected on security grounds. A few days later Japan announced a new policy seemingly designed to bar Huawei and ZTE from operating within its borders.

Huawei rejects the spying allegations, and points out that no evidence of subversion has ever been found. Vincent Pang, the president of Huawei’s western Europe division, says the firm has strong incentives not to spy on its customers. “We operate in 170 countries,” he says. “It would destroy our markets”. One former senior Western defence official admits that it is impossible for Huawei to prove a negative, ie, that it is not spying. That does not reassure the doubters, who point to Mr Ren’s background in the People’s Liberation Army, as well as to Chinese laws compelling private firms to assist the state if asked. As Edward Snowden’s leaks in 2013 showed, America’s spies are not above modifying products made by national tech firms to listen in on their targets. It would be odd if their Chinese counterparts were not at least pondering similar tactics.

Safe house

Other countries have been friendlier. On December 5th Huawei announced a contract with Altice Portugal, a mobile operator, to install 5G kit. After Ms Meng’s arrest France and Germany both stated that the firm is still welcome, although sensitive investments might be blocked. One particularly important market, says Shaun Collins of CCS Insight, a firm of analysts, has been Britain, despite its membership of the “Five Eyes” electronic-spying pact alongside America, Australia, Canada and New Zealand. The British government has insisted that the firm pay for a laboratory, called the Huawei Cyber Security Evaluation Centre, to scrutinise the hardware and software that Huawei supplies. It has never found a back door, only programming errors. A recent report found potential problems with Huawei’s code, which the firm will fix. For Huawei, British scrutiny has come to serve as a badge of trustworthiness that helps it mollify concerns elsewhere. A similar lab was opened in Germany, in conjunction with the government’s cyber-security agency, in November.

How bad Ms Meng’s arrest might be for Huawei depends on other countries’ reaction. Most important will be decisions made in America, where scepticism about it is strongest. America is ramping up pressure on its allies, particularly in Europe, Huawei’s second-biggest market, to ban or restrict it. That would be painful, says Mr Collins, but not fatal. Prospects elsewhere, especially at home, are still rich. China is expected to be the biggest and fastest-growing market for 5G networks for years.

But there is another possibility. Looming over Ms Meng’s case is a similar one in 2017 against ZTE, which was convicted of breaking sanctions on Iran. The firm then lied about having complied with the court’s punishment. As a consequence, in April American firms were banned from selling it goods. That throttled the company, which relies on American chips and software in its products. Relief came only when Mr Trump reversed the ban, reportedly as a favour to Mr Xi. In its most recent earnings report ZTE said it expects to post a loss of up to 7.2bn yuan for the year, against a profit of 4.6bn yuan last year.

Ms Meng has not yet had her day in court, let alone been convicted of trying to dodge punishments. But that has not stopped some American politicians, including Mark Warner, the Democrat vice-chair of Senate Intelligence Committee, from arguing that similar measures may need to be taken against Huawei.

If that happened it could cripple the firm, although the Chinese government or state-owned banks would probably bail it out if necessary. Like ZTE, Huawei relies on American components, such as Google’s Android and chips from Qualcomm. In a recent report, Jefferies, a bank, noted that Huawei would be unable to build smartphones or mobile-phone base stations without these firms. Like many other tech firms, it also relies heavily on chip designs licensed from ARM, a British firm owned by SoftBank, a Japanese company. Having previously said it believed Huawei’s gear was safe, SoftBank is now planning to remove at least some of it from its networks.

Huawei, in other words, looks vulnerable. Mr Pang counters that it is a big revenue-generator for Western firms. In November Huawei held an awards ceremony for its 92 top suppliers, of which 33 are American. Two—Intel and NXP, both chipmakers—got gongs marking a decade of working together. Mindful of that past co-operation, Mr Pang is optimistic that the current chill will pass. Even in markets that have banned Huawei or which are considering it, he says, “we will never give up”.