Tech Brew Ride Home - The Rise of Huawei with Dexter Thillien

Episode Date: May 12, 2019

Not too long ago I did a longreads suggestion about Huawei and listener Dexter Thillien got in touch, because he’s a telecoms analyst, and he was actually quoted in the article. Over email, he educated me about some of my misconceptions about Huawei and I was like, “Don’t just school me! Come on the podcast and let’s catch everyone on up Huawei!” And so, today, we do that. Where did Huawei come from? How did it get to a place where it’s the pre-eminent 5G infrastructure firm? Is Huawei just a tool of the Chinese government. I do apologize for the somewhat poor Skype connection, but the content here is so good, you won’t even notice. My thanks to Dexter Thillien. Sponsor: Everykey.com, promo code RIDE20 to get 20% off. Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to a weekend bonus episode of the TechMeme Right Home. I'm Brian McCullough. Not long ago, I did a Longreeds suggestion about Huawei and listener Dexter Tillion got in touch because he's a telecoms analyst and he was actually quoted in the article I shared. Over email, he started to educate me

about some of my misconceptions about Huawei. And I was like, dude, don't just school me. Come on the podcast and let's catch everyone up on Huawei and its history. And so today we do that. Where did Huawei come from? How did it get to a place where it's the preeminent 5G infrastructure firm? Is Huawei just a tool of the Chinese government? All of that answered and more. I do apologize for the somewhat poor Skype connection on this episode,

but the content here is so good. You won't even notice. My thanks to Dexter Tillion. Let's just start by looking at where Huawei came from. They were founded all the way back in 1987. So this is way before the modern telecom era that we're talking about today. And at that point, China had no homegrown telecoms technology or company or anything, right? Yes, that's right.

So they were funny quite a while ago, so over 30 years ago, basically to be one of China's main technological company at the time. but for a long time it really didn't do much, especially on a global scale. So it kind of did routers a bit, a bit like Francisco used to do, with a very, very minor player. It only really started, I think, in the early part of the 21st century, 2000s, where it became a kind of an important, not an important player straight away, but a player in kind of the network manufacturing side, so the network equipment side. So mostly focusing on emerging market. And at the time, especially in 2000, being kind of the keep and cheerful solution compared to the

big incumbent, which you would say were Erickson and Nokia at the time. So, yeah, go on. Well, I just want to highlight that because I think it's important. So it is sort of like the classic, they're coming in as the cheaper players. So when they're starting to land their first contracts outside of China, it's just initially that they can do it cheaper than Nokia. and Erickson can. But then they're also, over time, they grow out their quality too, right?

That's right. So if we go back a bit in history, to explain how they became that big. So as I mentioned in early 2000, Erickson and Nokia, the big players, the Huawei kind of starting to begin to the market. I think it's important to bear in mind to remember what happened in kind of the European telecoms market. So you could almost argue that before the Internet boom, Europe was kind of the leader in a TMT market. So the GSM kind of standard became kind of a board were standard.

Europe is very well. And what we saw in kind of the late 90s, early 2000, is that in Europe, spectrum options went for an awful lot of money. So you had in the UK over 20 billion pounds, which is about $30 billion. In Germany, close to 50 billion euros, which is about the same in dollars. And at the time, European operators as the incumbent, we're saying, yeah, can afford to pay that much amount of money because people when you're going to be using the internet on their phones they're going to pay an awful lot more so one major European

operators say yeah we're going to quadri pool or ARPU which is average per user because people will use the internet if you look at that operator's number from the 2000 and 2019 it doesn't change it's about 15 euros so they got it wrong drastically there but what happened was is that that people within that field, people within European telecoms, we're willing to pay an offer of the money, first of all for the spectrum, and secondly for the equipment, which is where kind of Erickson and Nokia became kind of very, very rich for the three, the role as for the 3G networks while at the same time, you are we kind of came in and was doing 2G and 3G in emerging market. So, you know, if you have that in mind to see kind of situation of the network equipment

market back in early to 2000. If we go back 10 years, so 2009, first 4G network in Sweden and Norway by the same operator, Telly O'Me. In Sweden, they have to use Erickson, because it's a prestige and Eriksson couldn't really not have the first 14 network in their own market, but in Norway they use Huawei. And I think this was the first time that people realized that you are always not simply the cheap and cheaply option, but it is becoming kind of a major player and it can compete on quality as well as on price. And what year was that? That was 2009?

2009. So that was... And it's Norway's telecom. So when Norway launches its first 4G, they go with Huawei, and that's really Huawei's sort of debut on the world stage. Yes. And at the same time, the other main operator in Norway, Teleno, which is incumbent and partly owned by the government, also decide that it's going to swap out his sold equipment

manufacturer and kind of roll out of Huawei across all its network within the next two years. So kind of a big push as well there. So, you know, we're in 2009, we've had the major economic crisis in 2008, which kind of as it many, many companies in many, many industries. And I think at the same time, operators realized that they got it drastically wrong with 3G in terms of how much money they were going to make. So they're not willing to pay as much for 4G equipment as they were with 3G. which means that Erickson and Nokia can't really rely on getting that about the same amount of money.

So what does they do? You always coming in. Erickson tries to diversify doesn't really work. Nokia is moving into some kind of a consolidation, so they buy Arcata Luceon, which is itself was a merger of Architeau, the French company, and Luson, an American one. So we're kind of moving into a market which is becoming more and more consolidated with three major players, one player which is growing its strength and us Huawei. And if we go back from 2010 to now, what we've seen is that you are way, they spend the most money, they've invested a lot in research and development. So they have the most 5G standards. They have the much 5G patents. If you look at 3G and 4G, Nokia and Erickson have most of the

intellectual property. So that's such a player has managed to become a major player in the last 10, 20 years, because first, Erickson maybe at Nokia can have rested a bit on the laurels based on what happened with 3G. And then with 4G, people realize that you are always a key player, not only on price, but also on quality. And it invested to do that R&D, does research and development into the technology, whereas it's main to competitors, where it's thinking of something else. So with Nokia doing some consolidation, which takes some time to implement it with Erickson trying to move into other market, they're trying to diversify, which is a strategy that didn't really work out for them. But that's how, in a stagerie now in 2019,

Huawei is a main player in what is more or less a three-player market. You have some minor players, so Samsung does a few things in South Korea. You have NEC also in Japan, which is doing a few things. But on a global level for canvas, the equipment, 5G equipment, it's UAE, Erickson and Nokia as a three big players and the three choices for operators worldwide. So I know that you just kind of explain this, but can you elucidate a little better for me? Because what I don't understand is, okay, so Erickson and Nokia took their eye off the ball because they were consolidating and they were, you know, it takes time to digest all of the consolidation. But everyone knows that the next step beyond 4G is 5G.

So what I don't understand is, like, they just, they just budgetary-wise, they didn't spend as much on R&D and Huawei went whole hog on R&D. Is it really as simple as that? I just don't understand if the whole industry knows what's coming next, how, as you say, they can take their eye off the ball. Yeah, I mean, the definite situation was their eyes off the ball. So I think what happened is that you've had the combination of having a major crisis with the financial question to them. happening at the same time as a new technology with 4G where those in common players, if you want to call it that way, realize that the golden years of the 2000 were not going to happen again.

So they were under pressure, both from the financial sector to make sure that the margin and the profit still fairly high. So that's why Nokia had to do consolidation. That's why Erickson actually so strategic moving into non-kind network market. to try to show that they were trying to do something different. While at the same time, you have kind of a longer-term strategic plan from your Huawei saying, you know, we're going to move very, very strongly into 5G. I think it's also worth bearing in mind that China itself, the country, was fairly late with 4G.

So it's only launched 4G in 2014, 2015, around the same time that the iPhone got there, but within five years, it's gone from 0 to 1 billion 4G subscriber. So it's moved very, very quickly there as well. So having, I guess, the advantage of having a strong domestic market moving very, very quickly, whereas in other countries and in other market, not as much. And the fact that it could invest far more than its rival, which I guess spread themselves a bit too much into doing other things as opposed to looking purely on 5G networks at the time for almost short-term reason

to make sure that the financial market was still happy with their performances, meant that you always managed to kind of overlap and overtake them. Please put a pin in that idea of why Huawei has the resources they have. But real quick, so there just is not a U.S. company that can do 5G infrastructure. There's no one, except for maybe small players piece together. There is no U.S. company that can take the lead in this technology. No, there's no major players. So, as I was saying earlier, you've got three main players.

So, Huawei, Chinese, Erickson, Swedish, and Nokia, no Finnish. But obviously, they bought other company. One was French and one was American. Mason was probably... Right. And then, Motorola was a main player in 2000, but then he got sold off and bought out, so it's not a major player as well. Right, right.

Okay, I do remember all that now. Okay, so people suspect, I don't know that we know for sure, but people suspect that one of Huawei's advantages is that the Chinese government itself might be funding or backstopping or, you know, guaranteeing loans or whatever, allowing them to have an investment war chest that maybe other companies would not? It's possible. I mean, there's no real evidence of it. Obviously, if you're a major Chinese company, you will have some kind of relationship with the government. That's the way most business is done over there. But I think it's worth bearing in mind. I mean,

talking about Ua and it's become a big geopolitical battle. I think the reason Uiore is also being targeted in one point of view is that if you look at all the big Chinese players in the tech side, it's the most international one. So if you look at the Bidualibaba, Tenson and Jeremy, 80, 90% of the revenue come from China. So you can target it as much as we want. You won't really impact them because they go to the Chinese market. The Huawei is different in the sense that 50% of its revenue comes from our side of China.

China is a big market for them. Obviously, 50% of your of your entire revenue is pretty big. But if you compare it to other big US players, you know, Apple has about 35, 40% in the US. I think Amazon is about 45 and 50. Facebook is about the same. Google is about the same. So in terms of shared domestically versus international, it's very similar to the big US tech players. Obviously, you do very, very different thing.

But I'm just looking at the share of revenue domestically international. internationally, and UAE is by far the most international player out there. So almost in a way the easiest to target. But as you were saying earlier, we'd want to target from a US perspective because there's no direct competition coming from any US company in terms of broader geopolitical battle. Put a pin in that as well, because we'll come back to that at the end. So you mentioned earlier that Huawei actually has more 5G patents than any other firm. So it's kind of like even if you want to do 5G at all at this point, at the very least you're going to have to pay them, right, because they have these patents.

Yes. I mean, even if you don't use their equipment, you're going to use an integral property. So you'll pay your licensing fee for whatever they've created, which is kind of standard within an industry. And a fairly big revenue stream for both Erickson and Nokia, I think with 3G and 4G are the two main patent holders. are not only numbers and not the top of my head, but if you want to do 5G and if you want to exclude your Huawei as a network player, then you're still going to be using some of the integral properties, therefore you're still going to be paying them to a certain amount.

So you are going to have to pay them, but it's still technically possible to build out a 5G network that excludes actual Huawei hardware, right? It is possible, yeah. Okay. But then again, just by the nature of having those patents, Huawei can shape the direction of how the 5G technology evolves anyway, right? To some level, yeah, I mean, because they've got the most integral property, so if you're

an operator, you can decide to make the decision that it's better to go with a, basically with a company that knows the most about it and there's the most advanced about it, and that's the most patent because they will use them better than the other. That's a decision for operators to make. But, you know, there was a big battle in terms of standards in terms of do which, you do 5G something very drastically different from 3G and 4G, which is what you are we were trying to push because they are the most kind of new patterns on that, or do you use a lot of all the technology, which is, which meant that you would need to use a lot of all the

parts of the technologies, meaning that Erickson and Nokia would get most of the licensing. I think we've kind of more or less figured out the balance. It's still an ongoing thing. There's still kind of a release is ongoing in terms of 5G services. I mean, 5G is still very new. We don't have a full technology. so far. But you are in terms of the pure 5G patents, and ZTE as well, which is also the main Chinese flair, they're the one that I've kind of created the standard in the patents over there

for 5G services. So give me the state of play. Places like Thailand, South Korea, I think maybe India, too. They're going ahead and just they're signing up Huawei to build out their 5G networks, right? Yes. So we've seen, obviously China is a big market for them. We've seen a lot of countries in the rest of Asia moving on. I mean, you have the exception. Obviously, Australia, Japan and New Zealand have banned it. So they're kind of the three most developed markets in the region after not you are way.

Not surprising in the case of Japan because Japan has kind of one domestic company that has been doing network equipment for quite a while. Maybe more surprising in the sense of New Zealand, Australia and New Zealand. But they're moving ahead. They have the most contract worldwide. I think there are 3540 commercial agreements already. I think Erickson is about 1520 and Nokia is about the same. So there are more contracts than the others. It was remembering in mind that most operators haven't made a choice yet

because in many countries, you know, operators haven't decided when they're going to be launching 5G. So I think we've done so research. It's only about 25 countries where we see 5G being known by the end of the year. So it's going to be kind of an ongoing process of the next year. And that's why in a sense Europe is almost a battleground in terms of what to do with Huawei in a sense that Europe on a geopolitical level wants to have a good relationship with the US and China. And also in Europe, we have an awful lot of global operators which want to use your way,

maybe not within Europe itself, but in other countries. And obviously, if you're an operator, you'd rather have competition. So you rather have the choice of street players as opposed to two. So just to give an example, Orange, which is a French incumbent, not using UAE in France, because they've got a long-term relationship with Arcatelous and which is Nokia, but using them in Spain, using them in Poland, and using them in most of their African subsidiary. Obviously, they won't be launching 5G services in Africa for quite a while yet, but they don't want to be in U.S.-plandbook in a sense.

They don't want to be able to be able to use them eventually in those markets. So that's where Europe is kind of code between the U.S. and China in that sense. So as you're saying, these European countries, these European companies, they're not just doing business in Europe, so they want to be in Huawei's Good Graces so they can play in places like Latin America and Africa. But is there also, I think I read that to a certain degree, there's a lot of these networks that the 4G networks are already Huawei networks. And so it would be pretty expensive to completely throw the baby out with the bathwater at this point, right?

That's also the case. So one thing with your way is that its networks are not interoperable, interoperable, in a sense that if you're using Ui for 4G, you need to use in for 5G. And if you decide to use somebody else for 5G, then you would need to get rid of your URA 4G network and use somebody else. So obviously that's an expensive time of cost, that's an expensive time of time. So that's kind of one issue as well that is kind of being considered right now. So difficult for them. So what we've seen in Europe is that we've always seen kind of a balanced decision. So the European Commission and Germany as well, they come up with something very similar,

which is we're not going to ban you our way right now because there is no actual evidence of them doing anything bad. But we're going to increase scrutiny on security of the network. So that's kind of where the kind of decision making is going right in Europe. So kind of leaving operators with a choice of what they want to do, but giving them kind of more tasks in order to make sure that the network is secure from any provider, not just targeting your way, but obviously you are always part of that equation. So just give me your personal take on this. And let's do it in the level of degrees.

How likely the most extreme degree is it, in your opinion, that this is all some sort of master plan that the Chinese government decided decades ago, we're seeing where technology is going. If we have a company that creates that infrastructure that will be able to always spy on everyone. How likely, in your opinion, is that in terms of the worst case scenario? I'm not sure there is a master plan in that sense, but what I would say is that in terms long-term strategic planning, China is far better than Europe and the US has been in terms of kind of technology over the last 10 years. So maybe not there wasn't a master plan as some 40G, Chinese Communist Party kind of went in and decided in 10 years time 5G is going to be big, therefore we need to create a leading company.

but and if you look what it's doing with artificial intelligence and other technologies is definitely kind of a longer-term strategy thinking that maybe we don't have in Europe and the US yet. So that's probably why they got a bit of an edge in terms of trying to create something, we're trying to create kind of a full technological infrastructure, whereas in Europe and the US, not as much strategic planning. In terms of spying, I don't know. I mean, what I would say about that is that there has been no evidence so far of you are a spying through their equipment and giving that kind of data to the Chinese government.

So there's been no evidence of that so far. So that's why I'm going to, you know, stand on for the being. I mean, I'm not saying there will never be any evidence of that. Right. Right now there is none. So in terms of if you want to ban you away from that, I guess we need to provide kind of concrete evidence, and we haven't seen it yet. Right. I was going to say, like, I had read that even there – some people are saying that the U.S. government, who is, you know, trying to encourage countries to ban Huawei equipment, people have said, well, if there really is a spying issue, the U.S. government hasn't actually given that evidence yet. So it's almost like they're asking people to trust us, and maybe the evidence.

doesn't exist? I mean, I don't know exactly that, but if you look at what might be happening in the UK, which is that they won't fully ban it, you could make the argument that if the US provided the UK with clear and concrete evidence of any spying from Huawei, they would not be allowing your way to be part of the network infrastructure, even if that evidence is not public. So if the UK is not the decision that has been kind of fully announced yet, I mean, it's causing quite a few commotion in the UK political system right now with the defense secretary having been

psyched yesterday for leaking that news. But either way, kind of fully concrete evidence, you would see probably European countries looking at that and saying, okay, we're seeing fully concrete evidence of that, therefore we're going to be banning the oil. The fact that it's not doing so far. does suggest to me, and obviously I don't know the details, but it does suggest to me that the U.S. has not provided that kind of concrete and clear evidence to ban you our way for spying activities. So then the second degree down, like, I guess to what degree are our Western

countries just concerned that, well, in an extreme emergency in the event of war or something like that, China could just lean on Huawei to knock out someone else's infrastructure, or denial of service and things like that. And so even though maybe they're not setting out to do that, it's just a happy accident that people would be concerned that China might be tempted to use in certain situations. Yes, I mean, I think the reason there's a big issue with 5G is that 5G is eventually going to be a network that's going to be connecting objects as opposed to connecting humans, but it's going to be connecting everything you can sync off.

So if you have one company kind of in charge of those networks and, you know, potentially capable of shutting them down, that kind of causes an issue. I think I would look at two kind of two things based on that. One is, you know, with an increased amount of connected object, you know, the fear of a security is not going to come only from the network side, but from the fact that you have more and more objects being connected, therefore, you know, you're just in one of this object to be vulnerable for it to kind of basically destroy your network. So the example I always gave in terms of cybersecurity

is a casino in Las Vegas, which had its eye-wold database hacked. And they couldn't figure out why. So they spent a lot of time. They got external consulting coming in. And North Consum of found out that the way the actor went in was through the newly installed smart thermostat in one of their fish tank. Because that wasn't secure. They could get into the network.

and therefore they could act into their most important piece of data. So if you're going to have 50, 60 billion connected devices connected to one network, obviously there might be some issue in terms of the network itself, but there's going to be some issue in terms of the overall vulnerability of having so many billions of connected things connected to one particular network. The second thing that goes in terms of, you know, the Chinese government potentially leaning onto Huawei. There's obviously that rule in China saying, you know, in case, you know, Chinese company have to help the Chinese government for whatever reason. So you got that in China and, you know, you could almost argue that should it be an issue,

you would have to be in regulation of those rules and would have to decide what the Chinese government does. On the other end, you've also had in the US something called the Cloud Act. So the Cloud Act was created just a few months ago after, I think the day, the day, The Department of Justice could not get Microsoft to give out data from one of the Othmell server in Ireland, so the US, when I was a cloud act, which mean that the US security apparatus or kind of national security services can go and ask any American company for data anywhere in the world.

And what I was created is that in Germany, the federal police is looking to purchase some body camps. Those bodycows are coming from Motorola, and the best way for them to put that data somewhere is to use AWS. And I has meant that the German kind of data protection agency, I'd say, theoretically, if you're using Motorola and AWS, because they're both an American company, it means that through the Cloud Act, the US authorities could take the data from the German police. So they kind of had a warning about that, like a few weeks ago. So you could almost look at it both ways. Yes, there were rules in China, which meant that the Chinese companies have to help the Chinese authorities, but you also have to do rules in the US where the big U.S. companies also have to help the U.S. authorities.

So it's not maybe as clear cut as you would expect and not purely on the Chinese side. All right. Well, then finally, the third degree on my scale here, how much of this is just, culture clash, just the idea that these Western governments and Western tech companies don't like the notion that for the first time a Chinese company is at the lead of really, really core technology. I think it's as much geopolitical clash as it is a cultural clash. So yesterday, I believe the acting defense secretary in the U.S. say that, you know,

through your way, China is trying to steal its way into global. tech dominance. So what we're seeing is almost a fear of China becoming a major player and not only within tech, but kind of in general. So you can call it the culture crash if you want to in a sense that we now have a non-Western country coming in and becoming a leader within the next, within a long term, within the take 10, 15, 20 years, if not early years and that. And it kind of fears in terms of, you know, what the model is going to be looking like, what the Chinese government is going to be doing on an international scale compared to what the US has been doing

or what Europe has been doing. So there's definitely a layer of I don't want to say conflict, but a layer of confrontation or cooperation in terms of it's not only comes the Western world leading the way you know the big players coming

from outside the global west which has been kind of dominating nowhere for quite a while for several centuries now And, you know, people, some people don't accept it, some people are fearful of it. And Huawei and kind of the technology is almost only one small areas of that kind of global battle, if you want to call it that way, or that global change on a geopolitical level, on a global level, where we're not seeing kind of big companies coming from outside the West.