Huawei

WikiLeaks Dump Adds to China’s Foreign-Tech Wariness — Wall Street Journal

Leave a Comment / August 11, 2020

–

–

–

 –

While the purported CIA documents leaked this week by WikiLeaks focus on the likes of Apple and Samsung, Chinese companies like Huawei do get some coverage. 

While the purported CIA documents leaked this week by WikiLeaks focus on the likes of Apple and Samsung, Chinese companies like Huawei do get some coverage.  
–
By Eva Dou

–
–

BEIJING—The latest WikiLeaks trove hands fresh ammunition to China’s cyberspace hawks, already pushing to reduce dependence on foreign products that could be vulnerable to espionage, observers say.

“The level of alarm in China will certainly increase, and with it a renewed determination to clamp down still further on U.S. technology companies’ operations in China,” said Peter Fuhrman, chairman of Shenzhen-based advisory firm China First Capital, which follows China’s tech sector.

The documents released this week—more than 8,000 pages in all—purport to show how the U.S. Central Intelligence Agency breaks into computers, smartphones, TVs and other electronics for surveillance. Many documents deal with leading non-Chinese brands like Apple Inc. and Samsung Electronics Co., though there is some coverage of Chinese products, including routers from Huawei Technologies Inc. and Baidu Inc.’s search engine.

The Chinese-product references are relatively sparse—and, in some cases, obscure. An undated list of CIA internal hacking demonstrations, for example, includes the “Panda Poke-Huawei credless exploit”—which one cybersecurity specialist says may be a method for taking advantage of vulnerabilities without logins or other “credentials.” There is also the “Huawei VOIP Collection,” a reference to “voice over internet Protocol,” making phone calls over the internet.

The document doesn’t say whether these methods were used for intelligence gathering. Huawei declined to comment.

A file titled “Small Routers Research-work in progress” lists router models from Huawei and ZTE Corp. It also mentions China’s three state-owned telecom companies and Baidu’s search engine, without further details.

The telecom companies and Baidu declined to comment.

The leak also offered what seem to be workaday notes among colleagues, including one CIA worker’s complaint about one piece of software’s default-language setting. “I don’t speak Chinese,” he griped.

WikiLeaks’ website is blocked in China, but Chinese state-run media reported the document leak, focusing on U.S. companies. Overall response has been muted, possibly because the official spotlight this week is on Beijing’s annual legislative gathering.

Cybersecurity experts say China maintains its own robust cyberhacking apparatus, though Beijing characterizes itself as purely a hacking victim, not a perpetrator.

“China is opposed to any form of cyberattack,” foreign ministry spokesman Geng Shuang said Thursday. “We urge the U.S. side to stop its wiretapping, surveillance, espionage and cyberattacks on China and other countries. China will firmly safeguard its own cybersecurity.”

In recent years, China has seized on leaks about U.S. surveillance to fan public support for its domestic tech products. U.S. tech brands felt a chill after former U.S. National Security Agency contractor Edward Snowden revealed NSA surveillance methods in 2013.

“It is like snow on more snow,” one China executive of a U.S. technology company said of the potential sales impact of the latest leaks.

These leaks could help countries counter CIA tapping and develop their own capabilities, said Nigel Inkster, former deputy chief of U.K. spy agency MI6.

“China, Russia et al will now both be better attuned to the risks posed by these capabilities,” he said, “and will no doubt seek to use them themselves.”

https://www.wsj.com/articles/wikileaks-dump-adds-to-chinas-foreign-tech-wariness-1489061414

–

Google Returns to China, As a Hardware Company — Financial Times

Leave a Comment / August 12, 2020

ft-logo–

google-1–

–

The end is in sight for Google’s seven wilderness years in China. With none of the theatrics that accompanied its voluntary withdrawal from the country due to web-search censorship in January 2010, Google is now firmly on a path not only to return to China but also to potentially seize a spot alongside Apple as one of the most profitable tech companies there.

This is a likely outcome of Google’s announcement last week that it is entering with full force the global consumer hardware industry. Google Pixel mobile phones, Google Home artificial intelligence-enabled speakers, Google Daydream View virtual reality headsets, these will be the engines of Google’s revival in China. Based on what Google has so far revealed – including pricing – these products may find a large market among Chinese consumers.

The company has made no specific mention of plans to re-enter China. China’s government will not likely strew the ground with rose petals to welcome Google back.

Instead, Google can rely on China’s enormous grey market for electronics hardware to bring its products into China’s on-and-offline retail network. Hong Kong is usually the main transshipment point, not only because prices are lower than in the PRC, but the quality of hardware sold there is considered to be higher.

There is a precedent here. Apple took six years after the iPhone’s launch to ramp up its official sales channels in China by doing a deal with the main carrier, China Mobile. By that point, an estimated 30m to 50m grey market iPhones were already in use in China.

Mobile phones running Google’s Android system already dominate the Chinese market, with about 300m sold this year. Most are sold unlocked without carrier subsidy. None can freely access Google search, storage or maps. The Google Pixel will likely have similar limitations.

But Pixel will have huge advantages no other Android phone can match of closely integrating the operating system and device hardware to optimise the performance of everything else on the phone.

All of China’s many Android brands will be impacted, but none more so than the current market leader, Huawei. It now dominates the high-end Android market in China, even more so with Samsung’s recent woes. The Pixel will be priced to compete directly with Huawei’s flagship models.

It is not only in its home market of China that Huawei may get battered. It has also set great store on becoming the world’s leading Android phone brand in Europe. That will certainly be far harder to achieve now.

As it happens, Google’s announcement came at a time when just about everyone at Huawei, along with everyone else in China, was enjoying a week-long national holiday. They return to their desks this week to find the tech world disrupted. No one quite predicted Google would amp up its hardware strategy to this level.

Google had toyed around before, selling small volumes of its outsourced Nexus-branded mobile phone to showcase more of Android’s features. Huawei was one of the companies making Nexus phones. Google also bought in 2011 Motorola’s mobile phone business and unloaded it two-and-a-half years later to China’s Lenovo, a deal that has not worked out at all well for the Chinese company.

But, this time Google says it is not dabbling. It defines its future strategy as becoming, like Apple, a fully vertically-integrated hardware and software business, but one with the world’s most powerful system of proprietary voice and text-enabled artificial intelligence.

Google introduced three hardware products last week. More are certain to follow, including perhaps a mid-priced phone that will take aim squarely at China’s Xiaomi (among others), already reeling from falling sales and an inability to crack the more lucrative higher-end Android market.

Google’s advantages run so deep they can seem unfair. Not only does it own and develop the Android software its competitors except Apple rely on, it also already has one of the world’s best and most recognizable brands. Also worth noting, Google now has about $70bn in cash, mainly sitting outside the US, looking for new markets to conquer.

As for the other new Google hardware products – the home speaker and virtual reality (VR) headset – the market seems ripe for the taking. Despite billions of government dollars invested into Chinese companies working on machine-learning, artificial intelligence and VR, none has come to market in any significant way.

Even if they now do, none can match Google’s enormous breadth, capability and experience in human-machine dialogue.

Though a success in the US, Amazon’s Echo home speaker, which is capable of interacting with the human voice, is a non-entity in China. It does not understand spoken Chinese. Google, on the other hand, is quite adept at Chinese. While Google Maps, Gmail, Drive are all blocked in China, Google Translate is not.

Indeed, the Chinese government quietly stopped blocking it about a year ago. It’s the only one of Google’s major online offerings that can be readily accessed in China. The reason: Google Translate has become an essential tool for Chinese companies active internationally, as well as for many of the 150m middle class Chinese now vacationing abroad each year.

If Sundar Pichai, Google’s CEO, is correct, the world including China is moving from a “mobile-first to an AI-first world”. Google is already miles farther down this path than any Chinese company. It need not reestablish its search engine business in China to be a major force there.

As for China’s government, however it chooses to react to Google hardware products sweeping into China, its own aspirations to nurture globally-competitive indigenous tech companies probably just got a lot harder to achieve.

In the seven years since Google departed, China became in many areas even more of a tech Galapagos. Poised now to reenter China by the back door, Google should like the way the competitive landscape looks there.

If Google takes just 1 per cent of the China Android market – and my prediction is it will do markedly better – it will have $2bn of annual revenues in China, a business larger, more valuable and unassailable than when it pulled out.

Peter Fuhrman is Chairman & CEO of China First Capital, a boutique investment bank

 

As published in the Financial Times

–

–

Can Xiaomi Reverse Its Slide in China? — CNBC Interview

Leave a Comment / September 28, 2016

 

cnbc-logo–

–

cnbc-4

–

From King-of-Mobile to possible also-ran in two short years, China’s Xiaomi is struggling to reclaim its spot at the top of China’s domestic phone market. Here’s my interview on CNBC on the tough challenges Xiaomi faces. Nerves are starting to fray among investors who put money into the company less than two years ago at a $45 billion valuation.

To watch the interview, please click here.

–

 

Why Taiwan Is Far Ahead of Mainland China in High-Tech — Financial Times commentary

Leave a Comment / August 12, 2020

FT logo–

–

Largan–

–

Every country is touchy about some topics, especially when raised by foreigner. Living in China for almost seven years now, and having been a student of the place for the last forty, I thought I knew the hot buttons not to press. Apparently not.

The topic at hand: high-tech innovation in the PRC and why it seems to lag so far behind that of neighboring Taiwan. A recent issue of one of China’s leading business publications, Caijing Magazine, published a Chinese-language article I wrote together with China First Capital’s COO, Dr. Yansong Wang, about Taiwan’s high-flying optical lens company Largan Precision.

Soon after the magazine was published, it began circulating rather widely. Howls of national outrage began to reach me almost immediately. Mainly we were accused of not understanding the topic and having ignored China’s many tech companies that are at least the equal, if not superior, to Largan.

I didn’t think the article would be all that contentious, at least not the facts. Largan last year had revenues in excess of $1 billion and net profit margins above 40%, more than double those of its main customer, Apple, no slouch at making money. China has many companies which supply components to Apple, either directly or as a subcontractor. None of these PRC companies can approach the scale and profitability of Largan. In fact, there are few whose net margins are higher than 10%, or one-quarter Largan’s. Case in point: Huawei, widely praised within China as the country’s most successful technology company, has net margins of 9.5%.

Taiwan inaugurated its new president last month, Tsai Ing-wen, who represents the pro-Taiwan independence party. Few in the PRC seem to be in a mood to hear anything good about Taiwan. In one Wechat forum for senior executives, the language turned sharp. “China has many such companies, you as a foreigner just don’t know about them.” Or, “Largan is only successful because like Taiwan itself, it is protected by the American government” and “Apple buys from Largan because it wants to hold back China’s development”.

Not a single comment I’ve seen focused on perhaps more obvious reasons China’s tech ambitions are proving so hard to realize: a weak system of patent protection, widespread online censoring and restrictions on free flow of information, a venture capital industry which, though now large, has an aversion to backing new directions in R&D.  In Taiwan, none of this is true.

Largan is doing so well because the optical-quality plastic lenses it makes for mobile phone cameras are unrivalled in their price and performance. Any higher-end mobile phone, be it an iPhone or an Android phone selling for above $400, relies on Largan lenses.

Many companies in the PRC have tried to get into this business. So far none have succeeded. Largan, of course, wants to keep it that way. It has factories in China, but key parts of Largan’s valuable, confidential manufacturing processes take place in Taiwan. High precision, high megapixel plastic camera lenses are basically impossible to reverse-engineer. You can’t simply buy a machine, feed in some plastic pellets and out comes a perfect, spherical, lightweight 16-megapixel lens. Largan has been in the plastic lens business for almost twenty years. Today’s success is the product of many long years of fruitless experimentation and struggle. Largan had to wait a long time for the market demand to arrive. Great companies, ones with high margins and unique products, generally emerge in this way.

We wrote the article in part because Largan is not widely-known in China. It should be. The PRC is, as most people know, engaged in a massive, well-publicized multi-pronged effort to stimulate high-tech innovation and upgrade the country’s manufacturing base. A huge rhetorical push from China’s central government leadership is backed up with tens of billions of dollars in annual state subsidies. Largan is a good example close to home of what China stands to gain if it is able to succeed in this effort. It’s not only about fat profits and high-paying jobs. Largan is also helping to create a lager network of suppliers, customers and business opportunities outside mobile phones. High precision low-cost and lightweight lenses are also finding their way into more and more IOT devices. There are also, of course, potential military applications.

So why is it, the article asks but doesn’t answer, the PRC does not have companies like Largan? Is it perhaps too early? From the comments I’ve seen, that is one main explanation. Give China another few years, some argued, and it will certainly have dozens of companies every bit as dominant globally and profitable as Largan. After all, both are populated by Chinese, but the PRC has 1.35 billion of them compared to 23 million on Taiwan.

A related strand, linked even more directly to notions of national destiny and pride: China has 5,000 years of glorious history during which it created such technology breakthroughs as paper, gunpowder, porcelain and the pump. New products now being developed in China that will achieve breakthroughs of similar world-altering amplitude.

Absent from all the comments is any mention of fundamental factors that almost certainly inhibit innovation in China. Start with the most basic of all: intellectual property protection, and the serious lack thereof in China. While things have improved a bit of late, it is still far too easy to copycat ideas and products and get away with it. There are specialist patent courts now to enforce China’s domestic patent regime. But, the whole system is still weakly administered. Chinese courts are not fully independent of political influence. And anyway, even if one does win a patent case and get a judgment against a Chinese infringer, it’s usually all but impossible to collect on any monetary compensation or prevent the loser from starting up again under another name in a different province.

Another troubling component of China’s patent system: it awards so-called “use patents” along with “invention patents”. This allows for a high degree of mischief. A company can seek patent protection for putting someone else’s technology to a different use, or making it in a different way.

It’s axiomatic that countries without a reliable way to protect valuable inventions and proprietary technology will always end up with less of both. Compounding the problem in China, non-compete and non-disclosure agreements are usually unenforceable. Employees and subcontractors pilfer confidential information and start up in business with impunity.

Why else is China, at least for now, starved of domestic companies with globally-important technology? Information of all kinds does not flow freely, thanks to state control over the internet. A lot of the coolest new ideas in business these days are first showcased on Youtube, Twitter, Instagram, Snapchat. All of these, of course, are blocked by the Great Firewall of China, along with all kinds of traditional business media. Closed societies have never been good at developing cutting edge technologies.

There’s certainly a lot of brilliant software and data-packaging engineering involved in maintaining the Great Firewall. Problem is, there’s no real paying market for online state surveillance tools outside China. All this indigenous R&D and manpower, if viewed purely on commercial terms, is wasted.

The venture capital industry in China, though statistically the second-largest in the world, has shunned investments in early-stage and experimental R&D. Instead, VCs pour money into so-called “C2C” businesses. These “Copied To China” companies look for an established or emerging business model elsewhere, usually in the US, then create a local Chinese version, safe in the knowledge the foreign innovator will probably never be able to shut-down this “China only” version. It’s how China’s three most successful tech companies – Alibaba, Tencent and Baidu – got their start. They’ve moved on since then, but “C2C” remains the most common strategy for getting into business and getting funded as a tech company in China.

Another factor unbroached in any of the comments and criticisms I read about the Largan article: universities in China, especially the best ones, are extremely difficult to get into. But, their professors do little important breakthrough research. Professorial rank is determined by seniority and connections, less so by academic caliber. Also, Chinese universities don’t offer, as American ones do, an attractive fee-sharing system for professors who do come up with something new that could be licensed.

Tech companies outside China finance innovation and growth by going public. Largan did so in Taiwan, very early on in 2002, when the company was a fraction of its current size. Tech IPOs of this kind are all but impossible in China. IPOs are tightly managed by government regulators. Companies without three years of past profits will never even be admitted to the now years-long queue of companies waiting to go public.

Taiwan is, at its closest point, only a little more than a mile from the Chinese mainland. But, the two are planets apart in nurturing and rewarding high-margin innovation. Taiwan is strong in the fundamental areas where the PRC is weak. While Largan may now be the best performing Taiwanese high-tech company, there are many others that similarly can run circles around PRC competitors. For all the recent non-stop talk in the PRC about building an innovation-led economy, one hears infrequently about Taiwan’s technological successes, and even less about ways the PRC might learn from Taiwan.

That said, I did get a lot of queries about how PRC nationals could buy Largan shares. Since the article appeared, Largan’s shares shot up 10%, while the overall Taiwan market barely budged.

Our Largan article clearly touched a raw nerve, at least for some. If it is to succeed in transforming itself into a technology powerhouse, one innovation required in China may be a willingness to look more closely and assess more honestly why high-tech does so much better in Taiwan.

(An English-language version of the Largan article can be read by clicking here. )

(财经杂志 Caijing Magazine’s Chinese-language article can be read by clicking here.)

http://blogs.ft.com/beyond-brics/2016/06/07/why-taiwan-is-far-ahead-of-mainland-china-in-high-tech/

–

Is Huawei a Paper Tiger?

1 Comment / January 3, 2012

No large Chinese company is more scrutinized, criticized, ostracized and demonized than Huawei, the Shenzhen-based manufacturer of telecommunications equipment. With revenues of $28 billion in 2010, and 110,000 employees, Huawei is the second-largest telecom equipment company in the world, along with being the largest and most prominent private technology company in China. It is also said to enjoy significant behind-the-curtain support from senior figures in the Chinese government and military.

Not much is known about the secretive company. But for all its size and prominence in the telecommunications industry, Huawei’s corporate finances and balance sheet may be a good deal weaker than commonly assumed. The problem comes from Huawei’s unbalanced balance sheet, and an over-reliance on loans from Chinese state-owned banks, rather than payments from customers, to finance its business. In 2011, instead of too much help from the Chinese government, Huawei seems to have suffered from a lack of it.

The bigger Huawei has grown, the more criticism it has attracted. Competitors outside China have loudly claimed the company was a front for the Chinese military, and that it owes its size in large part to an efficient process of stealing others’ technology and then selling its cut-price knock-off equipment within China and to telecom monopolies in the world’s poorer, most despotic countries.

Huawei has had a particularly hard time of it in the US, where it was sued in 2003 by Cisco for patent infringement. More recently, its plans to buy several US tech companies were blocked by the US government or obstruction by US politicians. Some of the same politicians also blocked Huawei’s sale of some larger telecom equipment in the US by asserting, without producing any real evidence,  Huawei equipment was used by the Chinese military for eavesdropping.

In part to counter all the criticism and alter its reputation as a technological lightweight, Huawei has been spending heavily in recent years to build large R&D centers around the world, hiring lots of PhDs, both Chinese and Western. The company is filing patents by the truckload, a total of over 50,000 at last count. In 2010, the company is said to have invested over $2 billion in R&D. According to the company, profits in 2010 were Rmb24 billion (US$3.7 billion) up from RMB18.27 billion in 2009.

But, the question still remains: is Huawei a solid high-tech company that is misunderstood and unfairly attacked by jealous competitors or attention-seeking politicians? Or, is it more of a bloated, backward and barely profitable machine-maker kept in business through hidden subsidies and support from various arms of the Chinese government?

I have no way to accurately judge, nor any particular interest in the company. I meet with Huawei people occasionally. Huawei is, after all, the largest and most prominent company in Shenzhen, where I now live. As a private company, Huawei releases limited financial information.

My sense is that Huawei’s main problem, at least at the moment, isn’t technical competence, but poor cash flow. This has been brought on by fast-declining profit margins, slow market growth, erratic payments from customers in less-advanced countries where Huawei derives a significant percentage of its sales. To top it off, once compliant Chinese banks have turned stingy in extending loans. Add it up, and Huawei may currently be in much less robust financial condition than previously. A paper tiger? Probabaly not. But, it does look like a very large company with a similarly large imbalance in its financial structure.

To sell its products, Huawei must usually be the cheapest supplier. But, its costs are rising fast and some of its largest markets of late, like equipment for 3G and other high-bandwidth mobile phone systems, are no longer growing quickly. Other product areas are basically stagnant, especially for traditional fixed-line telecom switches.

Though the company has made no public announcement about its financial condition, my conversations with Huawei people suggest the company had a relatively poor year in 2011, and has run into some serious cash-flow challenges. One example: Huawei’s private equity arm, which until recently was trumpeted by Huawei as a key source of future profits and access to new leading-edge technologies, has all but shriveled up and died. Funding has been basically cut off. The cash is needed apparently to keep other parts of the business above water.

In the past, Huawei could sustain its cash flow by tapping China’s state-owned banks for loans. This year, the flow of loans seems to have been curtailed. One reason:  the Chinese government has clamped down hard on all bank lending to stem rising inflation. That’s impacted most heavy borrowers in China, including, it seems, Huawei.

Chinese banks have cut back lending to Huawei, so Huawei apparently has cut back elsewhere in its business. If so, it suggests Huawei’s own cash reserves are scarce, particularly for a company its size. This is caused not only by low margins, but also because Huawei, as a private company, cannot raise money from the capital markets. Its only cushion is taking loans from Chinese banks. These loans, in turn, are dialed up or dialed down not based purely on Huawei’s creditworthiness, but also the overall credit stance of the Chinese government.

The simplest solution, a Huawei IPO, seems as a remote a possibility today as it ever was. The company does not seem ready to endure that level of public disclosure — of its murky financials, ownership, profit margins, management structure, reliance on orders and loans from Chinese government-backed entities.

Over the years, most of Huawei’s erstwhile competitors – including Northern Telecom, Alcatel, Fujitsu, Siemens, AT&T – have either gone out of business, or been dramatically slimmed down. Only Sweden’s Ericsson has sales larger than Huawei.

In the absence of reasonable profit margins and reliable cash flow from customer purchases, Huawei has used a ready flow of Chinese bank loans to finance its operations and investment. But, those low margins also make it a challenge to repay the ever larger bank debts. Ultimately, positive cash flow needs to come from customers, not bank loans.

Whatever the situation with Huawei’s books at the moment, I’m rather sure we will not be reading financial headlines anytime soon about a cash crisis at Huawei. It is a large business,  and well-connected politically. It is also reportedly a large supplier of equipment to the Chinese military.

The large banks in China are state-owned and are routinely used to advance economic, political and social goals.  These banks may have cut back on funding to Huawei this year, but if the company needs money to stave off more serious – and public — financial problems, it’s all but certain the flow of bank cash will be increased. If need be, Huawei could be put on heavy state loan intravenous support.

As Huawei has grown larger, the reliance on bank lending becomes ever more of a risk. It is, above all, a very stilted, unbalanced way for the company to manage its capital needs. A diet of too much debt and too little equity often leads to corporate malnourishment.

.