21 May
2019

Huawei in crisis: what it means for the IP market

The addition of the Huawei to the US Department of Commerce “Entity List” was perhaps the most drastic step yet taken in the US-China technology and trade confrontation.

Yesterday’s news that Google would stop providing Android updates to Huawei devices underlined the fact that the move, which means US companies cannot sell technology to Huawei without a government licence, could pose an existential threat to the Chinese firm.

But as the market continued to digest the possible ramifications of Huawei’s blacklisting, the Trump administration granted the company – and its many US suppliers – a 90-day reprieve in the form of a temporary general licence.

The situation is similar to the one faced by ZTE last year, when it was hit with a seven year ban on buying US technology after violating the terms of a settlement with the government in an Iran sanctions case. Before long, ZTE reached a new settlement deal with the feds, resuming supplier relationships.

The blacklisting of Huawei follows federal charges filed in January over trade secrets theft from T-Mobile and financial dealings with Iran. The Commerce Department has said Huawei was added to the Entity List on the conclusion that it is “engaged in activities that are contrary to US national security or foreign policy interest.”

Will Huawei follow in ZTE’s footsteps, getting off the blacklist either by settling federal charges or as part of a US-China trade deal? The alternative, a company starved of all US components, with perhaps a few exceptions to keep US blue-chips happy, could signal a tech cold war whose repercussions would be felt far and wide.

For now, there are many more questions than answers. Here are some of the key IP-related impacts to look out for.

Huawei reacts

A representative of Huawei’s IP team said the company would not be able to comment for this story. The company is projecting cautious confidence.

Teresa He, president of the company’s chipmaking unit, told employees in an email: “We have foreseen this dark day, and we have been preparing for many years. We have a backup plan. It’s now time to turn our backup plan to action.”

Huawei is reported to have stockpiled a full year’s supply of the most critical components and three or more months’ worth of other parts in anticipation of just this outcome. Bloomberg is suggesting that the company sent trucks to retrieve orders from a US-owned factory in China upon learning of the ban.

Company founder Ren Zhengfei even downplayed the significance of the 90-day general licence in an interview published by state-owned media this morning, saying it was not that meaningful. Earlier, he told Nikkei that his company would be "fine" without Qualcomm chips and other US-sourced components. He was also confident that the US ban would have limited impact on Huawei’s business.

Licensing impact

As the world’s second biggest mobile phone vendor, Huawei represents a big chunk of potential revenue for any company that licenses wireless technology.  

InterDigital has signaled to investors that the US ban should not affect its ability to reach a licence deal with Huawei, with CEO Patrick Van de Wille explaining to Reuters: “Our patents cover technologies that are publicly available and therefore outside the scope of US export control laws.”

But while companies like InterDigital and Qualcomm are legally free to negotiate licences with Huawei, that task could become both much more difficult and less lucrative if the sanctions stick.

A serious disruption to Huawei’s mobile phone supply chain would take money out of the pocket of any company that has the Chinese firm under licence (this currently includes Qualcomm, for example). Even if Huawei can source some components internally, other effects of the sanctions, such as a lack of Android support, could severely restrict its sales figures outside of China.

Of course, this assumes you can agree to a licence in the first place. InterDigital is currently being sued by Huawei in a Chinese court over its SEP licence offers. That is not an enviable position for an American company to be in right now.

Potential retaliation?

Trade wars are always based on tit-for-tat, and if they believe that the Huawei penalty is part of the overall US-China dispute, then Chinese officials could be looking for ways to retaliate. Some people thought it was significant that Chinese leader Xi Jinping visited a rare earth mining facility in Jiangxi yesterday, gesturing towards the dependence of global supply chains on raw materials from China.

Aside from that, Chinese authorities have wide latitude to investigate companies under the country’s Anti-Monopoly Law. This is always a source of business risk for IP licensors, and will be especially so if tensions continue to build. Currently, the State Administration for Market Regulation, China’s antitrust watchdog, is conducting a probe into Ericsson’s licensing practices.

Qualcomm could be one possible target. Although it entered into a settlement agreement with Chinese regulators over patent licensing practices just four years ago, a more recent dispute over rates with Huawei signals that some Chinese companies might want authorities to revisit the terms of that deal. And after all, it was just a few months ago that Qualcomm and US officials were publicly suggesting that the FTC case threatening the Qualcomm licensing business could imperil US national security by giving Huawei a leg up.

On a company-to-company level, as long as Huawei’s status is in limbo, it can be expected to make life more difficult for American companies and others doing business in China. Huawei and Qualcomm have currently only agreed to a short-term patent deal running through the third fiscal quarter. If the US company cannot extend that deal when it ends, investors will worry about the health of its business in China.

Huawei to accelerate R&D

One virtual certainty, regardless of how this case plays out in the short to medium term, is that Huawei will accelerate its internal innovation efforts.

Semiconductors are an obvious priority. Huawei produces some of its own smartphone chips through fabless chip design subsidiary HiSilicon, relying on licences from ARM and manufacturing by TSMC. Some experts have said Huawei’s efforts in this domain are on par with or better than those being undertaken by Apple.

But other analysts have warned that even Huawei’s internal chip business cannot survive without US suppliers, from chip design software providers to specialty laser firms.

Operating systems are another potential area that could see more investment from Huawei. Though Google has halted its plans to cut off Android support in the wake of the Trump administration’s 90-day general licence, the episode has certainly made Huawei aware that the Android platform is a potential source of vulnerability.

Huawei will not be starting from scratch here. It already spends huge amounts on R&D and pays its engineers more than rivals. Unless a radical re-think of its IP protection strategy is underway, all this will mean an even bigger patent portfolio for Huawei.

Impact on 5G and future standards

What does all of this mean for Huawei’s own IP licensing efforts? Its rejection of the 2015 IEEE licensing policy for certain standards, reported by IAM last week, was just the latest reminder that the company has significant ambitions as a technology and patent licensor.

Huawei pursued this goal in the best way it knew how – emulating peers like Qualcomm, Ericsson and Nokia by building up a significant body of contributions to the latest and greatest telecom standard, and the patents that went with them.

But the 5G patent portfolio built up by Huawei clearly caused a lot of anxiety in the United States, and played a role in the backlash that has culminated in Huawei landing on the Commerce Department blacklist. That has threatened Huawei’s very viability as a global tech company, and by extension its ability to get a return on its investment by licensing out those 5G patents.

So as companies start thinking about the next generation of wireless technology, it will be instructive to watch whether Chinese companies take the same collaborative path, or we once again see Chinese indigenous standards emerge.

This article is the second in a series about US-China trade and technology tensions. The first article, on US patent sales to China under the Trump administration, can be found here.

Jacob Schindler

Author | Asia-Pacific editor

[email protected]

Jacob Schindler