BS READS: How deep Huawei's roots run and why it's tough to keep it out

Keeping Huawei out is hard as its offerings are cheaper than European rivals, and it has ongoing maintenance contracts with telcos here. Two-thirds of 560,000 towers in India run on Huawei equipment

This isn’t the first time China’s Huawei, the global network equipment major, is under the scanner. Back in 2001, India’s intelligence agencies had placed it under watch after it emerged that Huawei was doing business with the Taliban, the terror outfit in Afghanistan. Later, however, the matter was dropped and what began was a period of Huawei's stupendous rise in India. Between 2002 and 2018, the Chinese firm rode the wave as the Indian telecom sector leapt from dial-ups to high-speed 4G, supplying networking gear to every large network in the land (at its peak, India had at least eight telecom carriers).

Now, Huawei finds itself under a cloud. Following India’s border skirmish with China, and an already growing scepticism about Huawei’s perceived closeness to the Chinese government, India wants to keep the company out. There are calls to bar it from bidding in the ongoing 5G trials. India’s telecom department even cancelled, and is reworking, a massive Rs 9,000-crore tender to supply 7,000 cell towers to government-controlled telcos BSNL and MTNL, purportedly to keep Huawei out.

Analysts say keeping Huawei out would be difficult for two reasons. First, its offerings are cheaper than European rivals. And second, it has ongoing infra-management and maintenance contracts with carriers in the country. There are 560,000 mobile towers in India, according to the Department of Telecommunications (DoT), and two-thirds of these, according to experts tracking the space, run on Huawei equipment. Huawei has also been a massive supplier for more than a decade, to Airtel and Vodafone-Idea, which will lose their competitive advantage if the Chinese firm is barred, experts say. Finally, while Huawei has recently fared poorly against other Chinese brands, it is still among the top-10 smartphone brands in India.

Huawei India declined to comment for this piece.

What is Huawei?

Founded in 1987, Huawei is a provider of telecommunication hardware, infrastructure and devices. It has, over the years, expanded to security and cloud services. It has nearly 200,000 employees and a presence in 170 countries. Counted among the biggest companies in the world, Huawei has been on the Fortune 500 list for over 10 years, most recently at the 61st spot. In 2017, it surpassed Ericsson to become the largest telecom equipment supplier in the world.

Huawei competes with Nokia, Ericsson, Alcatel Lucent, Qualcomm and Samsung, but it is widely considered cheaper than others. It is also at the forefront of technology. According to the company’s latest annual report, Huawei had 87,805 patents and 11,152 core-technology patents in the US. Its 2019 revenue was $122 billion.

Huawei is the centre of attention because it is one of the biggest players in 5G technology, which promises speeds of thousands of megabits per second (Mbps). 5G is accomplished through a combination of high-tech cell towers, mobile handsets, and carriers supporting transmission over high-wavelength frequencies.

In China, where Huawei is the leading vendor, 5G development started fairly early. Research began in 2013, and pilots were rolled out by 2016. According to a 2018 Deloitte report, since 2015, China has spent $24 billion more than the US on 5G and has 12 times more 5G base stations (towers). Globally, Huawei alone has helped build 5G networks in at least 10 countries, according to Bloomberg.

In India, Huawei has been operating since the late 1990s. For long, it has been the main vendor for Airtel, Vodafone and Idea (Idea and Vodafone merged in August 2018). The contracts go beyond merely supplying equipment for BTS (base transmitter station, or cell tower), and often include maintenance and management of telecom infrastructure on an ongoing basis.

“A substantial portion of (existing) network is Huawei,” says a senior telecom professional who does not wish to be named because he works at a rival firm. “As far as 5G is concerned, it is a new thing. Whether you deploy Huawei or anyone else, it doesn’t matter. For 5G, Huawei will have to compete with other vendors.”

Huawei’s India business is led by company veteran David Li, who took up the role this year after serving as sales director in Cambodia. It has about 6,000 employees in the country, about 4,000 of them serving at its R&D facility in Bengaluru. The Bengaluru centre, opened in 2015, is Huawei's largest overseas research hub, people close to the company say. It also houses a business unit called Global Service Centre, which supports carrier network operations (support work) for Huawei’s customers in over 30 countries. India GSC is also the largest in the world for Huawei.

Why is Huawei considered a threat?

Huawei has an uncommon ownership structure and is perceived to be close to the Chinese government, to which — it is alleged — it might offer foreign nations’ data if China went foul with any of them. The sceptics, led by the US, are wary that Huawei can potentially insert, or already has, “back doors” in the network infrastructure to spy on sensitive data.

A private company, Huawei is managed by a board of directors elected by employees, and has no external investors. The employees periodically vote to elect a 115-member Representatives’ Commission, which elects the 16-member board, including the chairman. The board ultimately runs the company. According to the company’s own admission, the union of its 100,000-plus employees hold a stake in its parent Huawei Investment & Holding Co.

There are a few reasons for suspicion but the biggest of them is its co-founder’s alleged ties with the Chinese government. Before founding Huawei, Ren Zhengfei, one of the founders, was the deputy director of an engineering unit under the People’s Liberation Army.

Further, it doesn’t help that China has a nationalistic legislation for the private sector. In 2017, the country implemented the National Intelligence Law, which states that Chinese organisations must “support, cooperate with and collaborate in national intelligence work”. This, coupled with a 2014 Counter-Espionage law, allows China to demand any sort of intelligence or data from Chinese companies on anybody deemed a potential threat.

“We are contemplating on this subject. At this point, we are closely watching what others like the US are saying. We will act when there is a directive from the top,” says a senior official at a government cyber-security agency. This person does not want to be named given the sensitive nature of the subject.

In June, US anti-trust agency Federal Trade Commission named Huawei and ZTE, another Chinese firm which works closely with Huawei, as national security threats. This was in furtherance to a May 2019 executive order banning Huawei from supplying to US companies, and even buying from US companies. The Chinese firm has been under the scanner for many years, but tensions escalated in 2013-14 when Washington found out that Huawei supplied American equipment to Iran in violation of US trade sanctions.

As US-China relations worsened through 2017-19, Huawei became the target of a trade war. Washington went so far as to have Meng Wanzhou, the company's CFO and daughter of Zhengfei, arrested in Canada in December 2018. The final, and perhaps the most resounding blow came eight months later when Google revoked Android licences for Huawei, leaving its phones without an operating system. The company has since launched its own OS.

“Potential loopholes in Chinese equipment are well documented,” says Rameesh Kaliasam, CEO of Indiatech.org, a group that promotes the interests of Indian technology companies. He points to research in a paper titled ‘Stealing Thunder’ by the European Centre for International Political Economy (ECIPE), which noted that while all governments might spy in some form or the other, a few did so to hand over the information to their industry. “With China you can never really be too sure,” says Kaliasam.

Amid the trade war, the US is now trying to convince its allies to bar the network firm. So far, Australia and New Zealand have blacklisted Huawei. The UK is flip-flopping: while it allowed Huawei a 'restricted' role in 5G trials in January, it has now decided to completely ban the company from its 5G network by 2027. India is still contemplating a response.

What is the status in India?

Even as it recently banned 59 Chinese mobile apps, India has not formally blacklisted Huawei yet. Huawei smartphones also continue to sell in India. However, their sales have dropped since Google Android pulled out, says Tarun Pathak, associate director, Counterpoint Research. “Because of a pick-up in anti-China sentiment, consumers are coming to retailers and asking for only non-Chinese brands to be shown. Having said that, Chinese brands have an 80 per cent share of the market, so we do not have many alternatives,” says Pathak.

The crux is that Huawei has ongoing engagements with Indian carriers and other industries. Further, it has been a long-time vendor to Airtel and Vodafone- Idea, which stand to lose if Huawei is barred in India.

“Because Reliance has been single-handedly aligned with the Koreans (Samsung), there has been a division between the Reliance and non-Reliance camps as far as network equipment purchase is concerned. Samsung basically doesn’t want to supply to any other operator. There is no option other than to buy from the Chinese. Nokia and Ericsson are generally priced much higher,” says the senior telecom professional mentioned above.

“That is why non-Reliance firms are asking the government not to ban Chinese players. They (companies other than Reiance) would lose their competitive advantage otherwise,” this person adds.

The Indian telecom equipment market is estimated to be worth Rs 70,000-90,000 crore, according to various reports. Telecom equipment demand coincides with spectrum allocation; that is when companies race to install new infrastructure. The most recent sale of 4G spectrum fetched the government Rs 65,789 crore in 2016. Analysts say, a sum as much as half of this would have gone towards network upgrade.

However, telecom companies have since become highly leveraged, and the entry of Reliance Jio, which cut mobile tariffs drastically, has only added to the burden. Most carriers other than Jio are also saddled with AGR dues. Now, if a key network vendor is ousted from the market, it may jack up prices, analysts say.

“We are at a loss as to what to do as an operator — should we order Huawei equipment or should we not? It (the risk) cannot be taken by operators,” Bharti Enterprises Vice-Chairman Akhil Gupta was quoted as saying in a March 2019 report. A recent media report said that Vodafone-Idea and Airtel could end up owing $1 billion collectively if they ended up cancelling contracts with Huawei.

Huawei has had a solid run in India. In 2018-19, the Indian arm posted Rs 12,884 crore in revenues and Rs 623 crore in profits. These were higher by 55 per cent and 213 per cent, respectively, from a year earlier. And Asia-Pacific, which includes India, forms only eight per cent of Huawei's global revenue.

The Chinese firm has been the nameless technology vendor in almost all major telecom breakthroughs in the country. When Reliance Communications ushered in the CDMA revolution, flooding the market with millions of cheap handsets, offering 40-paise for within-network calls in 2002-03, it was Huawei which helped set up the infrastructure. Again, in 2013, RCom invited it back for $200 million worth of network upgrade. Huawei also built all of Airtel's 3G network in Bangladesh in 2013, and for Vodafone-idea it has been the sole vendor for infrastructure in Delhi, Kerala, Odisha, Punjab circles.

Even Reliance Jio, when it was Reliance Infocomm in its early days, signed contracts with Huawei for 4G equipment, dongles and smartphones. Huawei’s clout surely is not limited to the telecom sector. According to its annual report, Huawei cloud and network solutions are used by some “municipal services”, while its “optical network” is deployed at some “airports, universities and schools” in the country.