Recently, Chinese telecom equipment maker Huawei announced it would invest EUR 70 million to open a R&D center in Helsinki, Finland. That was manna from heaven to the Finnish technology industry, which is amidst suffering from Nokia’s value meltdown.
Dan Steinbock
The move has only a small supportive role in Huawei’s strategy to double its European work force to 14,000, however. Last September, the company already announced it plans to invest $2 billion expanding its operation in Britain, creating some 700 new jobs in the next five years.
For more than a decade, I have followed closely the information and communications technology (ICT) sector, particularly mobile communications. I have also, written books on Nokia and other European and American industry leaders and an independent Huawei report last September.
In view of the global industry landscape, the EU allegations have less to do with effective competition than trade politics. Moreover, they may have been boosted by the recent U.S. debate on Huawei.
Huawei’s U.S. Odyssey
In the United States, Huawei entered the marketplace on Valentine’s Day in 2001. The push for expansion ensued half a decade later.
In the absence of a security case against Huawei, its expansion in America should be seen as an opportunity for the U.S. government, companies, innovation and consumers.
First, Huawei’s expansion in the U.S. brings jobs, capital, and tax revenues. Second, Huawei exerts a major competitive impact on price rivalry. Third, Huawei maintains more than half a dozen advanced R&D centers in the U.S. Fourth, due to the extraordinary scrutiny, Huawei has created an end-to-end global cyber security assurance system, independent third-party testing institutes, and it has opened up its source code. Its global chief cyber security officer is John Suffolk, who served as former CIO for the UK government, reporting to Prime Minister Cameron.
Despite Huawei opportunities in America – jobs and capital, competition and consumer welfare, innovation investments, and the quest for greater cyber security – its expansion has triggered opposition.
In spite of repeated bids, Huawei efforts to win a major contract from the top-tier U.S. carriers, AT&T, Sprint, T-Mobile and Verizon have been frustrated – not by the market, which has been eager for deals, but the U.S. government.
In mid-September, the House Intelligence Committee had hearings on both Huawei and ZTE. In early October, the Committee released its report, which was heavy on loud accusations, but light on serious evidence.
Only days after the Congressional report, Reuters disclosed that the White House had ordered 18-month review of security risks posed by suppliers to U.S. telecom companies. It found no clear evidence that Huawei Technologies had spied for China
During the past decade, the global marketplace has expressed its own verdict. Today, four of every five major telecoms operators worldwide cooperate with Huawei. Half of the networks that are in use worldwide deploy its technologies.
The European Case
While the potential EU case against Huawei centers on trade financing rather than security, the common denominator is the same as in the United States.
It is not the marketplace that opposes Huawei’s expansion in Europe, but Brussels. It is not consumer welfare that resists Huawei, but corporate welfare.
Reportedly, the analysis by the European Commission notes that Huawei and ZTE have been selling equipment for wireless networks at least 35% below “fair market prices.”
When Huawei arrived in Europe, industry margins declined significantly. From the standpoint of consumer welfare, however, price declines are typical to high-tech industries.
There is nothing eternal about “fair market prices.” In the past three decades, these, too, have migrated from the U.S. and Europe to Asia.
What makes the EU analysis something of a hot potato in Brussels is the additional fact that it attributes the success of Huawei and ZTE to Chinese government support given directly to Huawei and ZTE and to their customers, to buy goods made by the two companies.
Value Migrations
During the past decade, I have interviewed many executives in the global wireless industry. After the Internet and telecom bubbles burst in 2000-2001, they acknowledge that the rise of the large emerging economies of China and India saved the remaining US and European producers from devastation.
Those companies – typically Nokia and Ericsson, as well as Motorola – that rushed to China and India prolonged their lifespan, whereas those who didn’t failed to survive. However, as the U.S. and European producers have transferred their productive capacity and their R&D to emerging economies, they have also given rise to new challengers, including the privately-held Huawei and the state-owned ZTE in China.
The migration of value from one location to another is typical to the ICT sector. In mobile communications, the analog cellular (1G) was dominated by US companies in the 1980s. In the next decade, European players ruled over the digital cellular (2G). In the past decade, Asian tigers – from South Korea to Taiwan –became vital in the multimedia cellular (3G). In the 2010s, the broadband cellular (4G) will be increasingly dominated by corporate giants in China and India.
In the process, traditional cost structures have collapsed as the new challengers can keep costs relatively low, even as they build global brands and engage in global innovation.
Regionalizing Friction?
“Since financing is key” for this industry, “any unfair practices—like preferential financing from the Chinese government—destabilize the market instantly and create an unfair competitive advantage over the otherwise very competitive EU industry,” according to The Wall Street Journal.
In the EU allegations, Huawei’s success is attributed to financial support from the Chinese government. That is misguided. Typically, the allegations of Chinese state subsidies to Huawei surfaced in summer 2010, with the onset of the Eurozone debt crisis.
The credit lines made available through Huawei by the banks are designated for Huawei’s customers, not to Huawei. The matter of export credit financing is hardly limited to Huawei, China, or even other large emerging economies. It comprises all economies, including the advanced economies. These credit lines are a systemic issue, not just a company-specific issue.
Like other Chinese multinationals, Huawei is thriving because, in addition to its disruptive cost efficiencies, it is excelling in branding, and innovation. It is not that these companies are “playing unfair.” Rather, they are simply taking advantage of their strengths.
What we are witnessing is a showdown in the ICT sector in which U.S. officials are trying to support Apple’s fading efforts to sustain leadership in the smartphones (which Huawei is entering), and in which EU officials would like only European equipment makers to provide manufacturing jobs of the future (while China’s latest five-year plan designates much of the same ICT as strategically important sectors).
For now, the EU has held off starting an unfair-trade investigation that could lead to severe tariffs on wireless-network equipment imported from China. However, if the EU trade Commissioner Karel De Gucht moves ahead with the proposed “unfair trade investigation,” it would be the first trade investigation launched by the European Commission without first receiving a complaint from the European industry.
While Brussels may maintain that the move is vital to protect European companies from the Chinese government, the strategic move risks escalating a company-specific industry rivalry into a region-wide trade conflict.
Dr. Dan Steinbock is Research Director of International business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and EU Center (Singapore)
In mid-September 2012, Dr. Steinbock wrote an independent report “The Case for Huawei in America,” which was released by Huawei USA.
