The Huawei Sanction Might Just Pop the Tech Bubble

This crisis is about much more than one company

Photo: Mairo Cinquetti/NurPhoto/Getty

Last week, Chinese tech giant Huawei was officially sanctioned by the United States. That effectively means U.S.-based companies are banned from doing any sort of business with the mobile phone giant moving forward. And this is just the beginning.

After the U.S. sanctions were announced, Google revoked Huawei’s Android license, which could leave millions of smartphone owners stranded without updates. The process has since been temporarily suspended with the Department of Commerce granting Huawei a surprise 90-day permit to support existing customers — but the reprieve only covers existing products, and the window seems unlikely to be extended.

Shortly after Google’s move, computer chipset maker Intel said it couldn’t sell laptop CPUs to Huawei, and a few days later, chip designer ARM announced it couldn’t sell the company smartphone CPUs — even though ARM is based in the U.K., which is technically beyond the reach of the embargo.

If any of these things happened in isolation, Huawei might have been able to weather the storm until one side of the U.S.-China trade war backed down. The Shenzhen-based company certainly seemed to have been planning for a scenario just like this, laying in a “stockpile” of supplies ahead of the ban. But it’s hard to imagine the company lasting the year without falling apart, unless there’s rapid political resolution — resolution that seems increasingly unlikely.

It’s entirely possible that Huawei might implode as a result of all of this — in a similar way to how rapidly the Chinese telecom company ZTE found itself near the brink of financial disaster in 2018, when it ended up on the same list. But no matter your stance on the company and the politics surrounding it, what happens next is likely to be bad for tech and the global economy. Huawei’s downfall might finally pop the bubble once and for all.

The context

It might surprise you to learn that Huawei is in the top 10 most valuable technology companies by revenue, raking in a reported $105 billion in 2018 alone. This places it alongside companies like Microsoft and Google. The company is a juggernaut at home in China, where it rapidly outpaced Apple’s growth to become the most popular smartphone brand. But Huawei’s smartphones are popular across Europe and the Pacific, too, because they’re often significantly cheaper than an iPhone.

Consumer gadgets like phones and laptops aren’t Huawei’s only focus, however. The company is a huge player in the infrastructure space, too, building out submarine cables to connect countries and mobile networks — including 5G — as well.

5G is where this mess really started: a fight for supremacy over the next-generation of mobile technology that promises faster speeds, more efficient networks, and most importantly, a chance for Huawei to define the infrastructure we will all use on a daily basis for at least a decade.

Reuters reported that it was actually Australia’s spy agency that bought all of this to the attention of the U.S. in the first place, after performing an exercise to understand what impact a company like Huawei would have if it established dominance in the 5G space. According to that report, the spies were rattled by what they found: “The offensive potential of 5G was so great that if Australia were on the receiving end of cyber attacks on 5G infrastructure, the country could be seriously exposed.” They shared this information with the U.S. in 2018, which started us on this trajectory, with the Trump administration pushing an anti-Huawei message warning of spying risks and ultimately sanctioning the company.

The real kicker, however, is that Huawei has never been caught spying — doing so would be corporate suicide, and the company’s leadership knows it. Yes, Huawei has repeatedly been accused of intellectual property (IP) theft in the past, from stealing the finger design of a screen-tapping robot to allegedly cloning the entire hinge design of Apple’s MacBook Pro. But that’s a different problem — and has proven to be something of a cultural mismatch between how Chinese and American companies develop technology. China’s government has long avoided punishing IP theft.

It’s entirely possible that Huawei might implode as a result of all of this.

A 2018 report sponsored by NATO said that “there has been no evidence, at least publicly, of significant vulnerabilities in Huawei technology,” and it concluded that the actual issue was a matter of who is trusted more: the U.S. or China.

And this is where it gets messy. What we do know, today, is that the U.S. has and will engage in actively compromising or exploiting technology produced by American-based firms in order to spy on its targets — both with the cooperation of the companies making that hardware and occasionally without their knowledge entirely.

In 2014, a trove of leaks contained in the Edward Snowden archive revealed that the NSA had intercepted networking hardware from Cisco en route to its customers — unboxing it, installing a software-based or hardware-based spying bug, and carefully packing it back up like nothing had happened.

There are other examples of this occurring across many of the major technology giants — all of which vehemently deny it ever happened — but we know it’s actively happening in the background. The NSA is a known threat actor, and has terrifying, largely unchecked power and reach. But less is known about Huawei’s role in any alleged spying.

What this is arguably all about is political power and the potential for 5G to reshape a generation of connectivity. Huawei’s lead in 5G-based technology has surprised experts and the competition, leaving old-school tech infrastructure players like Nokia, Siemens, and Ericsson years behind, struggling to keep up.

The impact

The trade ban with Huawei will damage its ability to compete across the board, as entire countries become wary of being banned from connecting to each other if they use the company’s equipment.

When Google announced it couldn’t do business with Huawei and revoked its Android license, it seemed like things might be fine. Huawei’s biggest smartphone market by far is China, where it doesn’t rely on Google’s products anyway, because they don’t work there — a reminder that the tech world has long had political divisions. Huawei reportedly planned for this and built a custom OS and App Store, just in case.

But as other companies began halting their business with Huawei, it became clear that it will face existential challenges on every level. Without ARM, it can’t build competitive smartphone processors. Without Qualcomm, it loses out on the only modems worth using. Without Intel, Huawei has no laptop play, either. The list goes on, and dismantling a single Huawei smartphone reveals how intimately tied together we all are as a result of globalization — it takes components sourced from many companies based in different countries to create a functional handset, with no single entity able to pull it off alone.

No matter your stance on Huawei and the politics surrounding it, what happens next is likely to be bad for tech and the global economy.

Huawei will struggle to survive this, and we should all worry about what China will do in response. Almost all modern manufacturing is done in China, and the country holds almost all of the cards in that space. If it wants to strangle the industry, it could raise the cost of exporting goods and acquiring rare earth metals, or impose taxes on products made there.

This isn’t a far-out theory, either. Just last week, Chinese President Xi Jinping took an unexpected visit to a rare-earth factory — critical to the production of computer chips — which suggested that a more perilous front in the U.S.-China trade war could soon be opened.

Almost every American tech company — Apple, Intel, Qualcomm, and Google, to name a few — deeply relies on China being a consistent partner that can deliver staggering manufacturing scale. It’s not just that Chinese workers earn less than their American counterparts. It would take years for U.S. companies to learn how to pull off building with the precision and scale of the Chinese, and they’d essentially be starting from scratch.

Apple, for example, would struggle to reconstruct the processes, supply chain, and other moving parts necessary to build just the iPhone. The Cupertino company might have billions in the bank to weather the storm, but it’s hard to imagine a happy resolution.

The technology industry was already facing something of an existential crisis as smartphone sales slowed, and it began to search for the next big thing. Nobody’s even sure where to look yet. The trade war will exacerbate all of this. If the reliable growth of smartphones and laptops disappears, it’s hard to see how rapid deceleration wouldn’t pop the bubble altogether.

It’s feasible that an agreement might be reached before too much damage is done, but there’s a reason to be cautious. Huawei is too big for China to stand by and watch fail, so the real question is who it’ll drag down with it — and whether or not the global tech industry is ready for what happens next.