A wrong way about Huawei

Or why the Wall Street Journal does not tell it like it is?

In a recent article, the WSJ details how Huawei was propelled by Beijing’s billions. In the online version, the WSJ editors mark this text as a news exclusive. Indeed, the WSJ did extensive research estimating exactly how much help Huawei got from the Chinese state. It should not be considered news that it was a lot, because it is commonly known that the Chinese government heftily supports businesses perceived as pivotal for the strength of its nation. The numbers brought out by the WSJ are most likely true, but the article is not news at all. It is an opinion piece but, by not putting the numbers into a broader context, it is not journalism either; it is finesse propaganda.

From zero to one

On every possible occasion, Huawei leaders bring up that the company is still relatively young, starting literally from nothing in 1987. Ren Zhengfei, its founder, in every step acted exactly as Peter Thiel advises startups to do in order to succeed. With an obsessive perseverance he looked for and then executed opportunities of unexplored market niches, obtaining, at least for some time, a dominant position. When in the 1980s China began promoting private enterprises, every new business needed a small phone system. Every municipality in China needed to upgrade its obsolete phone systems as well, and so did the Chinese military. Mr. Ren determined whatever was the best in the world in this category, and as every startup in this position, he did reverse engineering and figured out how to manufacture in China the phone switches that were suitable and affordable for the local market. Huawei hit the sweet spot in the market, going primarily after small businesses and rural municipalities, mostly dismissed by the major market players. After getting some market presence, the bigger contracts arrived, including a pivotal contract from the Chinese People’s Liberation Army (PLA).

From the early days, the focus of Mr. Ren was not on acquiring existing technologies but on taking “wheels” that were already available and inventing the new ones. When entering the wireless telecommunication technology, again, Huawei focused on edge markets, mostly in rural communities, this time all over the world, and gradually expanding into major networks. Huawei became the dominant worldwide vendor of cellular switches and antennas. According to the WSJ, in the first three quarters of 2018, it provided 28% of all 4G equipment installed worldwide.

In 5G, Huawei is the world’s leader

The WSJ did not ask the most obvious question, how the American telecommunication industry lost its dominant position. Instead, it took a magnifying glass to find out if Huawei, a Chinese company, had been playing by American rules. From the start, it omitted the fact that, when looking for the technological advantages of future technologies, in 2009 Huawei spotted the work of professor Erdal Arikan, a Turkish scientist with an engineering degree from Caltech and a Ph.D. from MIT. From the earlier WSJ publication, we know that its editors knew about this key factor. Mentioning this detail did not fit the thesis of the article, that Beijing money, not business acumen and hard work, had propelled Huawei.
The art of digital communications boils down to compressing data and then sending it with as few errors as possible. The key theory quantifying how it could be done had been formulated by Claude E. Shannon in 1948. As a student, professor Arikan was interested in some aspects of Shannon’s theorem that could make communication networks more efficient. He developed his ideas in his doctoral dissertation at MIT in 1986 and presented the final concept in an article published in 2009, discovering the so-called polar code. Interestingly, at MIT professor Arikan worked under the supervision of professor Robert G. Gallager, who was under strong influence of Shannon; first as his student, then as the junior colleague at MIT. To make things even more intriguing, in the 1960s professor Gallager invented the Gallager code, which did not find a practical application until the late 1990s, and now, known as a low-density parity-check (LDPC) code, is commonly used in digital data transmission. In particular, when it comes to standards for 5G, LDPC is the major alternative to the polar code invented by professor Arikan.

When asked which code is better, professor Arikan answered diplomatically that it depends on the application. Huawei bet that the polar code is the best for 5G. After years of work, in 2016, in lab tests they got speeds as high as 29.3 Gbps. Judging from the tremendous political pressure from the United States, it appears that experts agree that the polar code is the way to go with 5G. Although Americans had prior inside information about its development, Huawei swept this technology from under Americans’ noses. Now, as WSJ confirms, Huawei holds most of the key patents and is at least one year ahead of its competitors in having 5G switches ready for deployment and they’re cheaper than others’. On the top of that, Huawei spends a tremendous amount of money for research and development, $15.3 billion in 2018. In short, it has no meaningful competitor worldwide, and there is no one around to challenge its position in the foreseeable future.

As it is

This means that in the strategically important telecommunication technology, the United States lost its dominant position. The challenge for American political leaders is that this loss is to China, which clearly aspires to use its newly gained economic power and technological advancement to increase its political and military position in the world.

In wireless telecommunication systems, prior to 5G, the progress was measured in enhancement of the performance of our cell phones and tablets. The 4G technology, where implemented and working to its full capacity, can satisfy most of the current and anticipated needs of our portable devices. High-speed and low latency 5G networks open a plethora of new applications, often called the internet of things (IoT). Self-driving cars are mentioned most often. With each vehicle being a link in the network, we can imagine a system where safety is not only obtained from analysis of sensors on the car, as it is done now, but by knowing the locations and activities of other vehicles in the surrounding area. Potential commercial applications are plenty and possible military uses are endless. For these reasons American political leaders are getting nervous, realizing that they lost to China on 5G.

Americans would not be so panicky if Huawei were just one isolated instance of China getting ahead of the United States technologically. According to the experts in the U.S. Department of Defense, besides 5G, China already has an “insurmountable” technological lead over the United States in drones, batteries, electric vehicles, hypersonics, solar energy, high-speed rail, mobile devices manufacturing and a few more.

Somehow, they missed geo-navigation. Since 1970s, the U.S. government operates the global positioning system (GPS) developed originally for the military and gradually released for civilian applications. Currently, this is the dominating system worldwide, giving the U.S. government the power to limit its use, as was done to the Indian military during the military skirmishes with Pakistan in 1999. China has just completed BeiDou, its worldwide alternative to the American GPS. In the American GPS, communication is available only from the satellites to the receivers. BeiDou offers two-way communication, which makes it much more attractive than GPS for many new commercial and military applications.

They do it faster and better

When writing about Huawei, which exemplifies this tremendous success of China, the WSJ editors find it worthy to bring up that 21 years ago, Huawei got in trouble with China’s equivalent of the IRS. If the WSJ editors were entrepreneurs themselves, they would know that being creative in avoiding taxes is a part of a surviving strategy for every startup, often leading to troubles with the IRS. The IRS has no interest in taxing startups to death. No political cloud is needed if one can present a reasonable argument that some leniency now can bring more money to the Treasury in the future. This is how it works in the United States. One can reasonably assume that Chinese tax authorities are not much different. The sensational tone of the WSJ reporting that in 1998 Huawei needed to be rescued by high-ranking politicians from Beijing due to the alleged tax fraud does not sound convincing for someone who knows firsthand how matters of this nature are resolved in the United States.

The WSJ laments as well that “China Development Bank and Export-Import Bank of China in the last two decades made available more than $30 billion in credit lines for Huawei’s customers.” Fairly, they report as well that, according to Huawei, rarely is more than $3 billion of that credit line used. With Huawei’s revenue of $122 billion in 2019, it is not convincing that money from Beijing propelled Huawei’s growth. It is correct, however, that Huawei offers financing for their products, but mostly from its own cash flow.

For the record, since 1934 the U.S. Export-Import Bank has done in the United States the same work as the China Development Bank and Export-Import Bank of China do in China. The WSJ quotes the opinion of Fred Hochberg, the former chairman of the U.S. Export-Import Bank, who candidly states that in providing financing for their products, Huawei outsmarts their competitors. The WSJ editors did not notice that this one quote derails the main argument of their article.

The WSJ editors write with indignation that between 2014 and 2018, Huawei got about $2 billion in discounts when buying from the Chinese government the land for its newest research center in Dongguan. The design of the recently opened campus flamboyantly mimics the most impressive architecture from European cities. Planned for 25,000 workers, it had about 17,000 employees at the beginning of 2019. Just recently, Huawei got a permit to add next to it a smart manufacturing complex with the capacity for the work and housing of 40,000 people. The bitterness in the WSJ comments can come from the comparison that in 2017 Foxconn was offered $3 billion in tax incentives for building in Wisconsin a factory employing 13,000 people. So far, not much has happened, and likely, if anything is realized, it will be a small fraction of the original plan. It is painful to see that the Chinese can make it work, when Americans do not.

The research by the WSJ editors confirmed as well that the Chinese government, by grants and tax discounts, heavily supported research and development work at Huawei. It was 17 times of the amount that in the same time Nokia, one of the major Huawei competitors, received from the government of Finland. Not to mention that another competitor, Ericsson of Sweden, got nothing from its government. The question one should ask: What would be a proper size of government support, if any? Should it be related to the size of the given company market, or to the aspirations of growth? Should the government’s support be proportional to the country’s population, or maybe to the country’s need to advance itself? The population of China is about 255 times larger than that of Finland, and despite tremendous progress, China is still an emerging economy. If the government of China sees telecommunications as a way of advancing the prosperity of its people, then who has the right to judge how much it should invest in the development of new technologies? Especially when a reasonable person has to acknowledge that if put in China’s position, they would do exactly the same.

The faith in America has been lost

As on every occasion, the WSJ brings up again that for many in the United States, Huawei is a security risk, “should Beijing request network data from the company.” It is reasonable to expect that others, including China, spy on America. Behind the panicky fears that the Chinese government can compel Huawei to be a part of its spying operations is an unspoken assumption that Americans do not have the talent and the skills, as good as China does, to timely detect potential security threats. Ironically, for the Chinese government, it would be unwise to risk the prosperity of its own company; it is much smarter to find a way to plant spying bugs in the equipment produced anywhere else but not in China.

This WSJ article illustrates how American political elites have been intellectually paralyzed by the rise of China. The president is promising to make America great again, but no one remembers how America became great in the first place. The 19th century for the United States was the same as that last 40 years have been for China. Europeans had been yelling and screaming that Americans were stealing their patents. Railroads connected the newly built cites across the continent. Europeans were looking at America with the same disbelief with which Americans now look at China.

By now, the self-confidence of Americans that anything can be done has been replaced with a self-contentment. Then, China happened, and Americans cannot think straight. Instead of whimpering that Huawei succeeded because it received billions from Beijing, the WSJ is afraid of asking the most obvious question: If the American companies had all the money in the world, would they be clever enough to capture the invention of professor Arikan and develop it as Huawei did?

In the video about how to pre-empt the Huawei threat, the WSJ shows a supposedly American intellectual who, with disapproval in his voice, reports that the Chinese want to be a leader, that this is the goal of the Chinese Communist Party. Should the CCP ask Huawei to hold their horses because the United States of America has a god-given destiny to be the leader in telecommunications for eternity? That kind of iconoclastic thought did not cross the minds of the WSJ editors. Instead, they did a lot of investigative work to assemble a collection of petty arguments to cover the plain truth that there is nothing wrong with Huawei, despite the fact that their leaders might not be saints, as not all of the industrialists who built America in the 19th century were saints either. The WSJ does not ask the most obvious question: What is wrong with the United States that it cannot compete with China? The article tells us something that the WSJ editors may not realize themselves, that they have already lost faith in America. And, this is the real problem.

Originally published at https://www.datadriveninvestor.com on January 14, 2020.