Business

Huawei was poised to fight Apple in the US. Now its fate is uncertain

Huawei once had big ambitions to grow its presence in the United States.

The United States makes up a tiny fraction of Huawei’s business, but the world’s largest telecom provider and second-largest smartphone seller wanted to have a much bigger presence in the country. It saw the US market as a growth opportunity for its smartphone business, and wanted to sell IT equipment to companies.

A key part of that effort had been Futurewei, the company’s US research and development outpost. Huawei, known for investing heavily in R&D, poured millions into Futurewei over nearly two decades. The research centers allowed Huawei to tap the country’s many resources for tech innovation at a time when it not only looked to grow in the United States, but also as it rapidly expanded around the world and prepared to be a leader in the push for 5G.

But the company’s ambitions in the United States, in particular for Futurewei, have been stunted by a White House pressure campaign that’s now gone on nearly a year. The restrictions hit Huawei’s US business on multiple fronts: barring it from buying from key American suppliers and threatening its telecom equipment sales in rural American markets. They’ve also made it illegal for Futurewei to transfer technology to Huawei locations outside the United States.

As a result, Futurewei has laid off staff, closed offices and is losing valuable partnerships with American universities, all of which could jeopardize its position as a leading technology innovator.

Although its investments in the United States are a relatively small portion of its total research and development budget, they reflect the importance of having a presence in the country where tech talent, venture capital and academic research, as well as other leading companies, are clustered. Although some executives have suggested the company could leave the country altogether, Huawei risks being hurt if it’s blocked entirely from development in the United States.

“You can’t count up innovations that didn’t occur, so we won’t be able to know for a while what the consequences are for Huawei of disengagement from the United States,” said Scott Kennedy, a senior advisor at the Center for Strategic and International Studies. “It’s like oxygen, you’re never really sure how significant it is until you don’t have it.”

For its part, Huawei has insisted it will be fine if it’s forced to leave the United States, but that’s not the route it wants to take.

“Huawei wants to meet with US government officials to work toward a solution, but it’s been challenging to find people that will speak with us,” the company said.

US research and development operations

In the early 2000s, Huawei undertook a broad “globalization” strategy in an effort to shift its image from a Chinese telecom provider to the global mobile services powerhouse it is today. It was in this spirit that Huawei established its US operations in Plano, Texas, in 2001 and began to build out research and development centers across the country.

In 2011, Huawei marked its 10-year anniversary in America by opening a 200,000 square-foot Futurewei R&D headquarters in Santa Clara, California. The company said at the time the facility included “state-of-the-art research labs” and would focus on developing “next generation communications solutions for US customers while supporting Huawei’s global R&D research efforts.”

But business got more difficult for Huawei in the United States the following year, after the US House Intelligence Committee released a report claiming the company poses national security and consumer privacy risks. Huawei has long denied that it poses any threat.

The White House acted on those fears in May when it added Huawei and 69 of its affiliate businesses to an export blacklist, restricting American companies from selling to it without a license. The Commerce Department last week extended a temporary exemption to that rule, but clarified the exemption is mostly limited to allowing sales of parts for existing products — not new ones. It also added 45 more Huawei affiliates to the blacklist.

The blacklist has obvious repercussions for Huawei, blocking it from buying parts from important US suppliers, such as Google (GOOG) and Intel (INTC).

But it also created a problem for Futurewei. It meant US Futurewei locations could no longer transfer intellectual property or trade secrets to Huawei’s Chinese headquarters or other blacklisted affiliates around the world, the company said. Now, research and development done at Futurewei can’t actually be implemented into new Huawei products.

Last month, Huawei laid off around 600 US Futurewei employees — about half of the company’s total US workforce — and closed several office locations as a result. At least 200 of those layoffs were from the flagship Santa Clara research facility, according to a WARN notice filed with the state.

The future of Futurewei

Remaining Futurewei employees will focus on completing projects that were already underway prior to the restrictions, said Tim Danks, Huawei’s president of partnerships and risk management. For now, the intellectual property for those projects will remain in the United States as the company hopes for a compromise with the White House.

But the likelihood of such a compromise happening anytime soon looks slim, Kennedy said.

“Perhaps they’re hoping for a change of administrations, a change of priorities,” Kennedy said. “But I think there is a consensus that Huawei is a problem … and that concern is going to outlive Trump.”

That could mean Huawei’s continued investments in US research and development end up going nowhere. Depending what those projects are, that could be a real loss for the company.

Danks didn’t specify the nature of the ongoing projects. But in the past, Futurewei workers have developed technologies related to core areas of Huawei’s business, such as a method for machine learning on wireless networks and one for encrypted data transfers on 5G networks, according to filings with the US Patent Office.

And Danks said it’s unclear whether Huawei will invest in new US research projects going forward. Huawei invested $500 million in Futurewei in 2018 and had planned to invest $600 million in 2019 before it was placed on the blacklist.

“This makes it difficult to do that research and development that will go into future products,” Danks said.

Additional challenges for R&D

Adding to that difficulty: Many American research universities heeded US government warnings and halted partnerships with Huawei in recent months.

Huawei had over 50 research partnerships with American universities last year. From 2014 to 2018, the company paid more than $10 million dollars in gifts and contracts to US universities, according to data from the Department of Education. But recently, MIT, Stanford, Princeton, University of California San Diego and others have all cut research and funding ties with the company over the national security concerns and its placement on the export blacklist.

Stanford said in a statement that it placed a moratorium on partnerships with or gifts from Huawei “out of an abundance of caution” and “are aware of nothing inappropriate arising from past support that Huawei has provided to Stanford.” Huawei had been a member of two research programs at the university, one focused on artificial intelligence and another on solving complex engineering challenges.

The opportunity to form partnerships such as these are part of the reason foreign companies create US research and development outposts.

“We have a huge, dynamic community of researchers and funders and universities and opportunities to test drive different technologies,” Kennedy said. “That’s why the US is one of the world’s leading innovators.”

Foreign companies investing in development also has residual benefits for the United States, experts say.

“If we have the best talent in the United States and the most innovative companies, that keeps us on the forefront of tech development so we know where things are going, it has a multitude of benefits,” said Martin Chorzempa, a research fellow at the Peterson Institute for International Development.

Huawei, however, says hurdles in the United States aren’t slowing its development efforts elsewhere. Danks said the company still has research partnerships with more than 300 universities globally and that Huawei has begun research on 6G — the next generation of wireless network technology — in Canada, in partnership with several institutions.

“As a global leader in telecom, we have to be looking at the future regardless of the current political climate,” Danks said.