I Want To Believe, page-86

"There was a follow up question because I did mention last time that we had an inbound from a large cell phone manufacturer. I would just remind you that it's a cell phone manufacturer in China. They have their own semiconductor group, so yes, it's a very active dialogue and we're getting to know each other, but we're being very cautious as that relates to question on the next piece of paper, which is protecting our IP. Large cell phone manufacturer, China with their own semiconductor business."

Inside Huawei's secret HQ, China is shaping the future

By Mark Bergen

13 December 2018 — 3:34pm

The surprise arrest of Meng Wanzhou, chief financial officer of Huawei Technologies, has thrust the company into a political firestorm and deepened a core threat: that more and more countries will blacklist its switches, routers and phones out of growing concern that they could be hijacked by foreign spies.

Yet inside Huawei's Shenzhen headquarters, a secretive group of engineers toil away heedless to such risks. They are working on what's next - a raft of artificial intelligence, cloud-computing and chip technology crucial to China's national priorities and Huawei's future. As the trade war drags on, China's government has pushed to create an industry that is less dependent on cutting-edge US semiconductors and software.

Huawei is investing massive resources in next-generation technology, seeking to replicate the success it has had in other areas.Credit:AP

Meng's detention, far from slowing these ambitions, would instead speed the fall of this "silicon curtain", when the US and China will no longer provide chips to one another, Gus Richard, a Northland Capital Markets analyst, wrote in a recent report. "Huawei is the icon of the rise of China industrial power," he wrote.

Though Meng was granted bail by a Canadian court, she must remain in the Vancouver area as she awaits possible extradition to the US on fraud charges.

The company is investing massive resources in next-generation technology, seeking to replicate the success it has had in other areas. Over the past decade, the closely held firm has quietly emerged as a titan in networking and telecom gear, now second only to California-based Cisco Systems. Then Huawei entered the smartphone market and, in a surprise to most observers, toppled Apple in market share earlier this year.

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Huawei's technical expertise, combined with its ties to China's blue-chip firms and government, could let it engineer another surprise in what many see as the critical backbone of future technology.

Those ambitions are consistent with the government's goals. President Xi Jinping wants China to be a self-sustaining leader in semiconductors - Huawei is showing it can. Xi wants China to have a global footprint - Huawei has one. Xi wants China to move from basic manufacturing to more lucrative industries, with the country capturing the benefits - and Huawei does that, too.

A sprawling room at its Shenzhen campus is filled with digital mock-ups of how banks, retail stores and city streets would look like with Huawei's technological capabilities. That tech is created a short drive away, inside a research lab nicknamed the "White House". Visitors there are rare. Yet the mock-up room, called the "vertical industries exhibition hall", welcomes guests and imagines a future where companies and governments use Huawei's cloud and AI to crunch data, spur sales and make cities see and hear everything.

Huawei's Enterprise Business Group, which trails networking and smartphones in sales, sells components and services for internet-connected devices, smart cities and cloud products. It would net more than $US10 billion ($13.8 billion) in revenue this year, about a 10th of the company's overall total, Qiu Heng, the division's chief marketing officer, said in an interview in November.

The company expects enterprise sales to double every two years. That means the business would lap $US100 billion in 2025, the year China's government has set to reach independence in technological production. And those projections are without an American business - Qiu said estimates for his division excluded the US, where Huawei is a political pariah.

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In one area, Huawei has a head start. In the past two years, the largest internet companies formed semiconductor units to improve their cloud offerings and AI applications, such as image recognition and voice assistance. Huawei's chip design unit, HiSilicon, has been around since 2004. It started working on customised chips to handle complex algorithms on hardware before the cloud companies did. Research firm Alliance Bernstein estimates that HiSilicon is on pace for $US7.6 billion in sales this year, more than doubling its size since 2015.

"Huawei was way ahead of the curve," said Richard, the analyst.

Yet in terms of sales and operations, Huawei's cloud business is meager next to its larger rivals. The company spent about $US13 billion on research and development in 2017, up more than 17 per cent from the previous year. Its rivals in the cloud market have cut similarly sized cheques.

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"Huawei has concluded that if it does not offer future solutions via the cloud, where its customers are migrating, someone else will," said Siow Meng Soh, a research manager for GlobalData.

By some measures, Huawei is lagging in software, too. In AI fields, such as deep learning and computer-vision systems, the company is "feverishly seeking to catch up" to US titans, said Oren Etzioni, head of the Allen Institute for Artificial Intelligence. "Huawei has data and government support, but are at a substantial disadvantage when it comes to AI," he added.

Still, if any company could erase that hindrance quickly, it would be Huawei.

Recent research from computer scientists in Zurich looked at the processing chips of Android phones and put the chips from HiSilicon at the top. Like its rivals, Huawei is throwing everything into its cloud package. It recently debuted a set of AI software tools and in October released a new specialised chip, called the Ascend.

"No other chip set has this kind of capability of processing," Qiu said.

Few chip-makers have such easy access to customers ready to invest deeply in AI. In Huawei's case, that customer is the Chinese government. The company sees a massive opening in the national ambition to plug every city street, camera and piece of infrastructure into a digital grid.

Huawei's aim, said analyst Soh, was to become the "nerve centre" for smart cities. Police in Shenzhen, which is just across the border from Hong Kong, are using Huawei's chips for several traffic cameras. Qiu said a single chip set could process video footage for as many as 16 cameras, a four-fold jump in computing power.

The cloud business allows Huawei to rely on its home market. While its overall sales are split about evenly in and outside of China, close to 60 per cent of the enterprise business comes from China, Qiu said. In the US, Huawei's size makes it a ready target for national security hawks; it loomed behind President Donald Trump's decision to block a $US117 billion merger.

Qiu said the company's products were compliant with Europe's General Data Protection Regulation, meaning that its clients, not Huawei, own and store data used in the applications. Huawei must tread carefully in Europe, where it has cloud partnerships with several carrier clients, including Germany's Deutsche Telekom. In the months before the CFO's arrest, US officials have reportedly asked counterparts in Germany and several European nations to drop Huawei equipment for 5G networks over security concerns. A Deutsche Telekom representative declined to comment.

In a statement, a Huawei spokesman said the company operated in more than 170 countries and criticised the reported moves by US officials. "If a government's behaviour extends beyond its jurisdiction, such activity should not be encouraged," the spokesman said.

GlobalData's Soh suggested that Huawei should turn to more welcoming markets across Latin America and Africa for its enterprise business, particularly after Meng's arrest in Canada.

"As long as they stick to the game plan, they still have a lot of room to grow," he said. "Unless the US manages to get their allies to stop buying them."

Bloomberg

 

Huawei sold 200 million phones in 2018