Made in China—three words often associated with cheap quality. Four years ago, the Chinese government repurposed the phrase as the name of a new industrial strategy intended to propel homegrown companies into more advanced markets, and to make them less reliant on overseas components. This month, tough new US sanctions on China’s Huawei, the world’s second-largest phone maker, made those ambitions more urgent.
Assessing Huawei’s options now that it’s blocked from tapping US technology shows how China’s tech industry has lessened its dependence on overseas technology. At the same time, US and Chinese companies remain symbiotically entwined. True independence—forced or otherwise—would entail economic pain on all sides.
Huawei’s rise shows how the Made in China 2025 strategy is more than a Communist Party pipe dream. The company was founded in the 1980s by a People’s Liberation Army engineer, and initially sold telephone switches and fire alarms imported from Hong Kong. Today Huawei is the world’s leading provider of telecom equipment and ships more mobile devices each year than Apple.
One sign of Huawei’s sophistication is that the two most crucial components inside those devices are designed in-house. The company’s HiSilicon chip division designs the processor and wireless modems inside phones like Huawei’s flagship, the $899 P30 Pro. That mirrors the all-in-one strategy of South Korea’s Samsung, the world’s largest phone maker, which also makes its own processors and modems. Apple, the world’s No. 3 phone shipper, crafts its own processors but buys its modems elsewhere. All three companies’ processors are based on designs licensed from ARM, owned by Japan’s Softbank. Huawei also makes chips for its telecom equipment, whose alleged security risks have sparked conflicts with governments around the world.
Those semiconductor smarts will be crucial if the chokehold the US Department of Commerce placed on Huawei this month becomes permanent. The company was added to a list of people and organizations deemed to threaten US national security or foreign policy, and it must now obtain permission before accessing US technology.
That change prompted Google to revoke Huawei’s licenses to bundle its search engine, app store, and other services onto phones. ARM suspended business with Huawei, saying its intellectual property includes “US origin technology.”
The abrupt end of Huawei’s relationship with ARM sliced at the heart of the Chinese company’s business model. But Huawei will be sheltered for a while, says Jim McGregor, founder of semiconductor analysts Tirias Research.
Huawei gets early access to ARM’s newest designs and will have already spent around two years working with the Japanese company’s latest generation of technology, McGregor says. ARM revealed its latest chip designs publicly Monday ahead of the Computex expo in Taiwan; they aren’t scheduled to appear inside devices in chips from partners like Huawei until 2020.
That means Huawei has plenty of time to ship a new line of phones with cutting-edge processors while waiting for the US hostility to cool. If it remains cut off from US tech, the company could even use its prior access to ARM’s technology to make its own line of chips compatible with existing apps and app stores in China, McGregor says.
The Wall Street Journal reported Friday that Huawei is already planning to create its own mobile operating system, to replace Google’s Android. The company could do that without starting from scratch by building on top of the open source version of Android, as Amazon has for its Fire devices.
Creating a parallel mobile ecosystem would cripple Huawei in Western markets, because its devices wouldn’t be compatible with Google’s app store and services. It might work better in Asia, particularly if other Chinese companies join in amid the US-China tensions, says McGregor. “We’ve known for a long time they wanted to develop their own prowess,” he says of Chinese tech leaders. “This dispute is pushing them much harder away from working with US technology companies.”
Huawei might survive without US technology; thriving would be another matter. China’s tech industry has steadily become less dependent on overseas tech, but neither the industry nor the country’s leaders have been aiming for full independence, says Minyuan Zhao, a professor at the Wharton School. “They built on Western technology expecting it would always be there,” she says. “Going it alone was not the plan.”
Zhao adds, “As the largest beneficiary of globalization, there’s no sense in China breaking globalization.”
Although Huawei designs some of the most crucial chips inside its phones and mobile network hardware itself, those products also include many components sourced directly or indirectly from the US.
Teardowns from iFixit and EE Times show that Huawei handsets include flash memory, motion sensors, and power management chips from US companies. China’s government has spent decades trying to accelerate its domestic semiconductor industry, but its companies are just gaining the capability to produce sophisticated memory chips like those from Korean, Japanese, and American companies.
Worse for Huawei, China’s tech industry as a whole is highly dependent on software from US companies, says Paul Triolo, who leads global tech policy at Eurasia Group. “China has never been able to produce the ecosystem that can really scale and is supported by a broad community of developers,” he says.
One reason for that may be China’s long tradition of software piracy deterring investors and entrepreneurs. Government efforts have also foundered. In 2000, the Chinese government sponsored development of an open source operating system dubbed “Red Flag Linux.” In 2014, local media reported that the project’s Beijing headquarters were shuttered.
Huawei’s business selling network and computing equipment to overseas companies has depended on US enterprise software, including from database pioneer Oracle, says Triolo. Oracle’s website lists Huawei as a partner and includes a statement from the Chinese company saying it works closely with Oracle to test new products. Oracle spokesperson Debora Hellinger said that many vendors certify hardware to work with the company’s products, and that it “will always comply with current regulations.”
Despite the way US firms prop up Chinese tech stars like Huawei, American companies do not stand alone. Leading American firms are themselves highly dependent on China. “Companies like Qualcomm and Apple also built their business models on the understanding there will be a global market and supply chain,” says Zhao of the Wharton School.
That interdependence is why the Department of Commerce’s recent Huawei ban includes a temporary 90-day delay that allows US companies to work with Huawei to support existing products. If it is not extended, some US consumers may see their cell phone service suffer. The largest US wireless carriers have generally avoided Huawei equipment, but smaller providers use it to serve millions of customers. Last year, a coalition of those operators warned the FCC that they could suffer network outages if cut off from Huawei.
Apple’s deep entanglement with China provides a good example of how broadly US tech relies on the country. The iPhone maker relies on Chinese manufacturers like Foxconn, which assembles devices, and Sunwoda, which makes batteries. Even Apple’s expanding income from software services such as music and TV rely on China. Those services stream to consumers from Apple data centers, which are stuffed with servers and other hardware likely dependent on Chinese manufacturers.
When President Trump proposed new tariffs on Chinese imports last year, industry think tank ITIF, whose board includes representation from Apple, warned that erecting barriers between US and Chinese tech would be “threatening [to] US leadership in both the adoption and provision of cloud computing.”
“As a country, self-sufficiency is an interesting idea but it’s not really possible in these areas of technology,” says Triolo of Eurasia Group. Apple did not respond to a request for comment.