Huawei indicted, China responds. Should consumers worry?

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The U.S. socked Huawei right in the mouth with the power of a heavyweight boxer. The Department of Justice this week filed indictments against the company, alleging it stole trade secrets, violated trade sanctions against Iran, and committed fraud. Everyone knew the hit was coming, but that doesn’t stop it from smarting.

The indictments are part of a years-long campaign by the U.S. to minimize Huawei’s reach in the telecommunications market over what it says are legitimate security concerns. Some believe the Chinese government has a backdoor into Huawei’s telecommunications gear that could be used for spying. The company has long denied any wrongdoing and asserted those claims once again in the wake of the latest action.

“Huawei is disappointed to learn of the charges brought against the company,” said the company today in a statement. The charges are aimed at Huawei CFO Wanzhou Meng, who was arrested in Canada last year. The U.S. hopes to extradite Meng and force her (and Huawei) to face trial. Huawei says it reached out to the U.S. after Meng was arrested, but was rebuffed. “The company … is not aware of any wrongdoing by Ms. Meng, and believes the U.S. courts will ultimately reach the same conclusion.”

The Chinese foreign ministry also leveled a new complaint against the DoJ. “We strongly urge the United States to stop the unreasonable crackdown on Chinese companies including Huawei,” said Foreign Ministry spokesperson Geng Shuang in a statement. The Ministry further urged the U.S. to “immediately withdraw the arrest warrant” and “stop making such kinds of extradition requests.”

The charges

Huawei has to play the short and long game at the same time, and navigate both skillfully if it wants to extricate itself from this ever-growing threat.

The U.S. case focuses on some fairly specific incidents. It alleges that a Hong Kong-based subsidiary, Skycom, acted as a front for Huawei’s activities in Iran. Skycom’s Iran offices were staffed by locals, but acted at the behest of Huawei to strike deals in violation of international trade sanctions in place against Iran. Bank fraud is lumped in with this charge. Meng was roped in due to her role as chief financial officer, a position that would have allowed to her to oversee such behavior.

The U.S. also says Huawei engineers in the U.S. attempted to steal trade secrets from T-Mobile. This case, settled some time ago, involved a testing robot called Tappy. A jury has already awarded T-Mobile $4.8 million.

Huawei claims its employees acted on their own (lone wolf defense), while the U.S. says it can prove the employees acted on the company’s behalf.

The actual theft of Tappy secrets isn’t that important, noted Tim Culpan, a Bloomberg contributor, via Twitter. It’s more important to learn whether company management was part of the plot and whether its lone wolf defense is legit. This will eventually establish — or strip away — trust in Huawei’s leadership.

Consumer impact

Can Huawei counter this in a meaningful way, and what might the impacts be on consumers?

While the company’s telecommunications gear has been banned in the U.S. for some time, Washington has only recently succeeded in making other countries question Huawei. Vodafone in Europe, for example, said it would pause purchases of Huawei equipment while it reevaluates its relationship with the company. Vodafone is one of the biggest carriers across the continent.

This shows things are beginning to turn south for Huawei’s telco biz.

Should carriers begin to source equipment from Huawei’s competitors, it will affect global 5G build-outs eventually. Carriers are set to begin deploying 5G in earnest over the next six to 18 months. Losing a major supplier could slow things down. This isn’t the worst possible outcome.

Then there’s Huawei’s other business: mobile phones. There’s still time for the company to shield its handsets from the fallout.

“Huawei really needs to separate its devices business from [its] telecom infrastructure,” recommends Avi Greengart, research director, consumer platforms & devices, at GlobalData.

Huawei has in the last year become the world’s second-largest supplier of cell phones. This includes its Honor-branded devices. Huawei sits between number one Samsung and number three Apple. It might consider divesting the business entirely. Maybe rebrand the entire phone business under the Honor umbrella, or come up with a new brand. Put a clear, internal wall to separate the telecommunications business from the phone business. Doing so might ease some minds and allow Huawei’s phone unit to continue innovating.

Innovation is key. With 5G around the corner, phones are about to get exciting again. It would be a shame to see the number two player, which has delivered some of the most compelling phones in the last year, knocked down. 

Huawei’s path forward is a bit murky. It must first prevent Meng’s extradition to the U.S. If it cannot, it needs to mount a successful lone wolf defense for those accused of breaking the law. Should Huawei lose the case entirely, its reputation will suffer severely and its telco business may be in immediate most danger. Consumers needn’t worry overmuch for the time being. 

Apple will update China iPhones to prevent ban, but Qualcomm still fighting

  • Apple will send software updates to several iPhone models in China to remove features disputed by Qualcomm as illegal. This will, hopefully, avoid a Chinese iPhone sales ban.
  • However, Qualcomm is at the same time fighting for the potential sales ban to cover even more iPhone models.
  • Apple admitted that if it cannot avoid the Chinese sales ban, it will be forced to settle with Qualcomm.

Earlier this week, a Chinese court issued a set of preliminary injunctions in the patent fight between Apple and Qualcomm. The injunctions — which heavily favor Qualcomm — essentially put a Chinese sales ban into effect for the Apple iPhone 6S, iPhone 6S Plus, iPhone 7, iPhone 7 Plus, iPhone 8, iPhone 8 Plus, and iPhone X.

Apple revealed today, via Reuters, that it will push a software update to the Chinese iPhones in question next week. This software update will change and/or remove the disputed Qualcomm technology, which Apple hopes will allow the company to avoid the sales ban.

“Early next week we will deliver a software update for iPhone users in China addressing the minor functionality of the two patents at issue in the case,” Apple said. “Based on the iPhone models we offer today in China, we believe we are in compliance.”

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Originally, Apple claimed the sales ban was irrelevant because the iPhone models in question all run iOS 12, which the company argues fixes the issues revolving around the case. However, Apple must have changed its mind, as now it is pushing an update.

Ultimately, it will be up to the Chinese courts to decide if this future software update will be enough to avoid the sales ban.

Meanwhile, Qualcomm is pushing even harder on Apple, apparently emblazoned by the preliminary injunctions win this week. According to The Financial Times (via Engadget), Qualcomm is now pushing for the sales ban to also include the Apple iPhone XS, iPhone XS Max, and iPhone XR.

Should the Chinese courts deem the software update to not be enough to avoid the ban, Apple concedes it would have no other option but to settle with Qualcomm. If this comes to pass, it would be an enormous win for Qualcomm in its years-long fight with Apple over alleged patent licensing infringement.

However, Apple does not mince words when describing how destructive an Apple sales ban in China would be. Apple had this to say in a December 10 filing, via The South China Morning Post:

“Apple will be forced to settle with the Respondent, causing all mobile phone manufacturers to relapse into the previous unreasonable charging mode and pay high licensing fees, resulting in unrecoverable losses in the downstream market of mobile phones. Apple, many other companies, and consumers … will suffer truly irreparable harm, [and the Chinese government] may suffer hundreds of thousands of tax losses.”

We can only assume that next week we will learn whether the Chinese courts will grant Apple some leniency in this case.

NEXT: Apple tipped to be working on own modem for iPhones, but don’t expect it soon

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