Huawei reacts to the US sanctions
By now, everybody is aware of the US prohibitions to export software and intellectual property to Huawei. While the sanctions are mostly geared towards the 5G infrastructure that Huawei builds and where Huawei is suspected of acting as a conduit for Chinese espionage, the US sanctions are also hitting its smartphone business hard. Huawei is the world’s second largest smartphone maker (selling 59.1m smartphones in Q1 2019, about 20 million more than Apple). In May, Google announced it would no longer support Huawei with some parts of its Android operating system. While Huawei still has access to the open source platform of Android, many apps will no longer be updated in the future. The result is a severe drop in Huawei sales over the next two years as has been revealed this week. But if you ask me, I doubt that Huawei will suffer that long or indeed will be relegated to a fringe player. If you ask me, Huawei is already preparing to come back with a vengeance.
At the recent St Petersburg International Economic Forum Huawei Deputy Chairman Guo Ping met with the Russian Minister for Digital Development Konstantin Noskov. Allegedly, the two discussed the possibility of switching the operating software on Huawei smartphones from Google’s Android to the Russian Aurora software as well as producing Huawei smartphones in Russian factories. Aurora is not just some second-rate Russian software, but basically the Sailfish open source operating system of Jolla, a Finnish company founded by former Nokia executives. In 2014, Russian billionaire Grigory Berezkin bought parts of Jolla in order to develop a Russian mobile operating system, which today is called Aurora. In 2016, Berezkin sold a 75% stake in Aurora to Rostelecom, which is listed on the Russian stock exchange but majority owned by the Russian government. Suddenly, Rostelecom may become the world’s third largest supplier of mobile operating systems via its cooperation with Huawei.
Furthermore, Huawei smartphones are already of high quality and much cheaper than Samsung or Apple phones and if they are produced in Russian factories with Aurora installed as operating system, they could become even cheaper, undercutting the prices of Samsung and Apple even more and expanding the market share for Huawei. Between Q1 2018 and Q1 2019, Huawei’s market share already grew by 50% in one year. If the tests with the Aurora software that are currently underway in China are successful, then Huawei could soon become the world’s largest provider of smartphones. Of course, with Chinese hardware assembled in Russia and a Russian operating system, these phones would likely provide a simple way to spy on Western consumers. And that might lead to access to classified information simply because many Western consumers like soldiers stationed around the world or government employees will give away their positions just by taking their private smartphones with them. I have already discussed how downloading TikTok on your smartphone can provide the Chinese government valuable information about classified US military bases.
Thus, the risk from the pivot of Huawei to Aurora is twofold: It is a serious challenge to the profit margins of Samsung and Apple and a serious security threat to Western governments- potentially a bigger security threat than to let Huawei build 5G infrastructure in the West where it can be monitored and checked by local intelligence agencies.
Rostelecom share price
Source: Bloomberg.