Huawei tries to reinvent itself

This is an audio transcript of the FT News Briefing podcast episode: Huawei tries to reinvent itself

Marc Filippino
Good morning from the Financial Times. Today is Thursday, September 30th, and this is your FT News Briefing.

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Our show is going to focus on Asia today. First, Hong Kong is struggling with fewer stock market listings. Japan has a new prime minister, and China’s Belt and Road Initiative is saddling countries with hundreds of billions of dollars in hidden debt. Plus, China’s telecoms giant Huawei has to shift its business focus because of US sanctions. But can the company pull it off?

Kathrin Hille
I think the big question remains how they will pay their way through all of this. And if the Chinese state is going to pay for it, can they really succeed?

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day.

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Hong Kong stock market is hurting from a drop in new listings after Beijing’s crackdown on Chinese tech groups. Listings from these companies have become vital to the city, and bankers had expected Hong Kong to pick up the slack after Beijing made it clear it doesn’t like its tech companies listing in the US. That has not happened. Over the past three months, Chinese tech groups raised just about $670m from Hong Kong listings, and new listings in total raised six and a half billion dollars. On both counts it was the worst performance since the first quarter of 2020, when the pandemic ripped through global markets.

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The big goal for China’s Belt and Road Initiative is to link the country to the rest of the world with a massive network of roads and bridges, ports and pipelines. But it’s also leaving many countries saddled with debt to China since financing for projects largely comes from Beijing. A new study shows that scores of lower and middle-income countries have been left with nearly $400bn in hidden debts.

Edward White
So this is basically the amount of public sector debt to China that governments and low and middle-income countries don’t report accurately to the World Bank’s data reporting system.

Marc Filippino
That’s the FT’s China correspondent, Ed White. US researchers ran the study, which looks at the first five years of Belt and Road financing.

Edward White
To explain that in a different way, that means more than 40 lower and middle-income countries now have levels of debt exposure to China that is higher than 10 per cent of the national gross domestic product. That means also that the average developing country is basically under-reporting repayment obligations to China by an equivalent of six per cent of GDP. So this highlights a real critical transition. This is a longer term transition that has taken place with China’s foreign lending. So previously, China’s lending was mostly directed to sovereign borrowers such as central banks. But now nearly three quarters, or nearly 70 per cent of China’s foreign debt, is issued across state-owned companies, state-owned banks, special purpose vehicles and joint ventures, as well as private sector institutions. So remember that these are debts which do not appear on government balance sheets. But crucially, the researchers believe that the governments, ie taxpayers, would ultimately be on the hook if these debts were not repaid.

Marc Filippino
That’s the FT’s Ed White.

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One of China’s top technology companies just got its CFO back. Huawei’s Meng Wanzhou was detained in Canada for nearly three years. She was finally released this past week after the US Department of Justice dropped its extradition request. The US accused Meng of violating sanctions against Iran, but now Meng has to deal with US sanctions that have crushed her company. To talk more about what’s happening with Huawei, I’m joined by the FT’s greater China correspondent, Kathrin Hille.

Kathrin Hille
Hi, Marc.

Marc Filippino
So, Kathrin, just to recap, the US sanctions on Huawei made it, you know, virtually impossible for the group to buy semiconductor chips. And this is a company that really depends on chips for the smartphone and telecoms gear it sells. How badly did those sanctions hurt the company?

Kathrin Hille
So until last year, the impact of the sanctions was not that visible. But in the first half of this year, we had the first really concrete evidence in terms of numbers. The company reported a 30 per cent drop in overall revenues. And last week, one of the senior executives of the group predicted that overall the smartphone business, which has revenues of about $50bn a year, would probably lose up to $40bn of those $50bn by the end of the year. So that basically means it’s going to be eradicated.

Marc Filippino
Wow. And so considering all these existing problems, it would probably make sense if Huawei were to try and reinvent itself.

Kathrin Hille
That is exactly what they’re trying to do. Now, the company leadership after the first scramble over the past two years to try and react to the US sanctions and trying to keep afloat, that they’ve now arrived at the point where they have a bit more time to think about their longer term future and develop a strategy and make new plans. If you look at what they are doing, there are basically two components — one is trying to find new revenue streams or new sources of revenue that can offset at least part of the revenues they’re losing, and then the second component is trying to stay ahead in the long term in the innovation race. And so the kinds of business they are targeting now to generate revenues in the near term are businesses that are less dependent on leading-edge semiconductors. So where they would need fewer chips and if they need chips, it would be more mature chips that can be manufactured in China.

Marc Filippino
And what kind of businesses is it developing now, Kathrin? Can you talk a little bit more about the sectors where Huawei is innovating?

Kathrin Hille
Sure. So one direction where Huawei is pushing really hard is electric vehicles and smart cars. The chips used in most of the applications in electric cars are chips that can be made in older chip fabs. So you don’t need, like, the newest of them all. And that means that those chip factories would not need new machinery or new software from the US. And the other big area, which is more of a future ambition for Huawei, is, of course, 6G. We’ve seen Huawei founder and CEO, Ren Zhengfei, talk to employees recently about the importance of focusing on research and development for 6G. And he said himself that for Huawei, it was crucial to stay ahead in the technology race in order to, he likes using military language and military metaphors, so he said we need to seize the patent front. So in order to enable Huawei in the future to be a big owner of patents that then other companies would have to turn to and pay them.

Marc Filippino
Are there any major obstacles standing in Huawei’s way in its planned transformation?

Kathrin Hille
I think the big question remains how they will pay their way through all of this. And if the Chinese state is going to pay for it or pay for part of it, can they really succeed or will that be kind of in line with the direction that the company itself would maybe want? The other big question remains about China’s future semiconductor supplies. The reason these US sanctions are relatively successful against Huawei at the moment is because US companies control technology and equipment in a few core niches. Just talking about some kinds of equipment, machinery that’s needed to produce the newest kinds of semiconductors. And as long as semiconductor technology doesn’t move away from that way of manufacturing into other segments, the US stranglehold is going to remain. And as long as China fails to manage to break through, I don’t see how this situation is going to change. And so it always remains settled with this key hurdle.

Marc Filippino
Kathrin Hille is the FT’s greater China correspondent. Thank you, Kathrin.

Kathrin Hille
Thank you, Marc.

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Marc Filippino
Japan will have a new prime minister to replace Yoshihide Suga, who announced his resignation earlier this month. Fumio Kishida won the battle to lead the ruling Liberal Democratic party. His victory is a win for the status quo and a defeat for younger LDP members who want generational change. The FT’s Tokyo bureau chief, Kana Inagaki, says the 64-year-old political veteran is known to be mild and steady.

Kana Inagaki
So under Kishida, we’re not expecting a huge change in economic or foreign policy. He has campaigned, you know, on promises to, for example, distribute wealth or to reduce income gap. And he’s talked a little bit about the shift from neoliberal policy that was pursued under, for example, former Prime Minister Junichiro Koizumi. But at the end of the day, I don’t think there will be much of a big shift, for example, on Japan’s policy of pursuing aggressive monetary policy or fiscal spending. Those economic policies aren’t likely to change under Kishida

Marc Filippino
That’s our Tokyo bureau chief, Kana Inagaki.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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