Summary Notes


In the season five premiere of "Acquired," hosts Ben Gilbert and David Rosenthal dive into the complex world of Huawei, China's telecom giant now facing international scrutiny. They explore Huawei's rise from a small importer to the world's second-largest smartphone manufacturer and the largest telecom equipment maker, highlighting its innovative strategies and the contentious ownership structure that ties it closely to the Chinese government. Amidst a tumultuous year marked by the arrest of CFO Meng Wanzhou, U.S. trade bans, and allegations of security risks, Huawei's future hangs in the balance. As the U.S. government challenges Huawei's global 5G dominance, the episode contemplates the potential bifurcation of technology stacks and the internet, driven by geopolitical tensions.

Summary Notes

Introduction to Acquired Podcast Season Five, Episode One

  • The podcast episode introduces Ben Gilbert, co-founder of Pioneer Square Labs, and David Rosenthal, a general partner at Wave Capital.
  • They discuss Huawei, the second-largest smartphone manufacturer and the largest telecom equipment manufacturer in the world.
  • Huawei has experienced significant challenges, including being barred from doing business with US companies and facing federal charges.

"Welcome to season five, episode one of acquired, the podcast about technology acquisitions and ipos. I'm Ben Gilbert and I am the co-founder of Pioneer Square Labs, a startup, studio and venture capital firm in Seattle." "And I'm David Rosenthal, and I am a general partner at Wave Capital, an early-stage venture capital firm that focuses on marketplaces, based in San Francisco."

The quotes introduce the hosts and set the stage for the episode's focus on Huawei, highlighting its status and recent challenges.

Huawei's Situation and Background

  • Huawei has been in a tumultuous position, facing legal and trade issues.
  • The company's CFO was arrested, and there were significant layoffs in the US.
  • Huawei's ownership structure and its role in tech and international relations are points of interest.

"Yes. Barred from doing business with US companies, federal prosecutors have filed charges of wire fraud and their CFO was arrested upon landing in Canada last year. Oh, and the layoffs last week of hundreds of workers in the US went down amidst the trade war."

The quote details the legal and trade challenges Huawei has faced, including charges of wire fraud and the arrest of their CFO.

Pilot, the Accounting Firm

  • Pilot is a startup-focused accounting firm offering accounting, tax, and bookkeeping services.
  • It is now the largest startup-focused accounting firm in the US, backed by prominent investors.
  • The firm emphasizes outsourcing non-core functions like accounting to focus on what improves the company's product and customer experience.

"Our next sponsor for this episode is one of our favorite companies and longtime acquired partner Pilot for startups and growth companies of all kinds. Pilot is the one team for all of your company's accounting, tax and bookkeeping needs."

The quote introduces Pilot as a sponsor and describes its services, positioning it as an essential resource for startups and growth companies.

Huawei's Founding and Growth

  • Huawei was founded by Ren Zhengfei in 1987 in Shenzhen, China.
  • Ren was inspired by Deng Xiaoping's vision for China's future, mixing communism and capitalism.
  • Initially, Huawei imported PBX switches and then expanded to develop its own technology.
  • Huawei's first product, the CNC8 digital telephone switch, was introduced at a competitive price, leading to domestic dominance.

"So he leaves the army very shortly thereafter and he moves to Shenzhen. He works briefly in the oil industry. He works for the Shenzhen South Sea Oil Corporation, which he realizes that the oil business is not for him. He's an engineer. He wants to work in engineering. He wants to work in technology."

The quote provides context for Ren Zhengfei's career transition from the military to entrepreneurship, leading to the founding of Huawei.

Huawei's Vision and Strategy

  • Ren Zhengfei named the company Huawei, which means "China achieving."
  • Huawei started by dominating rural telephone networks before expanding into cities.
  • The company invested heavily in R&D, leading to the creation of its own technology products.
  • Huawei's strategy included starting as an importer before shifting to selling its own products, similar to other successful companies like Nike.

"The name of the company that he chooses is China achieving. It's a good name. It's a good pick, especially for the time."

The quote reflects on the significance of Huawei's name, which encapsulates the company's ambition and alignment with China's national goals.

Huawei's Ambition and International Expansion

  • Ren's ambition for Huawei was not limited to being a large domestic company; he aimed for international success.
  • Huawei's success with the CNC8 switch was a stepping stone to becoming a significant international player in telecommunications.

"But again, the scale of Ren's ambition is not just to build a large company domestically."

The quote highlights Ren Zhengfei's broader vision for Huawei, which went beyond domestic success to international prominence in the telecom industry.

Huawei's International Expansion

  • Huawei, a Chinese company, started selling their developed switch to other countries in 1996.
  • They expanded from Hong Kong to Russia and Africa.
  • Huawei invested in wireless telecoms, becoming the largest CDMA equipment provider in Africa.
  • The expansion laid the groundwork for Huawei's current status as a leading telecom equipment manufacturer.

"So pretty quickly thereafter, in 1996, they begin selling this switch that they've developed to other telephone carriers in other countries outside of China."

This quote highlights the beginning of Huawei's international expansion, marking their transition from a domestic to a global player in telecom equipment.

Huawei's Growth and Government Support

  • Huawei's growth was rapid, raising questions about the factors contributing to its success.
  • The Chinese government viewed Huawei as a vehicle to modernize telecom networks.
  • Huawei sold gear to the government, cities, and the military, receiving loans to finance these projects.
  • Huawei's ownership structure changed, with a trade union committee holding 99% of the holding company.

"The government thought this is a pretty good vehicle to help this."

This quote explains the Chinese government's perspective on Huawei's role in modernizing the country's telecommunications infrastructure.

"Today, the Huawei operating company is 100% owned by a holding company."

This quote reveals Huawei's complex ownership structure, which is significant because it ties the company's economic interests to the government.

Huawei's Unique Market Position

  • Huawei's market position is unique due to government ties and funding.
  • It competes globally with different economic incentives compared to free-market companies.
  • Huawei is not officially a state-owned enterprise but operates in a similar manner in international markets.
  • Huawei's business strategy and product quality contributed to its success.

"You all of a sudden now have this actor in Huawei who doesn't quite have the same economic incentives as other free market actors."

This quote points out Huawei's distinct competitive edge due to its relationship with the Chinese government, impacting its global market strategy.

Employee Ownership and Control

  • Huawei's employees, through a trade union committee, have an economic interest in the company but no governance control.
  • The trade union committee's restricted phantom shares are lost if an employee leaves the company.
  • Huawei's governance structure indicates a connection to the Chinese Communist Party.

"No, you do. And this is where it gets complicated."

This quote addresses the complexity of Huawei's ownership and control, highlighting the employees' economic interests versus actual governance control.

Huawei's Business Lines and Diversification

  • Huawei has three main business lines, including telecom carrier networks.
  • They have been innovating in wireless technology since the mid-90s.
  • Huawei diversified by entering the handset market for consumers in 2003.
  • They released one of the first 3G phones in 2005 and an early Android phone in 2009.

"They say, maybe we need to think about getting into the other side of the business in telecoms and wireless as well."

This quote explains Huawei's strategic decision to diversify into the consumer handset market, capitalizing on their telecom network expertise.

Strategic Business Decisions

  • Huawei's ambition led them to become a dominant player in networking gear and handsets.
  • They leveraged innovation on the back end to introduce advanced handsets.
  • Huawei chose not to compete with China Mobile, a state-owned enterprise.
  • Huawei's business strategy is seen as brilliant, avoiding direct political speculation.

"By participating heavily in both sides here, as we were saying, they're able to drive a lot of this to benefit of both the tick and the talk of innovation here."

This quote discusses Huawei's strategic decision to be involved in both carrier equipment and consumer handsets, fostering innovation and competitive advantage.

Huawei's Financial Growth

  • By 2010, Huawei's revenue exceeded $20 billion, with international revenue surpassing domestic.
  • In 2012, Huawei became the largest telecom equipment manufacturer globally.
  • By 2018, Huawei was the second-largest handset manufacturer and surpassed $100 billion in total revenue.

"By 2012, they overtake Ericsson, who you were mentioning, Ben, as the largest telecom equipment manufacturer in the entire world."

This quote signifies Huawei's ascent to the top of the telecom equipment industry, outpacing traditional industry leaders.

  • In December 2018, Huawei's CFO Meng Wanzhou was detained in Canada at the US's request.
  • The US alleged Huawei violated sanctions by selling technology to Iran.
  • The incident highlights the complexities of international law and trade regulations.

"Meng Wanzhou, who is also the daughter of Ren Zhang Fei, it turns out, which blew my mind when I somehow missed that."

This quote reveals a surprising personal connection within Huawei's executive ranks, which has implications for the company's public perception and political challenges.

Extradition and House Arrest of Meng Wanzhou

  • Meng Wanzhou is currently under house arrest in Vancouver, awaiting extradition to the US.
  • The case is not clear cut, and the final decision will come from the trial.
  • The underlying issue is not solely the charge against Meng but concerns over telecommunications infrastructure and Huawei's dominance in 5G.

"At some point, this will go to trial and we will sort of see what the courts decide." "She has not been extradited to the US yet. She is still in Canada."

The quotes highlight the ongoing legal process and the current status of Meng Wanzhou, emphasizing the complexity and international implications of the case.

Huawei's Dominance and Security Concerns

  • Huawei is a leader in 5G technology, raising concerns about a Chinese company controlling key internet infrastructure.
  • Allegations of security vulnerabilities in Huawei products have been made, which the company denies.
  • The debate centers on the potential risks posed by Huawei's technology rather than current issues.

"It's about the US and many other countries feeling threatened here that telecommunications infrastructure has become such an important part of any society." "There have been several different research firms and different news stories that have come out sort of alleging that people have found security vulnerabilities in Huawei products."

These quotes discuss the geopolitical and security concerns surrounding Huawei's role in global telecommunications, highlighting the tension between the company's assurances and external allegations.

Impact of the US-China Trade War on Huawei

  • The trade war initiated by President Trump has significantly affected Huawei.
  • The US placed Huawei on the entity list, restricting US companies from doing business with Huawei without special permits.
  • This action impacts Huawei's access to crucial components and software, including the Android operating system.

"President Trump begins his trade war with China in earnest. And that has fallout for many companies. But Huawei kind of chief among them." "The US goes so far as they put Huawei on what's called the entity list, which freezes all us companies from doing any type of business with Huawei without special permits."

The quotes describe the escalation of the trade war and its direct impact on Huawei, illustrating the extent of US measures against the Chinese tech giant.

Licensing and Open Source Issues

  • Google's Android operating system, which is open source, faces legal uncertainties regarding its use by Huawei due to the entity list.
  • Huawei has been developing its own operating system since 2012 as a contingency plan.
  • Google has appealed to the US government, arguing that it's in national security interests to allow Huawei to use Android.

"Google is the primary maintainer of the Android open source project, and Google is a us corporation and entity that actually makes even the Android open source project, subject to this entity list ban by the United States." "Google has actually appealed this to the government and said, look, we should be able to do this."

The quotes emphasize the complications arising from the entity list, affecting even open-source software, and Google's stance on the importance of maintaining control over Huawei's use of Android.

Geopolitical Implications and Technology Stacks

  • The US is challenging China to develop its own technology stack for smartphones and infrastructure.
  • This could lead to a bifurcated technological world, with separate stacks for China and the rest of the world.
  • The divergence in technology standards could lead to fundamentally different internet experiences.

"What the US government is basically doing in this chess game is daring China." "That's a really weird and not good future right now."

The quotes discuss the strategic moves by the US government and the potential consequences of a divided technological landscape, highlighting the broader implications for global internet standards.

Congressional Actions and Huawei's Global Presence

  • A bipartisan bill in the Senate aims to prevent the executive branch from lifting restrictions on Huawei unilaterally.
  • Huawei remains popular outside the US, with significant market share in various regions.
  • US telecoms are not using Huawei equipment for 5G networks, showing the government's influence on limiting Huawei's presence.

"A bipartisan bill was introduced in the Senate that would prevent the executive branch from unilaterally lifting those restrictions on Huawei." "Huawei is incredibly popular in the rest of the know, outside of the US and China."

These quotes highlight the legislative efforts to maintain restrictions on Huawei and acknowledge the company's strong global market position despite limitations in the US.

Huawei's Business Lines and Growth

  • Huawei has three main business lines: telecom carrier networks, devices (smartphones), and enterprise solutions for customers and government institutions.
  • The company experienced a 21% growth rate last year.

"Let's recap a little bit, just so that we understand where they are as a business today."

This quote serves as a segue to discuss Huawei's business structure and performance, providing context for the company's operations and economic impact.

Huawei's Financial Growth and Business Units

  • Huawei's sales increased from $93 billion to $108.5 billion.
  • The consumer business, primarily handsets, grew by 45%.
  • The carrier business shrank by 1%, potentially due to reluctance to buy Huawei 5G equipment.
  • The enterprise business also decreased, but is less significant to Huawei compared to the consumer and carrier businesses.

"went from 93 billion in sales to 108 and a half billion... The consumer business... grew by 45%... The carrier business actually shrunk by 1% last year... The enterprise business also shrunk..."

This quote outlines the financial growth of Huawei and the performance of its different business units, highlighting the significant growth in the consumer sector and the decline in the carrier and enterprise sectors.

Huawei's Revenue Sources and Focus on 5G

  • 52% of Huawei's revenue comes from China, indicating a strong domestic market presence.
  • Huawei emphasizes 5G in their annual report, though smartphone shipments are the primary growth driver.
  • There is a narrative and numbers mismatch between Huawei's 5G focus and where revenue is actually generated.

"52% of revenue is from China itself... they make a lot of noise about 5G... smartphone shipments are really the primary growth driver of the company."

This quote points out the discrepancy between Huawei's public emphasis on 5G technology and the actual source of their revenue growth, which is smartphone shipments.

Huawei's Playbook and Strategy

  • Huawei capitalized on long-term trends such as China's telecommunications development and international expansion.
  • Huawei recognized the symbiotic relationship between backend network equipment and consumer devices.
  • Huawei's strategy involved translating infrastructure advancements into compelling consumer products.

"The trend and trends that they captured were one bringing China online, period... capturing that internationally... translating that into compelling consumer devices."

The quote summarizes Huawei's strategic focus on both domestic and international telecommunications development and their ability to convert these advancements into successful consumer products.

Geopolitical Factors Affecting Huawei

  • Huawei's growth strategy was unique to China's market conditions and state support.
  • ZTE, another Chinese telecom company, also received government support but was less successful than Huawei.
  • Huawei's growth playbook is not universally applicable due to China's unique market dynamics.
  • The global tech landscape may be shifting towards two separate technology stacks, influenced by geopolitical tensions.

"This playbook that they ran of how they grew in their first ten years is really something that could only be done in China... there could be two technology stacks."

This quote reflects on the unique Chinese business environment that facilitated Huawei's growth strategy and speculates on the potential bifurcation of the global technology landscape due to geopolitical shifts.

Huawei's Ownership Structure and International Prospects

  • Huawei's ownership structure differs from other Chinese tech giants, influencing its international business strategy.
  • Despite political challenges, Huawei is well-positioned domestically for 5G rollout.
  • The company's future in international markets, particularly with U.S. allies, is uncertain.
  • Huawei may need to develop new technology stacks, including instruction set architectures, chips, operating systems, and developer ecosystems.

"Huawei is going to be a big, if not the sole beneficiary of 5G rollout in China... they seem to be having a rough time selling their telecom or consumer equipment into Europe or."

This quote discusses Huawei's strong domestic position for 5G, while acknowledging the difficulties it faces in expanding its telecom and consumer equipment sales in international markets, especially in light of political challenges.

Acquired Podcast's Format and Listener Engagement

  • The hosts discuss the unique nature of the Huawei episode and its deviation from the typical format.
  • They invite listener feedback and expertise to potentially follow up on the Huawei discussion.
  • The episode concludes with personal "carve outs," recommendations unrelated to the main topic.

"As the show has grown, it's been great to get feedback on every episode... if you know anything we don't, we'd love to hear that too."

This quote encourages listener interaction and feedback, highlighting the podcast's openness to community engagement and additional insights on the Huawei topic.

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