Huawei Pursues Licensing Revenues From US Firms
In a Reuters exclusive this morning (here), it has emerged that Huawei is attempting other methods of extracting value from its extensive 5G Standards Essential Patent (SEP) Declaration portfolio of technologies and that it is in talks with several US telecoms companies about licensing 5G technology to them. This comes from Huawei executive Vincent Pang who has gone on the record to say that there are several US firms interested in the Chinese firm’s 5G tech with possibilities ranging from long term licensing deals to one off technology transfers.
For Huawei this move obviously makes sense. As a target in the ongoing trade war, it has been kicked back and forth through multiple rounds, being put on the US Entity List effectively barring American companies from working with it, but then gaining reprieves and exemptions. One thing is clear however, Huawei has not taken things lying down and is a different beast to ZTE (HKG:0763) which effectively saw its business implode after being placed on the US entity list previously.
Huawei has been pursuing making its own technology, attempting to reduce its reliance on Google (NASDAQ:GOOGL) for Android software on its handsets as well as Qualcomm (NASDAQ:QCOM) chips for its handsets as it forges ahead with its own Kirin chips.
Licensing Tech May Hold the Key
Huawei is at the convergence of numerous themes in the trade war between the US and China. Part security concern, part intellectual property theft concern, part trade imbalance concern, the high level rhetoric about the trade war has been about the trade imbalance between the US and China, but in reality the real problem is more the security and IP issues.
We’ve talked in the past about how the likelihood is that the trade imbalance isn’t going to go away as much as President Trump wants it to. If billions of dollars in subsidies aren’t enough to entice manufacturing back to US shores in the shape of Wisconsin’s disastrous attempt to entice Foxconn (read more of our coverage on that topic here), the best the US can realistically hope for is that the current American businesses which outsource manufacturing to China will seek other low cost centres of production in Southeast Asia like Indonesia, Thailand and others. Ultimately this will still keep the US trade imbalance where it is, just distribute it amongst countries other than China.
More at stake is the technological cold war currently being waged between the US/West and China and the concerns the West has over Chinese governmental access to critical Western communications infrastructure, as well as the continued intellectual property theft which Western companies allege against their Chinese counterparts when they are forced to engage in joint ventures with them to gain access to Chinese consumers.
For Huawei then, licensing may be critical to being able to gain some of the revenue it was hoping for when it invested billions into trying to build up the largest 5G SEP declaration patent portfolio. If it can’t sell hardware and software directly to US companies (other Western countries have been a bit more relaxed around banning Huawei from their 5G infrastructure) due to security concerns, it may as well try to license some of the underlying technology to these firms so that it can still get some money.
The difficulty with licensing deals is that the structures can be complicated. Software would probably not be trusted and would likely need extensive source code access and review to ensure that nothing untoward is occurring. Maintenance of software could be particularly problematic given this and the likelihood would be that some of these companies would likely want source code to be held in escrow in the event that relations broke down (whether between the two companies or at a governmental level) and they had to take over the development of systems themselves.
One off deals between Huawei and US firms meanwhile would likely mean that some of these US telcos would need ramp up staff levels in areas which they had previously outsourced to their technology providers, potentially hitting bottom lines. The point however of this is that it would only really make sense if the licensing of the tech along with any additional costs in terms of headcount etc came in at levels below what could be expected by purchasing from other (more expensive), Western providers such as Ericsson (STO:ERIC-B).
Is Huawei Really a Security Threat?
One of the surprising turns in the trade war was how quickly ZTE went from being classified as a security threat and being on the entity list to being removed from the entity list and granted access to American technology again as part of trade war negotiations. Republicans were none too pleased with President Trump for this when it occurred (as we covered here) and noises have been made repeatedly that even in the event of a wide-ranging trade deal between the US and China, Huawei should still remain on the entity list given concerns around the access many feel it would have no choice but to grant the Chinese government to Western telecoms networks.
As we wrote in June (here), Huawei has been pursuing revenues from other methods than selling technology. It asked Verizon (NYSE:VZ) for $1 billion for using Huawei patented technology in its core networks and other technologies. It seems likely that Verizon is one of the companies which a licensing deal is being discussed with and I wouldn’t be surprised if AT&T (NYSE:T) and Sprint (NYSE:S) as some of the largest US telecoms providers are also in discussions with the firm.
Huawei has repeatedly denied that it does or would give the Chinese government access to Western networks employing its technology and if a trade deal between the US and China sees Huawei being removed from the entity list, it would imply that President Trump’s administration believes that too, or at least that other concerns around a trade deal are seen as more material than any possible national security threat. It’s hard to imagine what could possibly trump a national security threat in trade negotiations but cynics may cite a trade deal leading to further economic growth in light of slowing global economic activity in the run up to a US election as a possible cause.
As ever, we’ll be following the story as it unfolds.
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