Huawei CEO Ren Zhengfei's Interview with The Economist, Part 1

Mr. Ren, before we ask you questions about Huawei, we would like to ask you a question about globalization and about how technology is challenging globalization, because you're also a very important global business leader, and you now have big companies that are selling products and services that can only make sense in a world of a great degree of trust. You know, it's not selling tennis shoes or tennis rackets. It's selling an autonomous car or a medical device. So, this globalization is now seeing trade in products that requires a lifetime of trust, at the same time as countries like China and America find it very difficult to trust one another. Can this problem be resolved? What is your view on how this problem can be solved?

“Economic globalization can bring substantial benefits to all of humanity. This is because it will play a significant role in driving the optimal allocation of resources and reduction of service cost, thereby accelerating the pace of social progress,” Zhengfei says. “Economic globalization was a concept put forward by Western countries. Their guiding principle was to allow the West to trade their advanced technology and equipment for developing countries' raw materials and cost-efficient labor forces. This enabled global trade. But the West did not expect that developing countries would slowly begin to move up the value chain with production of low-end products.

“The West had a serious economic crisis in the 1960s and 1970s, brought about by conflicts between employers and employees. Some Western economists suggested higher pay, higher commodity prices, and higher consumption would solve this crisis. This theory worked well to address the West's problems for a while. For the next several decades until the end of the last century, their economy grew very quickly. Sustaining such an economic model requires very high yields though. Without high yields, it's going to be very difficult to ensure that you have enough wealth to distribute. Although developing countries created a massive market space for Western countries to sell in, many products from these developing countries also entered developed markets. The clashes and contradictions that arose during the process are not an inherent problem with globalization, but occurred because of a lack of effective coordination between countries of these two different development stages.

“Let me use the Europe-China relationship as an example to explain how we could possibly address this problem. China has made a commitment to the World Trade Organization (WTO) that it will significantly open up its service and manufacturing sectors. Over the last two years, this opening up has been accelerating, even though it is still a bit behind the promised schedule.

“The UK and Europe have accumulated hundreds of years of experience in the service sector. China has a huge demand for services. In this sense, if the export of large quantities of services is allowed from the West into China, it will facilitate the social advancement of China. In addition, the money earned by China from Europe through the export of products will return to Europe through the export of products and services, creating a more balanced economic situation.

“Let's look at another example. China will reduce automobile tariffs to a very low level over the next five years. The UK and Europe produce the world's highest quality automobiles, while Japan produces the most cost-effective quality automobiles. Today, we need to address the problems arising from globalization one at a time, through consultation. There is nothing wrong with globalization itself. These problems are arising because the development mechanism has failed to adapt to some of the changes in our new environment and the different players involved are not sitting down to have good discussions about how best to coordinate on these problems.

“Let's take Russia as another example. If Russia had been accepted as a member of the European Union, I estimate that the trade between Russia and other Western countries would represent at least one trillion euros, because of Russia's energy exports and Western countries' machinery and equipment exports. These transactions would bring a lot of money into Europe, which would help Europe address the issues they are seeing related to increasing economic disparity.

“I've had very good talks with George Osborne and David Cameron in the past. Back then, Osborne had already lowered the UK's tax rate to 21%, but these cuts didn't impact their national revenue. Why? Because the UK only allowed welfare to be distributed under certain conditions. To receive welfare, recipients would have to be actively seeking a job or make some form of contributions to community service, such as caring for the elderly or engaging in public health activities. The reduction in tax revenue equaled their reduced social welfare spending, and thus ensuring stability within the country.

“Afterwards, Theresa May's administration announced that it would further lower the tax rates to 17%. All of these policies adopted in the UK are serving as the DNA for it to become an investment center again. All in all, this proves that different players have to keep adapting to the new globalized environment. A one-size-fits-all approach won't work. This is my humble opinion.”

The one country you have not mentioned is the US. You talked about Europe and Japan, which can see the economic globalization. When you look at the US-China relationship, are you worried about the future of globalization?

Yes, I think China-US relations will affect the future of globalization. The US is the most powerful country in the world. It used to maintain order as the "policeman" of the world, and in return it was rewarded with the US dollar becoming the world's currency. The US collects seigniorage from the world by issuing US dollars. If the US continued to maintain world order, it would not stand to lose anything.

However, the US has destroyed this mechanism. People no longer believe that the US is trying to maintain order in the world, or that the US dollar is the most reliable reserve currency. When the world's confidence in the US and the US dollar starts to wane, the national debts and stock markets in the US will face crises, which will cause great economic and political turmoil in the US.

This year, US diplomats have made a big effort to persuade allies like Britain and Australia, and to put pressure on countries like Vietnam, not to use Huawei products. How successful has the US boycott been?

First of all, it's perfectly normal for customers not to buy Huawei equipment. In fact, many customers did not buy Huawei equipment in the past. Most customers make their decisions based on commercial considerations.

When it comes to 5G, I think the US may be wrong to politicize 5G or treat it as something dangerous. Countries should make their decisions about 5G to facilitate their development rather than fulfil political agendas.

Let me give you an example. About 1,000 years ago, China was the most powerful country in the world. The prosperity depicted in the famous painting "Along the River During the Qinming Festival" was not fictional; it was real.

Several hundred years ago, the philosophical thoughts and social systems in the UK led to the Industrial Revolution. The British invented the train and steamship. However, China continued to rely mainly on horse-drawn carriages for transportation. Those carriages travelled at much slower speeds than trains, and they could carry far less cargo than steamboats. That's why China was left behind.

The UK became an industrial powerhouse, and managed to sell its products all over the world, hugely impacting social progress in many countries. Today, about two-thirds of the world's population speak English. With this example, I want to say that speed determines social progress.

5G is a connectivity technology that delivers high speeds, high bandwidth, and low latency. 5G represents speed in the information society. Countries that have speed will move forward rapidly. On the contrary, countries that give up speed and excellent connectivity technology may see economic slowdown.

The British are very intelligent, and British universities are among the best in the world. If the UK wants to make a comeback in industry, it needs speed in the information society.

Optical fibre networks and 5G technology that is based on optical fibre networks will connect supercomputers and super storage systems to support AI. If AI is able to increase productivity by ten-fold, then the UK will become an industrial power with a workforce equivalent to hundreds of millions of people. When I say AI can increase productivity by ten-fold, this is just an estimation. The truth is that in some rare cases, with the aid of AI, efficiency can increase by 100 times or even 1,000 times.

Alan Turing, the father of AI, was British, as was the scientist who cloned Dolly the sheep. I simply cannot imagine what the world will be like when genetic and electronic technologies come together. I believe the UK has enormous potential for revitalization. Speed will determine whether the UK can be successful again.

Tell us about the financial performance of the business since May, when the Entity List began? Have you seen a drop in revenues?

Our revenue has grown by 19.7% by the end of August, while our profits were similar to last year's. Our growth rate has declined from about 30% in the beginning of the year, to 23% by the end of June, and now down to 19.7%. Our profits didn't increase largely due to a significant increase in our strategic investments. We have recruited a few thousand more employees worldwide, mostly high-end talent like young geniuses and fresh PhD graduates, to help patch our holes caused by the Entity List.

We have patched our holes from 5G to core networks. On September 18, we will announce an AI cluster that connects 1,024 Ascend chips. This will be the fastest AI platform in the world.

Currently, the Entity List still impacts our consumer business, and it will take some time to patch our holes in this area.

Is the consumer business shrinking outside of China?

Our smartphone sales once declined in markets outside China, but the rate of that decline is now decreasing, now at around 10%.

Later this month, you'll be launching the Mate 30, the new handset. Will it have Android and Google apps available on it?

The Mate 30 series won't have the Google Mobile Services (GMS) ecosystem pre-installed.

If you launch a handset that doesn't have the full suite of Google apps on it, is it correct to think that the volume you sell outside of China will be much lower than in the past?

We would like to continue using Android, because we remain on good terms with Google. Even if the US government won't allow us to continue using Android, we have our alternatives. It will take us two to three years to replace Android with our own system, during which time our phone sales in markets outside China will see some decline. We think it is understandable. Our smartphones have their unique features in addition to ecosystem applications, so we believe there will be many more customers who will like and accept our products. We will launch the Mate 30 series in Munich on September 19, and you can find out what features they will have then.

Over this period when you may have to roll out your own system, do you think it's possible that a company can be pushed into making a loss?

No, our growth will slow down, but we won't see losses.

If I was running Google and Huawei ends up pushing its operating system out globally, how worried should I be?

Google is trying to persuade the US government to allow us to use their ecosystem. In this regard, we are willing to work with Google. Our operating system wasn't initially intended for smartphones. Moreover, Google's operating system is open source, so we can continue to use it. The US limits our use of Google Mobile Services, GMS. That ecosystem includes thousands of partners, and Huawei wouldn't be able to build a comparable ecosystem in just a couple of days. If the US government allows us to continue to use Google's ecosystem, the US would maintain its dominant position in this field. If the US government refuses to grant the license, it will hurt them in the long run.

Don’t miss out on the continuation in Friday’s issue of GT.

BY David Rennie, Beijing Bureau Chief and ‘Chaguan’ columnist, The Economist & Patrick Foulis, Business Affairs Editor, The Economist