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'Black swan': Global pushback threatening foundations of China powerhouse Huawei

Black swans brought in by Huawei Technologies Co. CEO Ren Zhangfei rest their wings on the surface of a pond on the grounds of the company's headquarters, in Shenzhen, in China's southern Guangdong province, on Sept. 26, 2018. (Mainichi/Kiyohiro Akama)

SHENZHEN, China -- On a roughly 1 million square meter plot of land here -- twice the size of Tokyo Disneyland -- the scenery of a traditional Western European town has been created with a specialized train system and an array of fancy restaurants where young people dine.

What seems like it could be a theme park is actually a research and development facility belonging to telecommunications giant Huawei Technologies Co., opened in the southern Chinese city of Shenzhen, Guangdong province, last autumn.

"Exceptional research is born from a favorable development environment -- that is our ideology," the guide for the luxury facility explained.

Huawei's headquarters within Shenzhen is even larger -- at 2 million square meters -- and is its own compact city with hotels, a hospital and shopping centers all in one place. Visiting the grounds, one can understand the true magnitude of what is called "China's largest private enterprise."

In China, where government-owned companies lead most industries, Huawei occupies a unique position. Founder and CEO Ren Zhangfei is an engineer who first went to college for architecture, and later studied electronic engineering on his own after graduation. In 1974, he entered the People's Liberation Army and worked on the construction of a textile factory. However, less than 10 years later, the unit to which he belonged underwent restructuring. With his severance pay from the military and other funds, Ren went on to start Huawei in 1987 -- from a second-floor apartment in Shenzhen.

Now, 30 years have passed, and Huawei boasts annual sales of more than 600 billion yuan, or roughly 9.5 trillion yen, and has grown into a global business with ongoing projects across over 170 countries. The company is also the world leader in the development of what is expected to be the key to future manufacturing -- "5G" next generation ultrafast telecommunication technology and is considered a treasure by China.

In one corner of the headquarters lies the "X lab," the center of the company's development of "5G" systems. "Let me show you the cutting edge of the possibilities of 5G," said one of the people in charge as they turned the handle on a machine and a car appeared projected on a screen. It was an image from a research center over 1,000 kilometers away in Shanghai. Through telecommunications, they could operate the vehicle even over the long distance.

"With 5G, video and operational signals can pass back and forth without a time lag," the individual explained. "The utilization of technology that was difficult before is now possible."

A special train running through Huawei Technologies Co.'s new research facility modeled on a Western European town arrives at a platform in the suburbs of Shenzhen, in China's southern Guangdong province, on Sept. 26, 2018. (Mainichi/Kiyohiro Akama)

The development of this new technology has had a large influence on Chinese society. 5G is 100 times faster than the current 4G, which has increased the amount of data that can be sent over the network and made smartphone streaming video and other services possible. 5G is going to make a true Internet of Thing (IoT), the connection of devices over the network, a reality. Companies all over the world are engaged in competition to see who will get ahead with 5G development. "5G has started a technological revolution, and business is changing rapidly. Business opportunities are growing," said one of Huawei's three "Rotating Chairmen," Hu Houkun.

--- Investing in research and pairing with powerful companies key to success

Huawei's policy is to invest over 10 percent of sales back into research and development. In 2017, that amount totaled roughly 13.8 billion dollars, or some 1.5 trillion yen. Beating out U.S. firm Intel Corp. and Japan's Toyota Motor Corp, Huawei was right at the heels of industry leader Amazon, which invested approximately 16.1 billion dollars in development the same year.

Out of Huawei's 180,000 employees, close to 40 percent at 80,000 are involved in the research and development field, and it registered the most patents in the world in 2017. With all those human and monetary resources, Huawei was the first to start the development of a 5G network in 2009, and boasts over 2,000 engineers specializing in the system. There are whispers in the industry that Huawei is ahead of the competition by 12 to 18 months.

Still, X Lab only handles telecommunication technology. The actual users of the system developed there are outside companies with interest in IoT that Huawei pairs with for joint development projects. Wang Yufeng, the director of the lab, revealed, "By releasing our technology to other companies in other industries, we can expand the possibilities for 5G even further." Pairing with powerful companies both in China and around the world looking for the latest 5G technology has only increased Huawei's technical prowess further. This positive feedback loop has served as the company's strength.

"There is no need for you all to wonder if your research is useful. Simply devoting yourself to the search of the yet unknown world is enough," said CEO Ren last November at Huawei's research center in Yokohama, south of Tokyo. The company's research bases spread across the U.S., Germany, India and other countries. However, the spread of Huawei's territory is now turning into the reason for a crisis.

In business, an unexpected shock to the market is referred to as a "black swan." In the pond on the grounds of Huawei headquarters, Ren brought in several resident black swans, to encourage his employees to have an awareness of "always being prepared for unexpected circumstances."

--- Global crackdown on Chinese technology shakes Huawei

In August last year, U.S. President Donald Trump prohibited government bodies from using technology and devices made by Chinese manufacturers under the National Defense Authorization Act. Following the U.S., the other members of the so-called "Five Eyes" intelligence gathering network -- Britain, Canada, Australia and New Zealand -- did the same, and Japan also effectively halted the government use of telecommunication technology originating in China.

The black swan had landed, and shaken Huawei's "grand kingdom." But in addition to this unprecedented headwind blocking the firm's progress, last December, Huawei Chief Financial Officer (CFO) Meng Wanzhou, CEO Ren's daughter, was taken into custody by Canadian authorities under a request by the U.S. government on allegations related to the U.S.'s economic sanctions on Iran.

A researcher at Huawei's "X lab" operates a car 1,000 kilometers away in Shanghai, after getting a live feed from a camera mounted on the car using 5G network technology, in Shenzhen, in China's southern Guangdong province, on Sept. 26, 2018. (Mainichi/Kiyohiro Akama)

The arrest had roots in the technological battle between the U.S. and China. The Chinese government released the hi-tech manufacturing growth policy "Made in China 2025" in 2015, aiming to be the world leader in cutting edge engineering. With Huawei's success serving as pressure, there is a possibility that the U.S. targeted the company because it was the leader in the Chinese high-tech sector.

In China, there is less distance between companies and the government, and the cooperation between the public and private sectors has served China well. Among these successes have been many collaborations between Beijing and government-owned telecommunication device manufacturers, and Huawei had already been wrapped up in suspicion of being tied to the government regardless of its private status.

Still, Huawei Chairman Liang Hua told Chinese media at the end of 2018, "Despite outside pressure, we are still concluding 5G business contracts all over the world," emphasizing that the influence was limited.

But the Chinese government's sense of crisis is also growing. 5G is the main pillar of "Made in China 2025," and with Huawei stumbling, there are no strategic alternatives. While the government continues to ask for clear evidence supporting the U.S. allegation against the company, it still remains to be seen if Huawei can chase away this black swan.

(Japanese original by Kiyohiro Akama, China General Bureau)

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