July 17, 2019
Q1 Akiko Fujita, Yahoo Finance: Thank you very much for joining us today. I want to start with the base that we are in, quite a grand thing. We had a chance yesterday to go to the Dongguan campus and saw all the European villages. I'm just curious. You are one of the biggest tech companies here in China. You're a national champion. Why do the European aesthetic?
Ren: All our buildings are designed by the people who won the bids for the projects. Many world-renowned construction companies have participated in the bidding process. It was Nikken Sekkei, a company from Japan, that won the bid for the design of our Dongguan campus. Its chief designer envisioned a museum of the world's most beautiful buildings, so he designed the campus this way and won the bid. Nikken Sekkei also won the bid for constructing our Ji Jia Center. Many Greek, Russian, and Chinese companies also participated in the bidding for the interior design and decoration of our Dongguan campus. Their joint efforts have made the campus what it is today. So this was a decision made by these designers, not by Huawei.
Akiko Fujita, Yahoo Finance: Could this be seen as symbolism about how Europe has dominated history and how China can be the dominant force moving forward?
Ren: No, it's all about beauty and magnificence. The architect proposed this design and our Shanghai consultants decided to accept it. They invited some experts to vote on it. So Huawei actually had no vote on the architectural design. They thought the design was beautiful, and we accepted that. When the construction was completed, everyone felt it was beautiful and so we also felt we had achieved our goal of building a beautiful campus. All in all, the designer was the major decision-maker. There's no particular symbolism behind it.
Q2 Akiko Fujita, Yahoo Finance: Let's talk about what played out between the US and China a few weeks ago at the G20 summit, where President Trump and President Xi met. One of the points of discussion between them was to allow for some licenses so American suppliers could begin selling to Huawei again. What shipments have resumed since then?
Ren: I don't think we were fully prepared for being added to the Entity List. So we faced some pressure at the beginning. However, after we tried to sort out our internal problems, we found that we are fully capable of shaking off our reliance on the US for our core products and depending on ourselves to survive. But we also have some non-core products that cannot do without US components. So we cut some of these non-core products to reduce the pressure. Over 80,000 members of our technical staff are working hard to fix other "holes" in this "bullet-riddled aircraft". We have seen very good results already.
The remarks made by Trump at the G20 Summit have had no substantial impact on Huawei yet. His remarks indicated the US is no longer trying to strike blindly at Huawei. When they added us to the Entity List, even McDonald's in Mexico stopped selling to us. This suggested that the US had no idea which products were actually not important and whether their supply to Huawei could be continued at that time. Trump's remarks have helped many small and medium-sized enterprises (SMEs) in the US. Resuming supply to us has boosted their sales. Of course, his remarks also allowed us to resume the production of a small proportion of our products. Overall, as long as the US is being friendly, we will continue to buy components from this country. We believe the world will ultimately collaborate for shared success.
Akiko Fujita, Yahoo Finance: You mentioned some SMEs have resumed shipments, can you tell us which specific companies?
Ren: I am not that clear about the details. To my knowledge, the supply of the vast majority of less critical components has resumed. This is a good thing. It can help some US companies change their business performance. But the US has not made any decisions on the supply of critical components yet. I estimate that they need around two more weeks to make a decision. If they don't make a decision, we will.
Q3 Akiko Fujita, Yahoo Finance: What the US Commerce Department has said is if these are components that are readily available, they will grant licenses to supply Huawei, but those that have national security will not. I'm wondering if there's a lot of confusion in the US. What is your understanding? What constitutes national security in terms of the components that you take in? Which component is considered a national security risk, therefore not being able to be sold to Huawei?
Ren: There's not one individual component that can threaten the national security of the US.
5G is just a tool that helps networks operate faster. It's good for the world. 5G is not an atomic bomb. How has it become a "threat"?
We don't have any networks in the US, nor do we intend to sell our 5G products there anyway, so there's no way we can pose a threat to the US. I think the US is too apprehensive. At the end of the day, collaborating for shared success is the only way forward. The US is the most powerful and the most technologically capable nation in the world. It should have more confidence in its ability to address cyber security issues.
Q4 Akiko Fujita, Yahoo Finance: I heard you recently said, "The US has helped us in a great way by giving us these difficulties", the implication being that you have been able to accelerate your efforts for increasing self-reliance. I'm wondering if that's the case. What do you see is your future with some of these partners that you have, like Intel, Qualcomm, and Micron in the US?
Ren: If the US government allows US companies to supply us, we will continue to buy from them, even in areas where we have developed our own alternatives. We adopted this approach in the past. Last year, we bought 50 million chipsets from Qualcomm even though we have our own complete chipset portfolio. We can live without Qualcomm, but we are still committed to working with them.
Intel is a provider of x86 servers. We also have our TaiShan servers powered by our Kunpeng CPUs. We will redouble our efforts to make our products even better over time. If Intel can continue supplying Huawei to help us maintain our leading position, then we will still buy in huge volumes from them. We hope that Intel's x86 servers will be able to secure a huge market share in the data communications area. We're only looking to obtain a tiny slice of the market, so that we will not squeeze Intel out. As long as the US is open to Huawei, we will keep purchasing huge amounts of US components, even in areas where we have developed our own alternatives.
Our procurement department adheres to the principle of not sourcing from only one supplier but from two or three at the same time. If there is only one supplier for a certain component, we will research and develop our own product as a backup. The fact that we have capabilities in certain areas doesn't mean we will back off from our US partners. We will continue to welcome US tech companies with open arms. We won't change our stance on this.
Q5 Akiko Fujita, Yahoo Finance: And as it stands right now, you are still in the wait-and-see mode because some of these American companies are still waiting for licenses before being able to sell to you. How long can you last without anything from the US?
Ren: I don't think we are in a wait-and-see mode. Instead, we are making every effort to ensure supply continuity. Since the US ban was announced, we have not experienced any shipment discontinuity for a single day. If US companies were to stop supplying us altogether, our production would not stop for a single day. Rather, we would ramp up production. We will face some difficulties because we need to switch product versions. To do that, we need more staff. This year, we have recruited over 6,000 new employees thus far to optimize or replace existing versions. During a version switch, all teams – including R&D, marketing and sales, and delivery – need to deliver products to customers in new ways. This means a bigger workforce and more costs.
There's no lethal risk that threatens Huawei's survival. The more advanced a product is, the fewer risks we face. We have our own "Plan B". For example, in 5G, Huawei is the sole provider of many cutting-edge chips. Our optical chips are the most advanced in the world. We can live without US suppliers in many areas, but this is not what we want. We want to work with US partners to jointly fulfill the responsibilities we have of building an information society. Huawei is not ambitious. We don't want to dominate the world. We only want to work with our partners to build an information society.
If Huawei were ambitious, we would have already dominated the most profitable markets. Why are we working in Africa, in remote regions in the Himalayas, and in deserts? We are doing this to serve humanity. Commercial interest is not our sole objective.
Q6 Akiko Fujita, Yahoo Finance: So, when you say you have hired additional staff to work hard so that you can continue to move forward, is the idea is becoming increasingly self-reliant? What is your goal you have in terms of how much of products and components that you want to produce in-house in the future?
Ren: We still have to depend on the rest of the world, because no one will succeed on their own in the information society. We have to depend on the world, including the US, so we hope the US will become more open. US government officials don't know much about Huawei, and if they come and visit our company, they may change their perceptions of us. There are rumors that we are struggling to survive, but you can see how many people eating in our canteens every day. That means our business is going on as usual.
We advocate for openness, and have no intention of working alone or isolating ourselves from others. Even if we do develop all the components we need on our own, we will continue buying components from others. That means half of our components will come from ourselves and the other half from others. We absolutely won't allow ourselves to become the sole supplier of certain components by squeezing others out of the market. When others stop supplying us, we will use more of our own components. When others resume their supply, we will buy more from them. We maintain some supply flexibility, and we will never take the path of working alone or isolating ourselves from others.
We hope the world will be more open. But first we ourselves must be strong enough so that we will be able to survive if others don't open to us. Otherwise, we wouldn't be having this interview here today. The fact that I'm giving this interview means we are strong enough to survive and we will continue to be so. If you come by three years later, you will see us still alive and you may see more new buildings on our campus.
Akiko Fujita, Yahoo Finance: I want to pick up on that point that you just made. You said that if the US could come closer and see your company, they would realize what this company is all about. Why not just invite administration in?
Ren: We always welcome US authorities to visit us. Some US politicians drove by but didn't come in, and some would rather wait outside while others are meeting us. We can do nothing about that. I suggest they change the color of their glasses, so that they may accept the reality.
People in US industry and academia know more about us than these politicians. They should listen more to these people, so that they may change their misperceptions of us.
Akiko Fujita, Yahoo Finance: Have you extended an invitation to the administration? If there are senators and administrative officials coming into China, have you extended a hand to say, "Come take a look at our company and we can show you that we're not exactly as you perceive it to be"?
Ren: Many US senators and members from the House of Representatives have visited us, including Rick Perry, the Governor of Texas. He once led a delegation consisting of a dozen of Republican senators to our company, with whom I met and exchanged views. Many people from the US have visited us, but it seemed that no one was willing to speak for us. I hope more people would understand us and speak for us.
Akiko Fujita, Yahoo Finance: Which lawmakers have you met with? Just to clarify?
Ren: I can't remember their names, but many senators and members from the House of Representatives have visited us.
Q7 Akiko Fujita, Yahoo Finance: Okay. I want to talk about what is at the heart of this. Why has the US said it targeted Huawei and that is on the concerns of national security? You look at American companies, Cisco, Nortel, T-Mobile, and Motorola, they have all accused your company of stealing trade secrets and gone to court with documentation to back up the accusations. Why should those companies or the US government trust you now?
Ren: New technologies are highly complicated. Although the US is very strong, it hasn't developed all these technologies yet, so they have decided to pick on us by focusing on some insignificant issues. We still trust the US courts for their rulings. They have made rulings on some of our lawsuits and made the right decision on behalf of the US government.
We are far ahead of US companies in terms of new technologies. Huawei has over 11,500 core patents granted by the US government, and has over 90,000 patents that support the foundation of the information society. The US should look more at Huawei's contributions to society, instead of finding faults with our weaknesses. If that happens, our collaboration with the US would become much better.
Akiko Fujita, Yahoo Finance: I guess what I'm trying to get at is, if you look at from the US side, there's been a lot of litigation against Huawei and there have been multiple companies that have come forward with these accusations. Can you understand where the distrust on the American side is coming from? Whether you agree with it or not, given what has transpired over the past 10 years, can you understand why there's so much distrust in the US?
Ren: This is because Huawei is far ahead of the competition. The US has been used to being the world's No. 1. They will never believe that anyone is better than them. That's why they have this mindset.
Akiko Fujita, Yahoo Finance: And this is my last point on this, but the accusation is not based on where you are right now, which is the leader in 5G, yes, but that you got here by stealing from American companies.
Ren: From the very first day Huawei was founded, we have valued intellectual property (IP) and opposed the theft of IP. This is because Huawei is a victim of IP theft and many individuals in China have stolen our IP. None of our litigation related to the US has found that Huawei has maliciously stolen anyone else's IP.
Our past success was created by our own hard work. Our R&D investment ranks No. 5 around the world and we are a non-public company. We don't have the problem that the US is imagining.
Q8 Akiko Fujita, Yahoo Finance: There are reports that have come out over the last few days that suggest you are planning significant layoffs over Futurewei R&D in the US. What is the future of Huawei's presence in the US?
Ren: First, Futurewei is a US company. According to the US Entity List regulations, they cannot send any of their R&D results to Huawei and no employees of Futurewei are allowed to have any contact with Huawei employees. This makes it difficult for us to manage this company and collaborate with them. We'd better wait for the US's interpretation of the Entity List, or the US's removal of Huawei from the list.
The US is home to the world's most advanced science and technology. If they are willing to work with us, we will increase our investment in technical partnerships. Before Huawei was added to the Entity List, we invested 500 million US dollars into Futurewei in 2018 and planned to invest 600 million US dollars in 2019. Now we cannot make further investment because we are not allowed to engage with Futurewei employees. What is our next step? This depends on the US government's direction.
Akiko Fujita, Yahoo Finance: Just to confirm, there are layoffs now at Futurewei and your R&D center in the US is essentially on hold right now because of Huawei being on the Entity List?
Ren: Yes. This is all because we cannot engage with Futurewei employees. If we cannot even discuss their work arrangements, how can they do their work?
Q9 Akiko Fujita, Yahoo Finance: Let me ask you about something that has been a consistent part of your narrative. I know you've heard this over and over, but let's talk about your military past as an engineer in the PLA. I know historically you talked about how insignificant that was when you think about when this all played out. But the US administration, which has put you on the Entity List, has continuously raised this. How far do you think you need to go to convince the administration, you know, that there's no tie there right now? I'm wondering if you've thought about what more you can do and what more Huawei needs to do to get that message out.
Ren: First, I've never considered needing to convince the US administration of my identity. I believe survival is success. In the future, I also won't attempt to clarify who I am to the US government. I am a clean man, and I don't think it's necessary to ask people to check whether I am clean or not.
There are also many veterans working in US companies. But do we say that these companies are all backed by the US military? I think the US should put themselves in our shoes. China has had over 50 million veterans since 1970s, and these veterans need to work and make a living. The employment of a veteran does not suggest a company's relationship with the military. What's more, I was just a low-ranking member of the army.
I've never considered trying to convince the US of who I am and will not in the future. I don't care what they think about me. What matters is that we win markets. No one can rely on others to fight their battles and win markets. I don't believe in any gods. I believe that we can only rely on ourselves, not anyone else.
Q10 Akiko Fujita, Yahoo Finance: I know you've gone back and forth. You've been asked this question on whether in fact you would be willing to take a call from President Trump. I've heard you say before that, you know, "Why would he call me?", "He has other things to do", and "We don't speak the same language". But I've also heard you say recently in an interview that yes, you are willing to take that call. Where do you stand on that right now? If he calls tomorrow, would you have a conversation with the president? In addition to that, I think you would get along with the president.
Ren: I think it could be possible. My family has said that we seem to have similar personalities, and we both sometimes act a little bit high-handed.
We have been communicating with the US government, for example, through its District Courts in New York and Texas. The US government can communicate with us through our lawyers. Is it really necessary to ask their big president to make a phone call to me? In addition, communication over the phone may not be clear enough. They can communicate with us through the lawyers.
Q11 Akiko Fujita, Yahoo Finance: Huawei is part of the trade conversation. Whether you like it or not, President Trump has made it a part of that. Since the G20 summit, there has been a back and forth, with the reports suggesting that the Chinese government is really pushing the US to reduce its pressure, back off on your company as part of the concessions from the US side. Are you willing to take that role? If the Chinese government asked you to be involved in the discussions, would you be willing to take part?
Ren: First, the US has filed criminal charges against us, instead of attempting to negotiate. The US is a country ruled by law, and issues related to law should be solved in the courts. I hope the relevant lawsuits will reach their conclusions quickly. The procedures are too long and slow. I hope our problems with the US will be solved quickly through the law. If they need to talk, talk through the lawyers with evidence.
Second, we barely sell anything in the US, so the trade between China and the US has nothing to do with us, and we won't ask the Chinese government to negotiate for us.
President Trump wants to use Huawei as a bargaining chip in his negotiations. If we got involved, the Chinese government would have to make concessions for us. Why should China make concessions for Huawei? Some people comment that the Chinese government could trade off something for Huawei. But Huawei didn't commit any crimes, so why should they have to save us? In addition, negotiations won't help. The US House of Representatives has passed a proposal that says Huawei may not be removed from the Entity List for at least five years. Should we just wait five years? Impossible.
Q12 Akiko Fujita, Yahoo Finance: I want to talk about where Huawei's business is going. You have a presence in 170 countries. I know outside China, Europe has been a big growth area. But as a result of the pressure that comes from Washington, you faced a lot of headwinds in some of the markets. The US is, as you point out, virtually zero. Australia has banned Huawei, Japan is now onboard, and Europe is still a bit of a mixed picture. Where do you see your growth coming from in the next few years?
Ren: First of all, Huawei has stayed customer-centric over the past 30-plus years. Our priority has been to create value for our customers, and we always put their interests first. During this period, we won the trust of the majority of our customers. They have been continuing to sign contracts with us despite all of the pressure from the US, which means they place a great deal of trust in us. Huawei is continuing to grow. This just goes to show that our customers are not breaking ties with us.
Second, Huawei is leading the world in 5G and also in many other areas, so we have full confidence that our customers will continue buying from us. The direction we are moving in and the pace of our development have not changed. We will need to make some temporary adjustments over the next two years though, as we switch the versions being used for many of our components, and it will take time to adjust and replace the existing versions. During this transition period, our growth may slow down, but from what we've seen, it won't be very much. We are continuing to move in the direction we have set, and this direction will not change.
Akiko Fujita, Yahoo Finance: What do you mean when you say it takes time to switch versions?
Ren: For example, if a company refuses to sell a certain component to Huawei, we will have to replace it with one of our own. This means that its version must be replaced, which will take time. During this transition period, we will face some pressure in terms of production capacity and volume. All that to say, while our growth may decrease over the next two years, it will rebound in two or three years.
Q13 Akiko Fujita, Yahoo Finance: The operating system is one of the big challenges that you see. You recently made some comments about the internal, the alternate operating system that you've been developing not necessarily being made to run on smartphones. If you can't use Android, do you have a plan B?
Ren: First of all, I'd like to say a few words about our in-house OS Hongmeng. This operating system is developed to adapt to future scenarios like the Internet of Things, artificial intelligence, industrial control, and autonomous driving. The latency of this system is no more than 5 milliseconds and sometimes even less than one millisecond.
We plan to apply this operating system to IoT applications like smart watches, smart TVs, and connected vehicles, but for right now, we really don't have plans to apply it to smartphones. Huawei has an agreement with Google, and we respect their work and the achievements they have made. We will only look into developing our own smartphone OS when Android is no longer an option, but as for now, we don't plan on it. IoT is actually a part of the AI industry, which will be a huge industry in the near future. 5G will simply provide support for it.
Akiko Fujita, Yahoo Finance: It sounds like you are operating under the assumption that Google will get the waiver and be granted a license to be able to supply Android to Huawei. Are you in touch with Google executives at all?
Ren: No, I have not met with executives from Google, but I believe both of our companies are working hard to resolve this issue. We are working to develop a backup operating system while they are working on communicating with the US government. I hope our efforts will pay off.
Q14 Akiko Fujita, Yahoo Finance: What about your 5G ambitions? Do you have to change the expectation a bit as a result of these very headwinds that you've talked about?
Ren: No, we have not adjusted our goals for 5G. This year, we are expected to ship 600,000 5G base stations, which will grow to around 1.5 million next year. Our 5G business will not be affected by the US ban in any way. None of our 5G components will be affected, either. We have already developed all of the high-end components we need.
Akiko Fujita, Yahoo Finance: So the base stations, the routers, you can continue to make those without any US components?
Ren: That's correct. According to our estimations, revenue from our network connection business will drop by 2% as a result of the ban, and our consumer business will be affected a bit more severely. Of course, the drop is the result of comparisons with our goals for this year set at the beginning of 2019; our sales revenue will still be higher than last year.
Akiko Fujita, Yahoo Finance: Just to clarify, the 2% decline is on the 5G equipment? The smartphones? What specifically were you referring to?
Ren: This decline will be from the impact of cutting out some minor parts of our business. The 5G part of our business will not be negatively affected. In fact, it will see substantial growth.
Akiko Fujita, Yahoo Finance: Do you see other areas when you look at your business and the portfolio Huawei has right now? Will you think that you may need to cut? I've heard you say in many occasions that maybe some of the minor businesses, you need to shed the fat a little?
Ren: First of all, we have not considered any specific areas we will cut. We have just considered the specific products we will cut in each area.
In Huawei's early years, we had many products. Now we have combined our products and have used new products to replace and remove many older ones. In general, the US ban has had no impact on our business continuity or on how advanced the products we use to serve our customers are. If the US becomes more open and collaborative, Huawei will develop faster and be able to contribute more to humanity.
Akiko Fujita, Yahoo Finance: When you say some of the products that you may not need, what are you referring to?
Ren: I was referring to low-end and outdated products. We have many such products. We have reviewed these products. Now one new product can replace dozens of outdated products. After these older products are replaced, we will only provide spare parts for these products to our customers.
Q15 Akiko Fujita, Yahoo Finance: I want to ask you about something that I think is quite personal for you, which is your daughter, arrested back in December. You are a father. You've seen your daughter going through this legal ordeal for several months now. She's in Canada. 24-hour surveillance and ankle bracelet. What do you think as a father, as you see what has been playing out over in Canada?
Ren: First of all, we have faith in the law. Under the law, we believe the case will be addressed based on facts and evidence. Emotions cannot resolve anything. The case must be addressed by law. As the legal procedure takes a relatively long time, we have to wait. There is no better alternative.
Akiko Fujita, Yahoo Finance: Do you talk to her often?
Ren: When I call her, she sometimes says they are eating hotpot, or making dumplings or noodles. She said she was busy with work for decades, and rarely had the chance to relax that she has had in recent months.
Akiko Fujita, Yahoo Finance: What did you tell her about, amid all those uncertainties, how she approaches all these? What advice did you give to your daughter as a father?
Ren: The only solution is to resolve the case through legal procedures. Such a big international issue cannot be solved through individual efforts. We believe the law is fair, just, open, and transparent, and our defense is based on facts and evidence.
Akiko Fujita, Yahoo Finance: How hopeful are you that it will be resolved and your daughter will not be extradited to the US?
Ren: It's not just that my daughter should not be extradited to the US, but that she should be freed and acquitted of all charges. She is completely innocent and it was a mistake to arrest her. But we need to wait for the court's verdict.
Q16 Akiko Fujita, Yahoo Finance: I want to go back a bit from talking about Huawei to what has been playing out in China. Over the last several years, we have seen big growth in tech here in China. You know all the big names, Alibaba, Baidu, obviously Huawei in the mix. Despite that success, though, there are all those skeptics who say that those companies grew because they had no competition, and that Western companies could not operate here without a joint venture in place. Is it time to open up the markets for the likes of Google or Facebook, so that you can actually come forward and say, "Look, we competed against the best and became the best"?
Ren: We have very good partnerships with Google, Facebook, and many other tech companies, and we are growing together in the world. Personally, I would like to see a more open market, but this is decided by the governments. For example, the US government has the sovereign right to close its doors to Huawei. We will try to persuade them to be more open and less conservative, but the decision is still made by the government. It's the same here. You can also try to persuade the Chinese government.
Akiko Fujita, Yahoo Finance: Do you think that this cloud will still hover over these companies until the Chinese government opens its doors to some of these companies? Yes, these companies have grown in their own ways and yet you continue to face skeptics who say you are only this great because the market is not open. Is it time for the Chinese government to change its stance, and open up the market more to Western companies, especially tech companies?
Ren: The premise behind these questions is wrong. Huawei has been facing fierce global competition ever since it was founded. In the 1980s, 100% of China's communications equipment was supplied by foreign vendors, mainly eight vendors from seven countries. These included NEC and Fujitsu from Japan, Lucent from the US, Alcatel from France, Nortel from Canada, BTM from Belgium, Siemens from Germany, and Ericsson from Sweden. We grew up in the small crevices between these Western giants. How could you say we didn't experience full competition? The story is similar in the enterprise communications market, where Cisco used to dominate the world and we started from scratch. But this year, we surpassed Cisco. This is not because Cisco yielded to us, but because we have grown strong by ourselves, tempered through full competition. No one has ever protected us, and we don't expect anyone to protect us in the future.
Q17 Akiko Fujita, Yahoo Finance: Can I get two more questions? What time is it? Can I just ask one more question though? Yesterday, we had a chance to walk around the campus and talk to some of your employees, and one of the conversations really struck me because there was a researcher who said, "Look, I came to Huawei because it is committed to cutting-edge technology, but I worry that the technology that I'm developing here could be misconstrued as a national security concern", that essentially, he feels the weight of the pressure that's coming from the US. What do you say to your employees who are wondering what this means for the future of the company and how they should push forward under all this pressure?
Ren: In fact, our employees have become more confident. I think this employee said that because he feels his work results are too advanced and too good. He may be proud of himself, and is indicating he has made great achievements in an understated way. I think this employee should be praised, as he is proud of himself. He believes that the US sees us as a threat only because we are too advanced. Of course, this is my personal interpretation. I don't know him.
We are very open at Huawei, and allow all kinds of ideas and voices. Huawei has an online forum called Xinsheng Community, where many people criticize me. Huawei's Blue Team, an adversarial wargame team within the company, once published an article called The Ten Sins of Ren Zhengfei; ten sins, not ten mistakes. And we responded by asking the whole company to study this article. We are not afraid of mistakes. We just correct them and make progress. We are open and free at Huawei.
It's the same for you here. You can interview anyone on our campus. If you have doubts, you can randomly pull someone aside in the canteens and ask them to take you to the Huawei employee apartment buildings. If their key can open the door, it will prove they are a Huawei employee, not pretending. By interviewing them, you will get a lot of genuine information.
I would like you to talk with all our employees. Our company allows employees to make some mistakes when communicating with the media. It's fine as long as 60% of what they say is right, and by "right", I mean what they really think. Currently, 70% of the international media coverage towards Huawei is negative, and the remaining 30% seems to be neutral. These media outlets do not view us positively, but at least they are friendly to us. Even if 40% of what our employees say is wrong, as long as they keep communicating, they will help turn these negative media reports into neutral ones. So it's a good thing. It doesn't matter if they make some mistakes. We encourage them to speak out about their real experiences and thoughts.
Q18 Krystal Hu, Yahoo Finance: It seems like Huawei has been making preparations for the crackdown from the US government and to some extent, you have foreseen the tension between the two largest economies in the world. Do you think you will stay in this condition for a while? What's your judgment of the situation?
Ren: Actually, we are not making preparations for the pressures coming from the US. Instead, we need to push for continuity and stability across the entire industry. We want to ensure that none of our products come from a single supplier; otherwise, a fire or some other disaster could cause us to collapse. That's why we have backups. These backups are not intended to cope with the US pressure.
Despite the attacks from the US, we are not hostile towards them. Instead, we think we should learn from US tech companies, and remain on friendly terms. Right now the US is not acting friendly towards us, but we are putting up with it. The US has a strong mechanism for self-correction, and they will soon get back on track. We will continue to remain friendly towards the US.
We have nothing to do with the trade frictions between the US and China. I haven't personally looked into these frictions. I only pay attention to advanced technologies from the US, not politics or anything else like that. Nor do I care much about what conflicts they have. What I do care about is focusing our efforts on researching and resolving customer issues. That's why now we have won great recognition from our customers. Sometimes, the US puts a great deal of pressure on us, but our customers have stuck with us and continued buying our products. That means they understand and trust us.
As for how long the conflict between the US and China will last, I think that all depends on the level of mutual understanding between the two countries. If the two countries could understand each other and come to a compromise, this problem might be easily resolved. If either of them tries to put the other at a disadvantage, this situation that we're in will just continue to exist for a long time.
We can tolerate the unfriendly international environment. So big changes to the external environment will have no impact on our internal operations. Over the past 30-plus years, we have gone through wars, epidemics, economic collapses, financial crises, and many other difficulties. We have been through many ups and downs. The world is unbalanced, and I think these challenges were tests for us. This time, it is the biggest test we have undertaken yet. Will we survive? Definitely.
We will remain friendly to the US. We will not hate the US just because several of its politicians are attacking us. The US is a great country. It has transformed from largely wilderness into such a developed country within just 200 years. This is really a great accomplishment.
I hope that China will also contribute to the world. The progress of humanity won't be a zero-sum game. If we run out of food, we don't have to catch all the fish in the sea, and we just have to learn to farm them sustainably.
AI will help increase, not reduce, the wealth of human beings. No countries will be plunged into war just because of lack of food or uneven distribution of wealth. The possibility of war will be slimmer. People will become increasingly reluctant to fight over a lunch box. Or at least I don't want to have a lunch box.
Q19 Akiko Fujita, Yahoo Finance: We're trying to get to the material impact to the company as a result of Huawei being added to the Entity List. You said before that 30 billion US dollars is the number you've put on the company in terms of the impact from this designation. Does that number still hold?
Ren: I think the Entity List is actually a good thing for our company. It's not a bad thing. In the past, our employees turned a deaf ear to our training. Many employees enjoyed their life in their comfort zone. They earned a lot, and often spent extravagantly. More and more employees were not fully committed to their work.
The Entity List has injected a sense of crisis in our employees, and inspired passion across the company. This has provided an opportunity for us to reposition underperforming managers and replace them with outstanding young employees. This has helped increase our vitality. In this sense, the Entity List is not a negative, but a positive. It has motivated our team.
Of course, it would be better if Huawei were removed from the Entity List. But even if that doesn't happen, we will not face too much pressure. Some say that removal may not happen for five years, but will we even need the removal by that point? I don't think so. The US delayed the ban on Huawei by 90 days, but this has done nothing good for us. Originally, the Entity List stated that many spare parts and components are not allowed to be sold to Huawei. After the 90-day delay, the Entity List covers a wider scope, and it even intends to include academic organizations, standards bodies, and universities. We must get mentally prepared. If the ban were delayed by five years, there might be even greater attacks against us.
Despite their attacks, we will not hate the US. If we keep chomping away at the grass like sheep, we will just get fat. The US is now chasing us like a wolf, so we have to start running. This will help us get fit again and become more effective.
Akiko Fujita, Yahoo Finance: I want to try to put a number on this though. The material impact, is it still 30 billion US dollars?
Ren: In Q1 of next year, we will release our 2019 financial report. At the end of July, we will announce our H1 business results. But they do not represent our annual financial report. In H1 of this year, we enjoyed high-speed growth for about four months. Following the May 16 ban, we continued growing due to the momentum we'd built up previously. Our H1 business results should be very good, but we will see real material impact in the second half of the year.
We will release our new financial report in Q1 next year. I believe the results will be quite good.
Q20 Krystal Hu, Yahoo Finance: We have seen many US technology companies like Amazon and Microsoft working directly with the US government and the military. They sign contracts with the US military. Why is Huawei so sensitive and unwilling to work with the Chinese government and the military?
Ren: First of all, the nature of our work is totally different from that of the military. We develop communications products for civilian use, not for military use. So we don't work with the military. The military tends to invest in R&D regardless of costs. They can put all their money in a single thing. Reaching targets is their top priority. We cannot spend money recklessly on something unwanted by the market; otherwise, our mobile phones will sell poorly. We value totally different things from the military, so we don't need to work with them. Some US companies can work with the military, because the US is so powerful. They can cooperate with each other as long as they want.
Second, there is a big gap between military and civilian industries. Military components are generally developed regardless of costs. Who can afford to install these components? Mobile phone technologies are actually very complex, but they are still cheap. The ways the military and civilian industries work are totally different. The military will spare no expense to develop a product, even if they just need a couple of them. At a country level, they may need only a few hundred or a few thousand of the product. Taking the atomic bomb for example. The US just has a few thousand of them. Generally speaking, civilian and military industries are totally different in terms of R&D, operating methods, and objectives. Military research is not suitable for civilian products.
Q21 Akiko Fujita, Yahoo Finance: Given the environment that we're in right now, I've heard a lot of people refer to this as a new Cold War, saying that there's a digital iron curtain going up as a result of what the US has done moving forward on pressuring the Chinese in trying to sort of constrain the technology. Is that where we're headed right now?
Ren: We've never wanted to curb the development of foreign companies. We communicate with companies, universities, and competitors in a friendly and transparent manner. We even keep open lines of communication with companies like Ericsson and Nokia.
We prefer to collaborate with the rest of the world in an open and friendly manner. Although the US is giving us a hard time now, if they stop doing so, we can still be friends. We will continue to buy components from US companies. However, we have to be more cautious. In the past, we were comfortable with signing 10-year contracts with US companies, buying large quantities of goods from them. But now, we have to sign smaller contracts on a rolling basis. In case they no longer sell us certain components, all the other components will become useless. By singing smaller contracts on a rolling basis, we will be able to more easily bear the losses caused by a supply problem.
Q22 Akiko Fujita, Yahoo Finance: One of the legal cases that I didn't ask you about is the one involving our parent company, Verizon. I know that you filed a lawsuit or sent some letter demanding 1 billion US dollars in licensing for your patents. I'm wondering why you decided to do that now. Can you help us understand the timing of it?
Ren: The timing wasn't taken into account when we made that move. Charging IP royalties is a standard international practice. We aren't even charging Verizon that much in licensing. People are saying the rates we chose are quite low. Verizon has never bought anything from us, but they are using many of our patents, so they should pay us royalties. Paying royalties could even galvanize them to solve some of their own development problems, so why are they choosing to delay the payment? Moreover, the US is a country governed by the rule of law. If a US company refuses to pay IP royalties, the US's reputation around the world will be negatively affected. Moreover, many non-US companies use US patents. If other countries follow suit and start to refuse to pay royalties, then it will be the US that will suffer the most, not China.
Q23 Akiko Fujita, Yahoo Finance: One of the things that I have noticed walking around campus was the image of the aircraft. You've talked a lot about this aircraft being able to fly despite having holes in it. Why have you chosen that aircraft to represent Huawei? Why this symbolism?
Ren: I stumbled upon this image on wukong.com. I saw it on the Internet shortly after the US put us on the Entity List. I had the feeling that it resembled us so much, seriously injured with wounds all over our bodies and with only our hearts beating. The aircraft was able to fly home. I believe we will also be able to fly home and land safe and sound. That's why I picked this photo. When I posted it on Xinsheng Community, many people had the same feeling, and it began circulating widely.
Q24 Akiko Fujita, Yahoo Finance: I know from conversations this morning that you had identified US-China tensions as a risk more than 10 years ago. I'm wondering what the catalyst was.
Ren: This narrative was made up by some employees trying to explain what we did in the past based on what is happening today. When we decided to make our own chips, we didn't do it to address possible conflicts between China and the US or between Huawei and the US. Huawei has always been learning from US companies and personally I am a fan of the US. I admire US culture, management practices, and technologies. When we started to make chips, our purpose was not to guard against the US.
It was because we believed it was essential to engage in some research if we wanted to develop and stay at the forefront of society. We invest heavily in basic research and we have many scientists. People may wonder why Huawei needs so many scientists and why Huawei spends so much money funding university research.
This is because the world is developing so fast, and it takes less time to translate theories into products. By staying ahead, we can earn more money. With this extra money, we can continue to invest. That's how we have developed into what we are today. Our technologies are a lot more advanced than the rest. In fact, they are too advanced for customers to resist even if our prices are higher.
Q25 Akiko Fujita, Yahoo Finance: Is there a particular company or a business leader that you really admire in the US?
Ren: I admire a lot of them. There are many great business leaders in the US. I admire the leaders of Google, Amazon, and the like. I'm also a big fan of Bill Gates and Steve Jobs. My younger daughter is a huge fan of Mr. Jobs. On the day he passed away, she was still a little girl and proposed that we have a moment of silence to mourn him, and we did.
Why do we have so much admiration for the US? Just think about how the US has become so powerful. All the US giants used to be small companies. They became what they are today by adjusting their structures and changing managers along the way, step by step. When I first heard about Microsoft and Apple, they were still very small. Huawei was of course even smaller, maybe smaller than half a sesame seed.
When a company is small, it must ensure that its internal structure is extremely fine-grained and stable. By doing so, it can remain stable as it grows bigger. We also started out as a small company, and became what we are today by optimizing and overlaying our structure time and time again. Today it may seem that Huawei is a "fortress" that cannot be demolished. This is because the path we took as we grew from a small company is similar to the way small companies in the US grow. We are able to fight huge battles. We can get used to the pressure even if the sanctions become the norm for us. In this sense, we are similar to US companies.
Second, I was once an army man. From watching movies about D-Day, I learned that 78,000 soldiers from the Allied forces died during their attempt to seize the beach. I once went to Normandy to visit the American cemetery. I have also visited the American cemetery in Manila of the Philippines. I learned how the US treated soldiers who had made contributions. These are both good examples to follow. We should also learn from US companies. Based on what we've learned, we can reinvent ourselves. We adopt a completely open model.
When you are here, you might notice that Huawei is not like a Chinese company at all. Except for our canteens and all the Chinese faces, it's more like a Western company. We have absorbed the good, advanced elements of the Western culture. Isn't our corporate culture like Protestant culture? We have actually learned a lot from US companies, so the US is our teacher and we should thank it.Nevertheless, American IT companies have made several major mistakes during their development.
First, during the 1990s, after digital circuits and wireless technology emerged, the US thought it was very powerful and tried to force the adoption of CDMA. Qualcomm was a leader in CDMA and raised the threshold too much, so the world didn't support it. The US also tried to force the adoption of WiMAX (Worldwide Interoperability of Microwave Access), aiming to turn computer technology into communications technology. They didn't realize that computers are about local area networks and communications are about global networks. The development of the standards for the global communications system is attributable to dozens of years of efforts made by tens of thousands of engineers who worked together in the ITU (International Telecommunication Union). When trying to challenge the world, American communications vendors took the wrong path. That gave rise to 3GPP, which resulted in the collective decline of these US companies. Their decline was not because of Huawei's rise, but because they were moving in the opposite direction of the world's development.
Second, the x86 CPU developed by the US was originally in a dominant position. However, due to Arm's breakthroughs in architecture, a new competitive environment formed for CPUs.
Third, the Internet developed too fast, and the US has established the world's largest and most competitive ecosystem. However, this doesn't mean ecosystems in other countries and regions cannot grow.
Following the emergence of these three "tracks", humanity started moving toward AI. The Internet of Things is a part of AI, which needs low latency. Today, in edge computing, people may object to the Von Neumann architecture. However, in AI and the big clouds of the future, this architecture will continue to be used. It involves supercomputers, including super-large-scale storage and super-fast connections. The US is abandoning 5G. Even if they have supercomputers and super-large-capacity connections, the US might still fall behind because they don't have super-fast connections. All three of these things are indispensible. For that reason, a new breaking point will appear. These breaking points will leave the US behind. 5G boasts high bandwidth and high uplink speeds. Previous generations like 4G mainly connect individual users, so that is B2C business. In contrast, 5G connects enterprise operations, so that is B2C and B2B. The high uplink speed of 5G is conducive to the realization of industrial automation, AI, and connected vehicles.