Political War Games

Let's Hope Innovation Isn't the Victim

We're living in strange times. Strange times politically and economically, and it's beginning to have a profound impact on the technology industry. Huawei is dominating headlines and seems firmly caught in a geopolitical struggle between China and the West.

But nothing is ever black and white. Indictments were announced on 28 January against Huawei by the US Department of Justice (DoJ), citing the violation of sanctions and the theft of trade secrets. Yet in the same month Huawei is a leading witness in another US government agency's case against a US company — Qualcomm. The suit by the Federal Trade Commission (FTC) claims anti-competitive behaviour by Qualcomm that is stifling competition and causing irreparable harm in the smartphone market.

These two stances by a single government seem wildly at odds with one another. Huawei is being depicted by the DoJ as a disreputable company that will try to get ahead at any cost, while simultaneously being granted leading witness status by the FTC. Moreover, if Judge Koh decides to rule in favour of the FTC against Qualcomm, Huawei is among those that have much to gain. Presenting a highly ambitious Chinese company as an objective voice in a case about whether a leading US rival is pursuing anticompetitive practices would always raise eyebrows. Doing so in the current environment is nothing short of remarkable.

To some extent the situation is unfortunate timing. The rising tide of sentiment against Huawei is the product of a concerted trade stance against China under the Trump presidency and indicative of the high stakes in 5G leadership. Moreover, there is justifiable concern about a lack of attention to security in 5G core networks and how this could be exposed.

It's fair to say the FTC case against Qualcomm probably wouldn't have been established under the current administration. Charges were filed by the FTC in the final days of the Obama presidency. What is perhaps most surprising is that this hasn't yet caught the attention of President Trump and his Twitter stream.

Both situations are complex, with the FTC case involving hours of testimony from the smartphone industry, consultants and economists to determine whether the alleged anticompetitive behaviour has resulted in harm. Nonetheless, we are concerned about the implications. Qualcomm has been a leader in CDMA, 3G, 4G and now 5G. Intellectual property is the product of considerable investment in research and development that takes place years before it manifests itself in consumer products and delivers any revenue. In its fiscal 2018, Qualcomm invested $5.6 billion in such research, or 25% of its $22.7 billion revenue. This is not to suggest others don't spend huge amounts too, albeit less directly attributable to cellular connectivity. In 2018 Apple invested $14.2 billion (5% of its revenue), Intel invested $13.5 billion (19% of its revenue) and Huawei claims its research spending tops $15 billion annually.

If that model of innovation is unfairly threatened it would affect not just Qualcomm but the broader industry. There is little question that Qualcomm's role in 5G innovation will be tangible at Mobile World Congress later this month in Barcelona, where pretty much every 5G device that is announced will contain Qualcomm's 5G X50 modem. Moreover, Qualcomm has said there are over 30 5G device designs in the pipeline in 2019. A good proportion of Qualcomm's overall revenue will go back into research and development. It's a virtuous circle.

The same goes for Huawei. We don't know the full extent of the evidence against the company, but if it is being unfairly punished because of the geopolitical situation, it will be the market rather than just Huawei that is disadvantaged. Huawei is the leading provider of network equipment by market share. If the market is deprived of a leading supplier with a keen approach to prices, it'll be the deployment of 5G networks and wider competition that suffers. It's also hard to ignore the risk of retaliation by China against leading innovators in the West and the further exacerbation of a worrying trend of tech nationalism.

Innovation is a delicate process. That doesn't mean it should be protected at any cost and particularly if it is either being derived or wielded unfairly. Governments wielding a heavy hand in the innovation process and arbitrarily determining what constitutes a fair return on investment is concerning. We need to be cognizant of the scope for unforeseen damage to the innovation process caused by short-term thinking or short-sighted determinations.

This entry was posted on February 11th, 2019 and is filed under Services. You can follow any responses to this entry through the RSS 2.0 feed or you can leave a response.

Posted By Geoff Blaber On February 11th, 2019

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