Huawei’s Global Cloud Strategy

By Jonathan E. Hillman and Maesea McCalpin

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The Issue

Many developed economies are restricting Huawei from their 5G networks, but developing economies are still welcoming the Chinese tech champion into the center of their government operations. The CSIS Reconnecting Asia Project identified 70 deals in 41 countries between Huawei and foreign governments or state-owned enterprises (SOEs) for cloud infrastructure and e-government services.

Key Findings

Emerging markets focus: The majority of deals (57 percent) are in countries that are middle-income and partly-free or not free. Africa leads the way with 36 percent of deals, followed by Asia (20 percent), the Americas (17 percent), Europe (17 percent), and the Middle East (10 percent).

Effective sales pitch: Huawei promises major commercial benefits to prospective customers, usually packages the delivery of hard infrastructure with services (60 percent of deals), and harnesses financing from Chinese policy banks to sweeten offers (nearly all deals for which financing could be identified).

Wide array of sensitive services: Huawei’s cloud infrastructure runs the gamut from small, modular data centers the size of a shipping container to multi-level buildings packed with servers, and its e-government services include document digitization, national ID systems, tax services, crisis communications, elections, and more.

Expanding trail of trouble: A significant share of deals (16 percent) have experienced complications from security, operational, or financial issues. Despite facing legal and reputational challenges, Huawei’s offers are still gaining traction, with nearly half of the deals with known start dates announced since 2018.

Allied action needed: The United States and its allies already have superior cloud products to offer, but competing more effectively in developing markets will require expanding financing for infrastructure, funding for technical assistance, and cooperating to remove and prevent regulatory barriers.

Huawei’s Strategic Niche

Huawei has made its cloud business a strategic priority. With U.S. sanctions limiting its access to mobile semiconductors, cloud computing has become integral to its survival. The pandemic provided a boost, accelerating global adoption of cloud services by one to three years and growing Huawei’s cloud revenue by 168 percent during 2020, according to Ken Hu, Huawei’s rotating chairman. “It is our goal to make it as convenient for customers to use Huawei’s cloud services as electricity,” Huawei CEO Ren Zhengfei said in a speech last year.

As it seeks to achieve that goal, Huawei is gaining traction in the developing world. The CSIS Reconnecting Asia Project examined open sources and identified 70 deals in 41 countries between Huawei and foreign governments or state-owned enterprises (SOEs) for cloud infrastructure and e-government services through April 2021. As illustrated in the map below, these deals are concentrated in developing countries.

A closer look at these deals shows that countries entering into agreements with Huawei for cloud infrastructure or e-government services tend to share three characteristics:

Non-liberal: 77 percent of deals are located in countries that are considered either “not free” (34 percent) or “partly free” (43 percent) according to Freedom House ratings.

African or Asian: 56 percent of deals are with countries located in sub-Saharan Africa (36 percent) or Asia (20 percent).

Middle-income: 72 percent of deals are in lower-middle-income (38 percent) and upper-middle-income (34 percent) countries.

These characteristics are the same as those among countries signing up for Huawei’s “Safe City” systems, as highlighted by previous CSIS research. And with a surge in deals announced since 2018, including several announcements during 2020, warnings about Huawei’s security risks do not appear to be persuading decisionmakers in developing countries.

The actual number of deals is likely higher. Huawei claims to have provided cloud services in more than 140 countries, including more than 330 projects for governments. Many of the “governments” that Huawei counts in that statistic are likely subnational entities within China, where Huawei is the second-largest cloud services provider. But there are likely additional foreign deals that have not been disclosed publicly.

These activities carry commercial and strategic implications. Huawei is trying to transition from providing hardware to providing services, but with only 4 percent of the global market for infrastructure as a service (IaaS), it is far behind U.S. cloud providers. In this contest, developing economies are valuable testing grounds and prizes in their own right, offering strong demand, fewer barriers to entry, and less scrutiny than developed economies. For example, while e-government adoption is most advanced in Europe, it is growing fastest in Africa, where a third of Huawei’s cloud and e-government deals are concentrated.

“In this contest, developing economies are valuable testing grounds and prizes in their own right, offering strong demand, fewer barriers to entry, and less scrutiny than developed economies.”

The strategic stakes are far higher than Huawei’s currently modest global market share would suggest. Huawei’s cloud infrastructure and e-government services are handling sensitive data on citizens’ health, taxes, and legal records. These services also operate critical infrastructure, from oil production and fuel distribution in Brazil to power plant operations in Saudi Arabia. As Huawei carves out a niche as a provider to governments and state-owned enterprises, its activities could provide Chinese authorities with intelligence and even coercive leverage.

Effective Sales Pitch

Huawei’s sales pitch effectively combines three elements that resonate with decisionmakers in developing economies. First, the company advertises major gains from using its cloud solutions. It promises to dramatically reduce governments’ operating costs and simplify public service delivery. For example, Huawei says its e-government cloud network installed at Brazil’s Planalto Palace—the official workplace of the president—helped reduce the government’s administrative costs by 20 percent. Claims like these are often impossible to verify due to poor transparency and political incentives. After publicly touting the benefits of these new systems, government leaders may be incentivized to portray them as successful, regardless of their actual performance.

Second, Huawei often packages hard infrastructure and services, including in 60 percent of the deals identified. The acute need for infrastructure in developing economies means that many prospective customers lack the physical systems to operate Huawei’s cloud solutions. That need, in turn, plays to Huawei’s historical strengths as a hardware provider. The company is able to tap existing ties with its cloud customers, having provided national fiber optic networks and wireless networks for them, for example. Huawei offers a wide range of cloud infrastructure solutions, from modular data centers that are the size of a shipping container to dedicated, multi-level buildings packed with servers. This flexibility means there is something for every budget.

Third, Huawei further sweetens deals with access to financing. In nearly every case for which financing could be identified, a Chinese financing entity was the source. The most common sources of financing, not surprisingly, were the Export-Import Bank of China and China Development Bank, Beijing’s two largest policy banks. In some cases, the data centers are essentially gifts from China. In March 2020, for example, China launched a data center with Huawei equipment in the Serbian city of Kragujevac, paid for with a $2 million Chinese grant. A few months shy of its completion, in November 2019, Serbia signed an agreement with China for Huawei to provide cloud infrastructure and a national AI platform to its national data center, backed by a $13 million grant from Beijing. These low upfront costs are compelling, although they can overlook longer-term security, operations, and maintenance expenses.

Photo: kragujevac.rs

As Huawei’s expanding footprint indicates, this sales pitch is effective even though its cloud services are not as advanced as its competitors. Huawei offers fewer cloud applications, a shortcoming its leaders have acknowledged and aim to address. Gartner, an industry research group, found that Huawei’s cloud services are inconsistent in their delivery and marketing, with offerings that frequently overlap. A closer look at Huawei’s cloud and e-government activities also reveals that a significant number of deals that have encountered trouble.

Trail of Trouble

A significant share of Huawei’s cloud and e-government deals (16 percent) have experienced complications from security, operational, or financial issues. Security incidents have understandably received the most public attention, but financial and operational difficulties have also negatively impacted customers. Rather than massive gains in efficiency, several customers have been left with projects that wasted public resources and now sit idle.

“A significant share of Huawei’s cloud and e-government deals (16 percent) have experienced complications from security, operational, or financial issues.”

Huawei claims their solutions are “secure and reliable,” but several examples suggest vulnerabilities. In 2018, Huawei completed a $53 million data center for Papua New Guinea that had systematically poor security, according to a leaked assessment. Last year, widely-known ransomware that was several years old knocked Cabo Verde’s e-government services offline for four days. Chinese hackers reportedly siphoned data from servers at the African Union headquarters as well as video footage.

Huawei also claims their solutions are “open and efficient,” but poor planning and execution have led to underperformance and even rendered some projects unusable. State data centers in Ghana and Tanzania, for example, have suffered from financial difficulties after failing to attract sufficient users. E-government projects in Guyana and Zambia experienced procurement irregularities and allegations of corruption. Papua New Guinea’s state data center fell into a state of disrepair after planners failed to adequately budget for operations and maintenance.

Papua New Guinea’s national e-ID project is another cautionary tale. In 2012, it signed a contract with Huawei to aggregate citizens’ biographical details in a central database and issue national ID cards. By 2018, however, only a small fraction of citizens had been registered and the project continued to struggle operationally and financially. According to a 2020 report, from the Ministry of Planning, the project suffered from “constant technical and mechanical issues” and no maintenance or service agreement was signed because it was deemed too costly.

Policy Implications

To be sure, Huawei is not solely responsible for all the shortcomings highlighted above. Governments pursuing e-government projects need to recognize and remove barriers that can stand in the way of adoption and successful operation. It is especially important to insist on realistic budget proposals that capture the full cost of maintenance and operations. The cases above also underscore the need to track and assess the actual performance of e-government projects, ideally in an objective and transparent manner.

U.S. and allied policymakers, meanwhile, should prioritize cloud infrastructure and services as an area of strategic competition. This is an area in which the United States already has superior products to offer. Competing more effectively in developing markets may require packaging cloud services with support for the infrastructure that underpins them, including not only data centers and fiber optic networks, but also energy infrastructure. The United States and its allies should pool resources to expand financing and funding for digital infrastructure, technical assistance, and training. They should also cooperate to remove and prevent foreign regulatory barriers that disadvantage U.S. and allied cloud providers.

Action is needed because the developing world will play a much larger role in global networks in the coming decade. The United States has advantages in cloud computing that could benefit more developing countries, boosting their competitiveness and supporting the U.S. economy in the process. A more effective sales pitch will require empathy for the tradeoffs faced by decision makers in lower-income markets, where affordability often trumps security concerns, and fashioning incentives to encourage the adoption of alternatives. The United States has strong alternatives on hand. Now it must compete.

Methodology

This dataset includes Huawei’s announced, signed, or completed deals with foreign governments and SOEs for cloud infrastructure and e-government services through April 2021. Cloud infrastructure includes data centers and their components (i.e., servers and switches). E-government services include: VoIP services, telepresence systems, data or digital document management, document digitization, email, multimedia systems, big data analytics, IoT platforms, and portals and applications that collect or process citizen information. Examples of platform and application uses include taxation, elections, national id management, health care services, education, and the processing of other public records.

The dataset was collected using publicly available information from government sources, Huawei’s website, news articles in English and local-languages, and scholarly data sources including the Center for American Progress, the Australian Strategic Policy Institute, and AidData. In instances of conflicting information, priority was given to the most authoritative source based on the best judgement of the research team.