Huawei

For our first episode of Season 5, Acquired returns to Shenzhen to cover another Chinese technology giant, this one slightly... different from our past subjects: Huawei. From a backwater importer of PBX switches to the world’s second largest handset manufacturer and near-undisputed leader in 5G infrastructure technology, Huawei’s ascent over the past 30 years has been nothing short of spectacular, equaled only by the spectacular fireworks of recent events surrounding the company. What’s the story behind this global telecom giant, and what does its future portend for global tech and US - China relations? We dive in. Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC LinksRen Zhengfei on Bloomberg TV: https://www.bloomberg.com/news/articles/2019-05-26/billionaire-huawei-founder-defiant-in-face-of-existential-threatWho owns Huawei? https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3372669Carve Outs Ben: Billions: https://www.imdb.com/title/tt4270492/David: Dune by Frank Herbert: https://www.amazon.com/Dune-Frank-Herbert-ebook/dp/B00B7NPRY8/ref=nodl https://www.amazon.com/Dune-Frank-Herbert-ebook/dp/B00B7NPRY8/ref=nodl_

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Rosenthal?

  Intros for tonight.

• 0:02Ben Gilbert?

  Oh, yeah. I wrote up like a little like thing that's based on exactly what you texted me that I kind of like the idea of.

• 0:10David Rosenthal?

  Great, great.

• 0:11Ben Gilbert?

  But what I'm thinking isn't, tell me if you like this.

• 0:20Ben Gilbert?

  Welcome to season five, episode one of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert, and I am the co-founder of Pioneer Square Labs, a startup studio and venture capital firm in Seattle.

• 0:34David Rosenthal?

  And I'm David Rosenthal, and I am a general partner at Wave Capital, an early-stage venture capital firm that focuses on marketplaces based in San Francisco.

• 0:43Ben Gilbert?

  And we are your hosts. Today, we are covering China's largest private company, Huawei. The company is the second-largest smartphone manufacturer in the world. Now, they're only behind Samsung, and they recently pulled ahead of Apple. They also happen to be the world's largest telecom equipment manufacturer, among other things. Now, David, the company has had a pretty wild last 12 months.

• 1:09David Rosenthal?

  That would be putting it mildly.

• 1:11Ben Gilbert?

  Yes. Barred from doing business with US companies, federal prosecutors have filed charges of wire fraud, and their CFO was arrested upon landing in Canada last year. Oh, and the layoffs last week of hundreds of workers in the US went down amidst the trade war. So what is going on with this company, and how did we get here?

• 1:32David Rosenthal?

  Yeah, well, that's what we're here to talk about. And this is gonna be fun. This is a little bit of an experiment for us here at Acquired. This is obviously not an acquisition, nor an IPO. And in fact, there is a interesting ownership structure of Huawei, which we will get into. But we felt like this is such an important moment for tech, for international relations, you know, critical for all of us to really dig into and understand. And we certainly wanted to. So.

• 2:00Ben Gilbert?

  And speaking of understand, it's a thing that I didn't understand before starting to do this research. And I would imagine most, most folks in the tech ecosystem kind of feel the same way. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 2:28David Rosenthal?

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• 2:49Ben Gilbert?

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• 3:11David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 3:29Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. All right, David, now on to the episode, and as you put it well, I think, in the pre-show, we don't actually know how this one's going to turn out, and that's pretty exciting for us here at Acquired.

• 4:05David Rosenthal?

  Yeah, a little bit nervous, but makes it all the more interesting. All right, well, history and facts of Huawei. We rewind, as we so often do here on Acquired, back to the early 1980s. It was a great time. I was... Being born shortly after then, close to the mid-

• 4:27Ben Gilbert?

  Least important part of the episode.

• 4:28David Rosenthal?

  1984, yeah. Most important part of the episode, but we just, and we recall back to a lot of the same themes we talked about in our Tencent episode, if you remember that. And that was both Shenzhen, the city in China across the bay from Hong Kong, and Deng Xiaoping and the opening up of China and the cultural reforms after Mao and the Cultural Revolution that would lead to China becoming the, you know, economic, be the first steps in China becoming the economic juggernaut that it has turned into today, both economic and technological juggernaut. As we said, this is a few years after the Cultural Revolution.

• 5:10David Rosenthal?

  Deng has taken over leadership of the party and he has seen and lived through all the turmoil of the Cultural Revolution and he believes that China needs to move forward. And he, he seizes the Communist Party's 12th National Congress, which they do every five years. It's the big five-year planning event that the party does in 1982 as the moment that he is going to announce his vision for the future of China. And again, we talked about this on the Tencent episode. And what he sees is China as the, the system in China as being socialism rooted in communism, but with Chinese characteristics. And what he means by that is he wants to introduce a market economy back into China and introduce in a small way capitalism.

• 5:53David Rosenthal?

  And he has a very specific idea in mind. He has the city of Shenzhen as a special economic zone that is going to be the testbed for this idea of keeping China as a communist political system, but reintroducing capitalism and the market economy.

• 6:12Ben Gilbert?

  It's amazing. I mean, looking at that sort of declaration of the special economic zone and the, you know, 40-year effects that it's, it's had on that city and so much innovation has come out of Shenzhen.

• 6:23David Rosenthal?

  Yeah. Well, and it's like, this is such a visionary and crazy idea at the time that you could mix communism and capitalism.

• 6:34Ben Gilbert?

  This city is going to have a different economic structure. Like, the economy in this area is going to be different than that of the rest of our nation.

• 6:41David Rosenthal?

  Yeah, yeah, completely. And obviously, the experiment was a success. But in attendance in 1982, at that National Congress, that very National Congress, was a relatively low-level engineering corps director in the army, in the People's Liberation Army of China, whose name was and is Ren Zhengfei. Ren is better known today as the founder and CEO of Huawei. But back then, he was a long way from those heights. So who is Ren? Well, one, he's a very witty individual. He's been a little bit of a recluse, at least

• 7:21David Rosenthal?

  from Western media, over the last few decades. But with all the events around Huawei over the last few months, he's kind of come back out of seclusion, and has given many interviews to Western media and Eastern media. He's really a very, very smart and witty individual.

• 7:40Ben Gilbert?

  Yeah, and I would define him as reclusive, except when he feels his company is misunderstood.

• 7:45David Rosenthal?

  Yeah. You know, just to give you a little taste, we'll link to a few interviews with him that you can find on YouTube and other sites online. But he was asked by Bloomberg in one of these interviews, you know, how he feels about all the action that the US has taken against his company, and in particular, how it's going to impact these bands, the smartphone division. And he says, this is the quote, "We might miss our growth target, but we are still growing. Being able to grow in the toughest battle environment, that just reflects how great we are." That gives you a little flavor for Ren. So who's Ren? He was born in the 1940s in rural southern China. His father had actually been college-educated,

• 8:27David Rosenthal?

  which was incredibly rare for that time and place. Both he, Ren's father, and his mother were schoolteachers. Ren ends up going to college as well himself. He studies civil engineering at the Institute of Civil Engineering and Architecture in Guangzhou. After college, he works as a civil engineer for a few years. But then, of course, shortly after joining the workforce, the Cultural Revolution happens. Ren signs up. He joins the PLA. As an engineer, he gets put in charge of a really glorious assignment. He gets sent to a remote part of the country in central China, and he gets put in charge of setting up a synthetic fiber factory.

• 9:06David Rosenthal?

  He ends up doing well enough at that and succeeding at setting up and managing this factory that he gets rewarded by the army. He gets sent to the country's National Science Conference in 1978. Then he goes back and he continues working, working at the factory. And then in 1982, because he succeeded so much, that is how he lands himself the invite to this really prestigious, you know, National Congress and historic Congress where Deng Xiaoping announces, you know, the opening up of China. So he's there, he's in the audience, and, you know, he's inspired by Deng and this vision and leader, and he decides he needs to, he needs to follow this call and become an entrepreneur.

• 9:47David Rosenthal?

  So he leaves the army very shortly thereafter, and he moves to Shenzhen. He works briefly in the oil industry. He works for the Shenzhen South Sea Oil Corporation, which he realizes that the oil business is not for him. He's an engineer. He wants to work in engineering. He wants to work in technology, but that was his path to Shenzhen. So at the same time, now, this is the, the mid 80s. The Chinese government has, is trying to modernize all of the technical infrastructure of the country. And one piece of the infrastructure that is severely under invested in is telecommunications infrastructure.

• 10:25David Rosenthal?

  So what's that at the time? You know, there's no, there's no mobile telephones. There's no wireless industry. These are all fixed line wireless telephone. Switches, yeah. PBX. So the government is trying to find ways to import.

• 10:43David Rosenthal?

  Telephone switches into the country. And so Ren sees this, and of course, he had been part of the army and part of, part of the party. And so he's now finds himself in Shenzhen and he says, you know, maybe I can start a company to start importing these, there's this great demand for telephone switches. And maybe I can do that here in Shenzhen. So a couple of years into his job, he leaves in 1987 and he starts a firm along with five other co-founders to do just that. Import PBX switches and resell them, import them from Hong Kong and resell them in China. And famously, as the story goes, he starts it with only 21,000 RMB, which was about $5,000 at the time. That's debatable whether that was actually true, but that is the lore.

• 11:27Ben Gilbert?

  You know, it's crazy thinking about trying to put yourself in his shoes at this time. You only recently heard that this thing was not only legal, but possible, you know, starting a company and, and becoming an entity that generates a profit and, and performs this private sector activity.

• 11:48David Rosenthal?

  And become an entrepreneur when entrepreneurs were persecuted during the Cultural Revolution. And you were a member of the army during that time.

• 11:56Ben Gilbert?

  Right, right. Yeah. Not only was this thing illegal, which here in the US, you know, you, the thought of doing something illegal can, can totally cross your mind and you can sort of still do it. But this was one step further where, you know, it's something that, that was so culturally shunned that no one would sort of dream of doing it. You know, you blend ethics and religion and legal all into one and it, the result is like you just don't perform that activity. And in just a couple of years later, here he is getting a band of people together to start a profit generating corporation.

• 12:29David Rosenthal?

  Just another window into what must've been going through his mind at this point in time. He decides to name the company, of course, as we know Huawei. Well, where does he come up with the name Huawei? Well, Hua means China and Wei means achievement. So the name of the company that he chooses is China Achieving.

• 12:49Ben Gilbert?

  It's a good name.

• 12:50David Rosenthal?

  It's a good name.

• 12:51Ben Gilbert?

  It's a good pick, especially for the time.

• 12:53David Rosenthal?

  Yeah. But you can see, I mean, coming from the army, having been literally there in the audience when Deng Xiaoping is announcing the socialism with Chinese characteristics and the future and this vision for what China's both, you know, economy and, and politics are going to be for the next 40 years, it's all wrapped up in this.

• 13:12Ben Gilbert?

  Yeah, you'll notice he didn't name it Telephone Switch, Inc. You know, it's quite the vessel to be able to do whatever he wants within.

• 13:19David Rosenthal?

  So the initial aim of the company, of course, as we said, is to import these telephone switches from Hong Kong and resell them in China, which they do, and they do very successfully. And they follow a playbook that Ren had seen as part of the military in China. And that is that they start in rural areas and they come to dominate rural telephone networks and selling to small villages in the countryside. And then they build up from there and then they sell into cities. And the years go by and they become quite a large importer of this technology into China. But he doesn't really want to stop there. The ambitions are to build a big company and of course, to achieve and for China to achieve.

• 14:03David Rosenthal?

  The way that they're going to do that and going to do that on an international, large scale, isn't just to import technology, it's to build and develop their own technology internally. So he starts building alongside this import business, a pretty strong R and D and engineering group that grows to about 600 people over the first couple of years of the company. And that's crazy. You know, I mean, here you have this, again, this, this import business that has developed this R and D group of 600 people alongside to build their own technology.

• 14:34Ben Gilbert?

  The like pattern matching radar going off in my head reminds me of Shoe Dog, where Nike started as the blue ribbon shoes and they were importing Onitsuka Tigers and reselling those and you'd go to your blue ribbon guy to get your own Tsukka Tigers. Then it was this big jump to go and start actually doing the R and D and manufacturing their own shoes. I feel like I don't know as many recent examples of companies that started purely as an importer and then sort of switched the product that they were selling to be their own. But it keeps popping up in, you know, things from, from the eighties.

• 15:06David Rosenthal?

  Well, it's funny, like, technology now is such an intellectual property-driven business.

• 15:14Ben Gilbert?

  Yeah.

• 15:14David Rosenthal?

  Where it's really hard to do that. Now, of course, you could argue, and lots of people do, that it was back then as well. And Huawei played fast and loose with the intellectual property of the gear that it was importing. But it wasn't, you know, quite like it is today.

• 15:26Ben Gilbert?

  That's a fair point.

• 15:28David Rosenthal?

  So about five years later, in 1992, Huawei, the fruit of all of this R and D investment that they've been making, they introduced their first product on their own, the CNC 08 Digital Telephone Switch, and they introduced it into the Chinese market. And it completely dominates. It has the largest switching capacity of any product that was available in China at the time. Now, of course, Huawei had a large say in what other products were available in China at the time. But most importantly, they sell it for about a third the price that the imported switches are selling for. So as you can imagine, this comes to just dominate. And so very quickly Huawei grows into a very

• 16:07David Rosenthal?

  large company domestically. But again, the scale of Ren's ambition is not just to build a large company domestically. He wants to bring this and the technology that they're building within China out to the rest of the world. So pretty quickly thereafter, in 1996, they begin selling this switch that they've developed to other telephone carriers in other countries outside of China. First, they go to Hong Kong, back across the bay from, you know, they're originally importing networking gear from Hong Kong. They're now selling their own gear back to Hong Kong. From there, they go to Russia and Africa, and things really start to work. Right around the same time, and this is the mid 90s, wireless

• 16:51David Rosenthal?

  is finally becoming a thing, and Huawei starts investing heavily in building networking gear for wireless telecoms as well. And pretty quickly, they become the largest CDMA equipment provider in the entire continent of Africa.

• 17:05Ben Gilbert?

  This really starts to lay the groundwork for that. You know, when I was introducing the episode, you know, saying that they're the largest telecom equipment manufacturer, you know, we'll get into this later, but they have these three business lines, and this is still a huge one for them, these telecom carrier networks business that, you know, they make 5G equipment now, but they've made basically every generation of equipment that goes on cell towers and is used in the backbone of cellphone technologies since the mid 90s. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 17:46David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 18:00Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 18:10David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 18:28Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 18:44David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 19:01Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 19:10David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. So the question you might ask, we've been telling this story of grand international scale ambition from the unlikeliest of places, beginning in the early 80s in Shenzhen. You have to wonder a little bit, like, how did this unlikely story unfold? Besides certainly hard work and ambition and innovation at Huawei, how did they come within the span of a decade to become the largest wireless telecoms gear provider to countries completely outside of China?

• 19:52Ben Gilbert?

  And here, I thought you were just going to glaze over that, David.

• 19:55David Rosenthal?

  Yeah. Well, you know, if you remember back to what I was saying about how it was a strategic initiative of the government to modernize telecommunications networks within China, when they found Huawei and Ren as a former PLA member, and Huawei literally meaning China achieving, well, the government thought this is a pretty good vehicle to help this happen. And so, you know, all of the gear for those first few years being, of course, imported, but then later their own switches that Huawei was selling domestically, who were they selling it to? They were selling it to the government. They were selling it to cities. They were selling it to towns. They were selling it back to the military itself. And the government was

• 20:36David Rosenthal?

  using it to set up both civil and military communications networks. That's interesting. Because of that, the government obviously had a big interest in what Huawei was doing and the products that it was providing, so much so that it started giving loans to the company to help them finance these projects that they were, these contracts that they are awarding to them. Somewhere along the way, the ownership structure of the company changed. So if you remember, Ren started the company with five co-founders. That is no longer the ownership structure of the company today. Today, the Huawei operating company is 100% owned by a holding company. Here we go. And who owns the holding company? Well, 1% of the holding company is owned by Ren

• 21:20David Rosenthal?

  Zhengfei. 99% of the holding company is owned by another entity that is a trade union committee. What is the trade union committee? Most directly, it represents the union employees who work at the company. And economically, it does. It's effectively a profit-sharing structure for employees working at the company. Again, this is China, and China is a communist country. And trade unions, who do trade unions ultimately report up to? And should there be any liquidation of Huawei? Where legally do the assets of the company go? They don't get distributed down out to the members of the trade union within the company.

• 22:03David Rosenthal?

  It gets distributed up and the trade union is ultimately rolls up to being part of the Chinese Communist Party, which is of course, the government.

• 22:13Ben Gilbert?

  So this trade union has economic interest in the company, but not sort of control over the company. If you, if you own a lot of the sort of, it's not equity, but the, I believe the phrase is restricted phantom shares in the union. Do you actually have any say over the governance of the company?

• 22:33David Rosenthal?

  No, you do not. And it's, this is where it gets complicated. So as you say, economically, if you are an employee of Huawei and you participate in the trade union, which all at least Chinese employees of Huawei do, then yes, you do have an economic interest in the profits of the company. But yes, the governance and the control, and again, should there be a liquidation of the company, does not come back to you. It goes ultimately up to the party.

• 23:01Ben Gilbert?

  And an interesting, other thing to note here, I mentioned the restricted phantom shares, which if you hold direct shares in a US company, you know, that should already feel a little bit different to you. A major way in which it's different is if you are no longer employed by the company, you don't have the right to own those restricted phantom shares. They are immediately purchased backed by the company. So you cannot sort of be an outsider who has, we already talked about no control, but now you can't even have economics as an outsider.

• 23:28David Rosenthal?

  So what does all this mean? You can start to see in a competitive global market, such as the market for telecom networking gear, you all of a sudden how now have this actor in Huawei, who doesn't quite have the same economic incentives as other free market actors. They are, a large portion of their projects are for domestic government uses. That government is directly funding the company via loans from state banks, state banks and state owned enterprise banks.

• 24:03David Rosenthal?

  And they also have a, if not economic, a governing seat at the table, shall we say, at Huawei. Now, there's not anything, and you compare that to, you know, a international company, which is purely operating based on supply and demand and pricing, you know, power versus over both their suppliers and their customers in a normal market, and that's quite different. Now, there's not necessarily anything unique or necessarily wrong about this. China and other countries, indeed even Western countries, have state-owned enterprises, you know, companies like Airbus are state-owned enterprises. What's interesting is Huawei isn't officially a state-owned enterprise, and it competes in an international market.

• 24:44Ben Gilbert?

  Listeners, you might think, wow, Ben and David are really harping on this, like, they must feel it's important. Well, Huawei feels it's important, too, because if you look at the 2018 annual report, on the very first page, before they even get into sort of like outlooks for the company and, and sort of the company's ethos, of course, they have who is Huawei, and the very second question is, who owns Huawei? And the answer is, of course, that they are a private company wholly owned by its employees. And that says, if I were to quote this, "This scheme is limited to employees. No government agency or outside organization holds shares in Huawei." Now, that's in the first five or six sentences of this entire multi-hundred-page document.

• 25:26David Rosenthal?

  Of course, that was not highlighted in the way that it is now, before all of the events of the past six months started. Whatever the reasons, certainly, there's no arguing that Huawei, at this time, was an amazing growth story. Their products were good, at least as good, if not better, than the competition internationally in these markets that they are entering, and they were certainly cheaper. So you can start to see why, you know, first, in developing and redeveloping countries like Africa and Russia, their networking gear products were much more attractive than those from competitors like, say, Ericsson or Nortel in Canada. But then, they keep, they keep innovating,

• 26:07David Rosenthal?

  and they keep investing heavily in R and D, such to the point that, as the years go Buy and wireless becomes a more and more important industry globally and a more technology driven industry. Huawei becomes one of the very top players internationally. By 2002, they were doing over 500 million in revenue internationally annually. And by 2005, they passed the revenue, international revenue passed domestic revenue to be the majority of the company.

• 26:38Ben Gilbert?

  Pretty impressive.

• 26:39David Rosenthal?

  Around the same time in the mid 2000s, you know, this is going to be a recurring theme here. Ren and Huawei's ambition is always growing larger. They've come to be one of the few dominant players in international networking gear for the backend for carriers. They say, maybe we need to think about getting into the other side of the business in telecoms and wireless as well. And not just make gear for carriers, but also make handsets for consumers. And so in 2003, they released their first handset. And then in 2005, which is pretty early for the time, they shipped one of the first 3G phones available in the world.

• 27:19David Rosenthal?

  And then again, in 2009, at Mobile World Congress, they launched one of the first Android phones available.

• 27:26Ben Gilbert?

  Yeah, very early to this stuff. And that's, that's kind of a crazy idea. I mean, if you think about, of course, there were others that manufactured the, the sort of cell tower side equipment that also made the, the handsets. Imagine that today, I mean, imagine that going the other way, like Apple making telecom equipment that goes on, on the towers. I mean, I guess the strongest other example of someone that did that was when Ericsson partnered with, with Sony to produce that. My dad, my dad actually had this phone, it's like a little candy bar.

• 27:56David Rosenthal?

  Oh, I remember that one.

• 27:58Ben Gilbert?

  Yeah. And they were actually Ericsson, who's also a very large telecom equipment manufacturer, was sort of in this business of having consumer branded phones for, for a while. And they, they did pretty well, but you know, that was before the, the smartphone era that we know today.

• 28:12David Rosenthal?

  Yeah. And so it's interesting. Huawei, I think, saw the opportunity in having both sides of this business that because they were driving a lot of the innovation on standards and capabilities on the backend side, by having handsets on the, on the frontend side, they could be playing off one another and keep introducing handsets that were early to taking advantage of all of the feature sets that the carriers were offering. And so that's why you see them being, you know, being relatively early to 2, 3G, being relatively early then to 4G and relatively early to, you know, the whole smartphone revolution and embracing Android.

• 28:50Ben Gilbert?

  You know, I didn't have this in the notes at all, but why, why weren't they China Mobile? Like, why wouldn't you also find a way to be the carrier and really own the whole stack? So you didn't have this thing where it's like, like, right now, we're in this strange chicken or the egg game in the, the US where the carriers have to roll out 5G in order for the phone manufacturers to sell a, a high number of 5G phones. And consumers are sort of sitting here waiting for both of those things to happen at enough scale that it's useful. And so, of course, there's 5G phones come out, but you only have them in certain cities and it's mostly bad. And so you have these three players where the handset manufacturers are waiting on the

• 29:34Ben Gilbert?

  carriers to roll out the cell towers that are made by the Ericsson's and the Huawei's of the world. Like, it really does feel like there's this sort of middleman missing in Huawei's business model where they really could own the whole stack.

• 29:48David Rosenthal?

  It's a good question. I didn't think about it, but I think, I think it must be because China Mobile is a state-owned enterprise, I believe.

• 29:55Ben Gilbert?

  Must be. Yeah, they probably couldn't, couldn't get into that business.

• 29:58David Rosenthal?

  So they probably couldn't compete there. In the absence of that, you know, I think this is one of the things that's really so interesting about Huawei is, you know, obviously there is all of the political overtones to all of this, but their business strategy is really brilliant. By participating heavily in both sides here, as we were saying, you know, they're able to drive a lot of this to benefit of both the tick and the talk of innovation here.

• 30:20Ben Gilbert?

  And have as much inside information as you possibly could have on what's the best way to use this new technology rolling out.

• 30:26David Rosenthal?

  Yeah. Had they... Again, been in a different market. That's a really interesting question of like, could they also have been a carrier? They couldn't in China because China Mobile is a state-owned enterprise. They couldn't internationally because they're selling to the carriers internationally. What are they going to go do? Set up carriers in all of these different countries? I mean, I guess they could have tried to acquire Vodafone or some similar player along the way, but that probably would have invited a lot of political, a lot more political speculation that they managed to avoid.

• 30:58Ben Gilbert?

  I'm sure this is something they thought of.

• 31:00David Rosenthal?

  So by 2010, total revenue of the company has eclipsed $20 billion, or almost $22 billion, and net profit is almost $3 billion. By 2012, they overtake Ericsson, who you were mentioning, Ben, as the largest telecom equipment manufacturer in the entire world. And then last year, finally in 2018, as you said at the top of the show, they surpassed Apple in handset shipments. So they're still smaller than Samsung, but Huawei is the second-largest handset manufacturer in the entire world. People love their phones, love the cameras on them, love the technology. They shipped over 200 million handsets globally last year, which is an astounding number. I would say on the handset side of the business, Huawei

• 31:43David Rosenthal?

  is certainly at parity with other manufacturers out there, be it Samsung or Apple or the like. On the infrastructure side, Huawei is ahead of the field. You know, when it comes to 5G, even though 5G networks aren't really rolled out to the public anywhere yet, you know, consensus in the industry is that the quality of the technology of the gear that Huawei is producing is two to three years ahead of any of the competition out there in the market in terms of 5G.

• 32:13Ben Gilbert?

  David, I'm not going to let you fully say that the Huawei phones are sort of at parity with everyone in the market. I was going to save this for playbook later, but like, come on, there's blatant ripoff after blatant ripoff of sort of Apple UI and their modified Android operating system. And not only, but like, not only blatant ripoffs, like every, this is a subjective comment, but is a copy that is slightly worse in many, many facets every time they do it.

• 32:44David Rosenthal?

  I love it. If Steve Zhao's were alive today, he would be railing against Huawei, not Samsung.

• 32:51Ben Gilbert?

  It's true.

• 32:52David Rosenthal?

  But certainly, people like the phones, and so much so that last year in 2018, they surpassed $100 billion in total revenue across their, all their divisions. Half of that, 52 billion of which was in handsets. And net profit for the company was almost $10 billion. So, things are going well. But then, as you alluded to at the top of the show, in December of 2018, a fateful event happens, which is that the CFO of Huawei, Meng Wan Zhou, who is also the daughter of Ren Zhengfei, it turns out.

• 33:29Ben Gilbert?

  Which blew my mind when I somehow missed that when all this news came out. And doing the research for this episode, I was like, wait, Huawei's CFO is his daughter?

• 33:38David Rosenthal?

  Yes. And she has a different last name because he, she's his daughter by his first marriage.

• 33:46David Rosenthal?

  Her parents got divorced and she ended up taking her mother's family name, Meng, after the divorce. But yeah, she's his daughter. She was on a international business trip on route to Mexico City from Shenzhen and had a stopover in Vancouver, Canada. And after getting off the plane and attempting to go through customs, was detained by Canadian Border Patrol, ultimately arrested. And it turns out that the US had issued a extradition request for her and asked Canada to apprehend her and extradite her to the US to stand trial for allegations that Huawei had been reselling US technology equipment

• 34:31David Rosenthal?

  to Iran through a shell company that she had helped set up.

• 34:36Ben Gilbert?

  Which would, of course, violate sanctions.

• 34:38David Rosenthal?

  Now, this is interesting. It wouldn't necessarily violate Chinese law, but because so many of the components of the products that Huawei sells are made by US manufacturers, they, by selling Huawei products and systems of Huawei products to banned countries like Iran, they would be violating US trade law by doing so, because so many US components were part of it.

• 35:07Ben Gilbert?

  Not only is it a, you know, absolute bombshell of a piece of news and a, and a thing to do, but it's not completely clear cut that there's a case here. At some point, this will go to trial and we will sort of see what the courts decide. I believe the current state is that she's on house arrest in Vancouver, awaiting extradition to the US for, for trial.

• 35:30David Rosenthal?

  Yes, she has not, she has not been extradited to the US yet. She is still in Canada. Canada has not released her to the US. But it really begs question, you know, as we were talking about the Iran sanctions, you know, that is the charge. But I don't think anybody really believes that that is what this is truly about. It's about the US and many other countries feeling threatened here, that telecommunications infrastructure has become such an important part of any society. And Huawei is clearly the leader in 5G rollout. And

• 36:10David Rosenthal?

  what would it mean if a Chinese, you know, company with strong ties to the state is now responsible for the majority of the backbone of the internet in countries around the world?

• 36:24Ben Gilbert?

  Yeah. And, and I'll say on top of just this notion of, wow, can this be owned by a foreign power? There have been several different research firms and different news stories that have come out sort of alleging that people have found security vulnerabilities in Huawei products. That of course Huawei, the company, says is completely false and that the security is of the utmost importance. And not only are they not doing anything intentionally, but these are, this is complete falsehoods. And the company is, you know, is one of the most secure companies on the planet. And this is ridiculous that they're being accused of such things. And so you have this stalemate where, you know, the company says there's absolutely nothing wrong. And yet, different journalists and different

• 37:09Ben Gilbert?

  security researchers keep, keep saying, hey, there are things to be concerned about here.

• 37:15David Rosenthal?

  Yeah. And what's interesting is like, it is, at least to me, as I was doing the research, it's not entirely clear that there is something wrong right now. It's more the potential that something could go wrong, that people are worried about here. And of course, very shortly after the arrest of Meng Wanzhou, of course, in the beginning of 2019, President Trump begins his trade war with China in earnest. And that has fallout for many companies, but Huawei kind of chief among them. So on May 16th of this year in 2019, the US goes so far as they put Huawei on what's called the entity list, which freezes

• 37:56David Rosenthal?

  all US companies from doing any type of business with Huawei without special permits. So what does that mean? We already alluded to the fact that, you know, if you think about a Huawei handset, and the same applies to Huawei networking gear on the backend, the number of chips that are part of that and components that are made by US companies from Qualcomm to Broadcom to, you know, what have you, is quite large. I mean, it's 50% or more of the total manufactured product. No component, at least on the smartphone, on the handset side of the business, is more important, of course, than the operating system, which is Android, which is sold by Google, which is a, well, not sold, but is made by Google, which is of course a US company.

• 38:42Ben Gilbert?

  And on top of that, David, even one more thing is ARM. And we discussed this being a British company that, you know, started out of Cambridge. You can go back and listen to the ARM episode if you want details on that, that of course is owned by a Japanese company, SoftBank Now, believes that they have significant US-based IP as a part of ARM. And so they have also, even though they're, they're over in the UK, they have also stopped licensing chips with the ARM instruction set architecture, which is basically all mobile chips to Huawei. So-

• 39:17David Rosenthal?

  Not just mobile chips, but, but chips of all types in all use cases, including backend infrastructure.

• 39:23Ben Gilbert?

  Oh, so that's, that's all the impact on what can't be sold to Huawei from the US as an ingredients in the product.

• 39:32David Rosenthal?

  One more super interesting wrinkle here, back to Android for a minute, is there's commercial Android through Google. Obviously, you can understand how that would be prohibited from being distributed to Huawei because of the Huawei being placed on the entity list. You might say, well, of course, there's also the Android open source project. You know, Android is an open source operating system and many of the flavors, well, really all of the flavors of Android that are on handsets in China are not Google Android. It's open source Android because of course, Google doesn't operate its services in China, as we've talked about on other episodes. What's really interesting here is that because

• 40:12Ben Gilbert?

  Is that open source software?

• 40:14David Rosenthal?

  Right. It really begs the question of is that open source software? Now legally, it's a little bit of a gray area, but experts believe that because Google is the primary maintainer of the Android open source project and Google is a US corporation and entity, that actually makes even the Android open source project subject to this entity list ban by the United States. And even the core open source version of Android could potentially be off limits to Huawei from now on.

• 40:46Ben Gilbert?

  It's wild.

• 40:48David Rosenthal?

  That's totally wild. No, of course Huawei didn't have their head in the sand for the last 10 years or so, thinking that like this was, would never happen. They have been preparing contingencies if this were to happen and they've been working on their own operating system internally since 2012. But this is super interesting. Like even if it were really great, if you could build your own operating system today, how far would that get you? Because you wouldn't have access to all the third party applications that are available on Android and iOS. So they could release their own, their own OS, but they wouldn't have the whole ecosystem of third party developers from, you know, Tencent and WeChat on down that would participate in it.

• 41:31Ben Gilbert?

  So Google has actually appealed this to the government and said, look, we should be able to do this. It's actually better for US national security if they are using Android. Because otherwise, if they switch to a fork and start, you know, working on a completely different system that we no longer, you know, maintain in any way, shape or form, you know, we actually have a lot less control and we actually, it could be that they fork something that has a security exploit, and this is Google's argument here, that then gets sold in the US and then suddenly there's a bunch of Android phones in the US that have a security vulnerability that Google has no ability to fix. And so, you know, Google's argument to the US government, and of course, this is all in flight right now, is, uh, can we please keep licensing Android to Huawei?

• 42:16Ben Gilbert?

  It's really important for all of us here. And it's fascinating to watch this game. And what we're, we're really seeing here is, if you think about this geopolitically, what the US government is basically doing in this chess game is daring China. They're saying, okay, um, you want to make a smartphone? Well, you can't use our operating system. And of course, if you make your own, you don't have access to our apps, but sure, maybe you'll figure that out. You actually can't use the instruction set architecture for the chips that all the phones use. So go make your own chips and instruction set architecture for those chips.

• 42:57Ben Gilbert?

  And, oh yeah, you can't use any of the sort of like telecommunications chips either. So you're going to need to really do all of that on your own. And you end up basically in this world, if this fully gets played out, where there's two completely different technology stacks, one for the China world and one for everywhere else. And it's, it seems to be like the US government daring China to do that and daring Huawei to be the ones that, that sort of figure out how to rebuild the, the phone computing stack.

• 43:28David Rosenthal?

  Yeah. Obviously, this has not been a traditional acquired episode, but we thought it was so important to do this because, you know, knowing now all this history and what the current state of play is here between Huawei and Google and the US and China.

• 43:46David Rosenthal?

  And you start to think about that future, that's a really like weird and not good future, you know, where they're, you know, right now, basically all of the standards, of course, there are, you know, there are differences like Google services don't work in China, they do here, you know, WeChat services work much better in China than they do, you know, WeChat is crippled outside of China. But basically like we're all on like pretty much the same internet. This is a future where like both sides, the infrastructure backend side and the, you know, operating system frontend side for consumers really diverges. And I don't know what that means.

• 44:26Ben Gilbert?

  One thing that we haven't talked about is the, the other side of the bidirectional exchange here. So you'll notice if you go, like, we're talking about Huawei here, who makes these smartphones that are theoretically the second most sold in the world. Plenty of your friends, or maybe you have a Samsung Galaxy. I bet very few people you know have Huawei phone if you're, you're here in the US.

• 44:45David Rosenthal?

  Well, it depends on where you live. If you're in the US.

• 44:47Ben Gilbert?

  Yeah, yeah, yeah.

• 44:47David Rosenthal?

  But if you're in Europe, I bet you may have a Huawei phone.

• 44:52Ben Gilbert?

  Totally. So one thing to observe from that is, you know, let's walk through a little bit more of a timeline. So in December, of course, we had this happen with the CFO of Huawei being, being detained and arrested. Then in January, AT&T was very close, days away from, from executing their deal with Huawei to distribute Huawei phones that on their network in the US. And it would be available when you go to an AT&T store. And at the very last minute, they dropped that. They, they blew up the deal. And I'm not sure, this was reported that it was because of pressure from US officials who distrust Chinese companies. I'm not sure if that is a fact or sort of just something that, that is sort of alleged. But holy crap, this is some very serious effort to limit the number

• 45:37Ben Gilbert?

  of Huawei devices in the US. And they've really done it. If you look around, we don't, there's not a lot of Huawei phones. There's not a lot of Huawei tablets or laptops that are distributed in the US. And so to the extent that the US government was concerned about security on these devices, and they wanted to, to limit the distribution, they've really done that.

• 45:56David Rosenthal?

  But now the question is, and this is back to really the troubling implications of separate internets. Yes, they've limited that in the US, but Huawei is incredibly popular in the rest of the world, outside of the US and China. And that's everything from Europe to Africa to the Middle East to the rest of Asia, to Australia. It's the number two global handset manufacturer.

• 46:19Ben Gilbert?

  Yep. I will say too, the other thing that they limited in the US is all of these telecoms that are Verizon, AT&T, they're rolling out 5G networks are not doing it with Huawei equipment. So it's not just the handset side, but it is the infrastructure side.

• 46:35David Rosenthal?

  Yeah. So the last couple pieces in the chain of events here of Australian Facts is, as many people know, at the end of the G20 summit this year, on June 29th, Trump and Xi Jinping announced that they intend to resume trade negotiations. And Trump implied that as part of that, he might ease the restrictions on Huawei. And we back down from the edge here. But just yesterday, on July 16th, a bipartisan bill was introduced in the Senate. Imagine that, a bipartisan bill in the Senate at all these days, that would prevent the executive branch from unilaterally lifting those restrictions on Huawei.

• 47:18David Rosenthal?

  That's how critical Congress believes these restrictions are. So they want to keep the restrictions in place, even if Trump wants to remove them.

• 47:26Ben Gilbert?

  Wow. I did not see that. That is pretty intense.

• 47:30David Rosenthal?

  That's pretty crazy. So here we are. So one of the interesting things, I think, to discuss, and this kind of falls into the category of what would have happened otherwise, is we've talked on the show about other Chinese companies. We've talked about Tencent, we've talked about Xiaomi, a handset manufacturer. We've talked about Alibaba. Why is Huawei being treated so differently from these other companies? And I think a big piece of it is just the ownership and the structure of the companies. Like, what's interesting is Tencent, Alibaba, Xiaomi, Baidu, these are publicly traded companies that have a diverse International investor and ownership base. That is clearly not the case with Huawei.

• 48:10Ben Gilbert?

  Yeah, Huawei, a company that did $108 billion in revenue last year and is still, quote unquote, privately owned by employees.

• 48:19David Rosenthal?

  Yeah.

• 48:19Ben Gilbert?

  Like, think about that in the US. The scale of that revenue, you're a public company. And of course, there's exceptions like.

• 48:27David Rosenthal?

  There are certainly private companies in the US and elsewhere that are very large, that are privately held. But, but the difference is they're privately held by individual shareholders. They're not held by a union that reports to essentially a government.

• 48:43Ben Gilbert?

  So lots of concern among, among the United States government about this company. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 49:02David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 49:19Ben Gilbert?

  So the founders did exactly what great founders do. Operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 49:34David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 49:58Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 50:17David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 50:47Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at legora.com/acquired and just tell them that Ben and David sent you. Let's recap a little bit, just so that we understand where they are as a business today. So they've got these three business lines. The telecom carrier networks business, which we were talking about, that makes all the telephone pole equipment. The devices business that with smartphones, that's the second largest by units in the world.

• 51:27Ben Gilbert?

  And then they've got this enterprise business that provides equipment, software and services to enterprise customers and government institutions. So this is a solutions or sort of a services business. If you look at what each of these businesses are doing, it's pretty interesting. So the business as a whole grew 21% last year. So they went from 93 billion in sales to 108 and a half billion. If you look at and sort of zoom in on that, what's going on there? The consumer business, which I think is their handset business, grew by 45%. So at the scale they're operating, that that business unit grew at, you know, 45%.

• 52:08Ben Gilbert?

  The carrier business actually shrunk by 1% last year, which is pretty interesting. I'm wondering if that's sort of people were refusing to buy the Huawei 5G equipment before this whole sort of consumer goods thing started to really shake out. But, you know, if you look at 26% growth and one of your enormous businesses shrunk at 1%, well, that, you know, they clearly made that up in the consumer business. The enterprise business also shrunk, but it's sort of less important to them than the than those other two.

• 52:36David Rosenthal?

  Yeah, my understanding is the enterprise business is, as you're saying, basically implementations and solutions business for the carrier networking equipment.

• 52:45Ben Gilbert?

  Yep, exactly. 52% of revenue is from China itself, so that's shifted back and is, China is more dominant for the company now from a purchasing perspective. If you read their annual report, they make a lot of noise about 5G. This is, this is something the company is really beating the drum on. But if you look at the revenue line, smartphone shipments are really the primary growth driver of the company. So sort of interesting to see a sort of narrative and numbers mismatch there. Well, do you want to move into playbook, David? And, you know, not that we're not already here, but it feels like we've laid all the facts on the table.

• 53:19David Rosenthal?

  Yeah, yeah. So from a playbook perspective, aside from all the political questions surrounding Huawei, it's a really incredible example of seeing a long-term trend that is going to happen and capitalizing on it and capitalizing on it with really stellar strategy. The trend and trends that they capture were, you know, one, bringing China online, period. You know, building up telecommunications networks within China. You know, first is fixed line telephone, but of course that then bled into wireless and then the internet. But also capturing that internationally and, and better than any of their competitors realizing

• 54:02David Rosenthal?

  this, this symbiotic relationship between the backend and the frontend. As you said, Ericsson and Nortel and other, other backend equipment providers, you know, made half-hearted attempts at handsets over the years. But nobody has really been able to take the roadmap of what was going to be coming on the infrastructure side and translate that into compelling consumer devices and compelling consumer devices available, you know, relatively early versus competitors in the market as Huawei did.

• 54:33Ben Gilbert?

  It's, it's really well executed. There's a couple that I had on my list. The first is just an observation. The second is a geopolitical comment, which we should probably say we're pretty unqualified to do geopolitical analysis here. Much like drifting into the airline industry for a little bit with the Alaska Airlines episode, here we are drifting into geopolitics away from our sort of tech and business analysis just a bit because I think it's obviously incredibly important to this company and this story. This playbook that they ran of how they grew in their first 10 years is really something that could only be done in China. If you thought, you know, hey, I'm going to start a company in the US. I mean, I'm pretty US centric in my, in this show

• 55:18Ben Gilbert?

  because like it's what we know. But if you were, say, living in Ohio and you said, hey, I'm going to start a business and over the next 10 years, I'm going to start by importing things and then I'm going to slowly start making my own and then I'm going to emerge as the dominant creator of that thing when I make my own. There are certain things that you wouldn't get to do such as be really the only importer of something for an extended period of time and then undercut the price by, you know, two thirds in order to really get yours at the deepest distribution.

• 55:50David Rosenthal?

  Now, it is important to note, there actually is one thing we glossed over a little bit in History and Facts, which Huawei was not the only company that was benefiting from state support in doing this throughout these decades. There is another company called ZTE, which is a Chinese telecoms company. It's a direct competitor to Huawei on both sides of the market, the backend and the handset side. It's smaller and not as successful as Huawei, but the government was also supporting that company as well.

• 56:18Ben Gilbert?

  Okay, fair point.

• 56:19David Rosenthal?

  So there was some competition, but it was limited.

• 56:21Ben Gilbert?

  Let me generalize my comment then and say that a lot of the lessons that could be learned and extrapolated from this company are not ones that would universally apply the way that we think about a lot of our business model frameworks.

• 56:31David Rosenthal?

  Yeah.

• 56:32Ben Gilbert?

  The second sort of like geopolitical observation that I want to make is it's kind of unbelievable that, to use the title of a book, the earth becoming flatter and the world becoming more globalized, that we are moving into an era where there could be two technology stacks. There's already kind of two internets. Like if you think about the, there's sort of an hourglass shape. Here where for thousands and thousands of years, the East and the West developed differently. And it's kind of incredible that two completely different language systems emerged. I mean, the the sort of Latin character set and Germanic languages and Romance languages are all sort of super similar and use a similar character set or read a certain way or written a certain way.

• 57:15Ben Gilbert?

  And Eastern languages are, they influence each other, but they definitely don't borrow from the sort of Western character set and and Western way of writing things down and communicating. It was a long time until, you know, the 18th, 19th, 20th centuries where those two worlds really met and then did business and, you know, started to really mesh and the world became flatter and more globalized. And here we are, like, 2019, and there's little cracks where it's starting to drift apart again. And it's just not a thing that I would have predicted.

• 57:50David Rosenthal?

  Yeah, me neither. And it's so weird, and again, part of why we're doing this episode, weird and a little scary. I mean, to me, it's, it's wonderful. It's awesome that like here for us at acquired, like are some of our most popular episodes are Tencent, our Alibaba, are these amazing stories of globalization, of wealth creation, of education in really not just in China, but across borders, you know, the ability for US investors and investors all over the world to be able to invest into those companies at a corporate level of like, like Yahoo and like Naspers, Yahoo and Alibaba and Naspers and Tencent. And then, of course, individual shareholders on the public markets.

• 58:32David Rosenthal?

  But then here you have this like weird other story that is now taking center stage. You know, I really hope this becomes a blip and we go back to the incredible trajectory that this other narrative had been on. And with recent IPOs, of course, from China, Pinduoduo and Meituan Dongyang and so many other great companies. It's really an oddity.

• 58:53Ben Gilbert?

  Well, listeners, you know, this next section is usually grading, but since there's never been a transaction with this company, we have nothing to grade. I suppose maybe in the initial structure of setting up that 99% and 1% ownership, there's something there, but you know, no, no party has ever taken control and watched value either appreciate or depreciate after that. And so what do we do here? Well, Dave and I were chatting before the episode and we thought what Mike makes sense is just kind of to speculate on the future of the company and, and sort of think about which way things could go here. And if you're purely sort of an economic investor and thinking about the company, like, how would you sort of go about evaluating it at this point? Not that you could be, but just for fun.

• 59:37David Rosenthal?

  The downside is certainly down, but, and this, these are some of the things that Ren was, has been talking about in the interviews he's been given. It's not terrible. Like Huawei is, if things go, you know, south internationally for them, they're still very well positioned domestically in terms of 5G rollout. I mean, they do have the best integrated 5G technology in the market and they of course have a tight relationship with the Chinese government. It's very plausible to believe that Huawei is going to be a big, if not the sole beneficiary of 5G rollout in China and in China's allies. I literally can't imagine a world where that doesn't happen.

• 1:00:20David Rosenthal?

  Now, what's interesting internationally, and I think this gets back to why is Huawei being treated so differently than these other great Chinese companies is if this were happening with say Alibaba or Tencent, they would have a very, very powerful deterrent from any sort of less than malicious behavior or anything smelling like it internationally because they have the profit incentive. They would lose huge amounts of their business internationally if other countries stopped using their products. But for Huawei, because of the ownership structure and the incentives that they have, that's not as big a problem for them.

• 1:00:59Ben Gilbert?

  That's pretty interesting to think about. Yeah, that capital structure, it's kind of like in early-stage startups. And we've talked about this a little bit on the LP show, David, but that governance is a blessing in some ways, where it can actually be to your advantage, because then if their capital structure was such that they did have a bunch of shareholders who could, of course, not only have the economic upside of the company being able to address a larger market, and therefore, the company naturally steering that way, but also a board who would sort of vote and say, it's important to us because we need to maximize the per-share value of our ownership and every common shareholder's ownership, they could actually steer the company to do that. That is not the case here.

• 1:01:41Ben Gilbert?

  The way that I sort of thought about grading is, I have no concerns about the China market continuing the sort of massive, massive appetite to buy Huawei's great consumer devices. But they seem to be having a rough time selling their telecom or consumer equipment into Europe or North America. And so, were this a company you could economically participate in, I would sort of want to evaluate the prospects of being able to do either one of those things, sell the telecom or consumer equipment abroad. And I guess I shouldn't say abroad, but in the US specifically, and the US's allies. And I also would want to really dig into, so how expensive is it going to be for us to write a new instruction set architecture,

• 1:02:23Ben Gilbert?

  build new chips, write a new operating system, and build that new developer ecosystem? That's a new stack.

• 1:02:31Ben Gilbert?

  So.

• 1:02:32David Rosenthal?

  Yep, totally agree.

• 1:02:34Ben Gilbert?

  All right, carve-outs?

• 1:02:36David Rosenthal?

  Well, on that note.

• 1:02:38Ben Gilbert?

  They shouldn't rush us here. Like, should we take a deep breath? Should we say, oh my, like, this is quite the different-acquired episode.

• 1:02:46David Rosenthal?

  Yeah, quite the different-acquired episode. Well, yeah, thanks for bearing with us, listeners.

• 1:02:51Ben Gilbert?

  As the show has grown, it's been great to get feedback on every episode. So I think if you do know more than we do here, would love to hear it and happy to do any follow-up, or maybe do a follow-up as an LP episode or something like that. But would love your takes on this. And if you know anything we don't, would love to hear that, too.

• 1:03:08David Rosenthal?

  Yeah.

• 1:03:09Ben Gilbert?

  Car outs.

• 1:03:10David Rosenthal?

  Car outs. I just got back from summer vacation in Europe. Had a great time. We were in Morocco and Portugal. Portugal is a great, great country. Highly recommend it. If you want a beautiful, relaxing travel with diversity of all types there. It was really wonderful. But while I was on vacation, I read the, reread the Dune series by Frank Herbert. Just excellent, classic, classic, classic science fiction series. Apt for this episode because, you know, really an analogy of politics and political systems and long-term implications of different versions of that.

• 1:03:53David Rosenthal?

  But so good and super cool. Also, like, I didn't realize the first time when I read Dune many years ago, but reading it now, like, the influence on Star Wars is like so clear, so clear. Especially the first one, Dune. Very, very clearly. You can see where George Lucas was influenced by it.

• 1:04:11Ben Gilbert?

  That's cool. I have to confess, I did not make it through Dune. I may pick it up and give another shot. My carve out is the Showtime original series, Billions. David, have you watched this?

• 1:04:24David Rosenthal?

  I have not, but so many people have recommended it.

• 1:04:27Ben Gilbert?

  I am, after this episode, going to watch the final episode of season four, after just binging all four seasons over the last month or so. It is absolutely spectacular. And if you like this show and you like good drama, it is like an absolute treat to watch every episode. So the show is created by Brian Koppelman, David Levian, and Andrew Ross Sorkin, who some of you may recognize as a New York Times writer. Brian Koppelman, who sort of is the lead on it, is also the guy behind the movie Rounders, which some of you may remember with Matt Damon and Ed Norton.

• 1:05:03David Rosenthal?

  Yeah, classic.

• 1:05:03Ben Gilbert?

  Great story. So Billions, getting into the plot, is loosely based on Preet Bharara, who was the US District Attorney for the Southern District of New York, and his massive legal battle with Steve Cohen, who's a- Of course, a big hedge fund manager and it's played.

• 1:05:21David Rosenthal?

  SAC, right?

• 1:05:22Ben Gilbert?

  Yep, yep. And the roles are, so Paul Giamatti plays the attorney for the Southern District and Damian Lewis plays Bobby Axelrod, who is running Xcap, which is the sort of top fictional hedge fund on the street. And the drama that ensues and the cat and mouse game and the whole dance between these two characters and every other character involved is like a total treat to watch. And frankly, I want to hurry up and finish this episode so I can go and watch the last episode.

• 1:05:52David Rosenthal?

  All right. Well, on that note. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 1:06:01Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:06:12David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 1:06:32Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags and product analytics into one unified system. So teams can ship safely, test rigorously and directly link what they changed to how users actually behaved.

• 1:06:44David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:06:55Ben Gilbert?

  If you aren't a limited partner yet, subscribing gets you access to our bonus show, where we dive deeper into the nitty gritty of building companies. And last week, we covered due diligence and the work that typically gets done by a venture capitalist and entrepreneur in the diligence process. To listen, you can click the link in the show notes or go to glow.fm/acquired and all new listeners get a 7-day free trial. Dave and I are going to record another one of those this week and you should see that popping into your podcast player. If you are already an LP or if you're trialing a new subscription, you will see it as well. So with that, we will see you next time.

• 1:07:34David Rosenthal?

  See you next time. You too.