Huawei founder sparks alarm in China with warning of ‘painful’ next decade

The founder of Huawei has delivered a stark warning for the tech company's future, sparking alarm with the frankness of his assessment and what it signals for smaller businesses amid China's economic troubles and a global downturn.

In a leaked internal memo, Ren Zhengfei told Huawei staff "the chill will be felt by everyone" and the company must focus on profit over cashflow and expansion if it is to survive the next three years, indicating further job cuts and divestments.

"The next decade will be a very painful historical period, as the global economy continues to decline," Ren said, pointing to the pandemic as well as the impact of the Ukraine war and a "continued blockade" by the US on some Chinese business.

"Huawei must reduce any overly optimistic expectations for the future and until 2023 or even 2025, we must make survival the most important guideline, and not only survive but survive with quality."

China's economy is under pressure from factors including pandemic restrictions, a property industry crisis and plummeting international relations. The country is not expected to reach its economic growth target of 5.5% this year.

Huawei, routinely listed as China's largest firm, is working to manage big falls in revenue and profit. Revenue declined 14% in the first three months of 2022 and its net profit margin narrowed to 4.3%, from 11.1% a year earlier, in the three months through March.

It has been a flashpoint of US-China tensions, with Washington and other western counterparts restricting Huawei from their markets over national security concerns. The company has also been barred from buying some foreign technology.

"In the past, we embraced the ideal of globalisation and aspired to serve all mankind, so what is our ideal now?" wrote Ren.

"Survive and earn a little money where we can. From this point of view, we need to adjust the market structure and study what can be done and what should be abandoned."

Ren's memo went viral on Chinese social media, shared and discussed by more than 100 million users, with some expressing fear of what it meant for regular people and small businesses if a company the size of Huawei was sending such warnings.

"The last person who said such things was Vanke's Wang Shi and then real estate was in danger," said one commenter, referring to the chief executive of a state-run property development company.

Several blamed the US, with one commenter saying Huawei's expansion "came to an abrupt end under the frenzied suppression of the United States".

Linghao Bao, an analyst at Trivium China, said the global economy was in bad shape and it was not unusual to be cutting costs in a recession. "The reason why Ren Zhengfei's words stood out is the way he said it. He sounded like he was in panic mode," he said.

"In addition, it's a politically sensitive time right now. We're just a couple of months away from the 20th party congress. As you know, economic performance is tied up with the party's legitimacy."

Professor Steve Tsang, director of the SOAS China Institute, said Ren enjoyed a status that might allow him to speak more freely than others, and should be taken seriously.

"When someone like Ren admits how much trouble a national champion like Huawei can be facing as a result of US sanctions, it does indicate the wider Chinese economy is also vulnerable," said Tsang. "But that is, as the saying goes, above his pay grade and is a matter for Xi Jinping to decide on how to tackle. The questions are whether Xi will have the pragmatism and vision of Ren to come up with something that may be as effective as what Ren is putting forth for Huawei."

China's government this week announced a further $146bn (£123bn) in stimulus funding and 19 new measures to address the economic damage wrought by the pandemic and the country's hardline responses, as well as a crisis in the property development industry.

Extensive and unpredictable lockdowns have disrupted factory production, supply chains and general economic activity, particularly among small businesses. The private sector provides a third of all jobs in China and creates 90% of new urban jobs, according to state media.

Youth unemployment reached an all-time high of 19.9% in July and the general urban jobless rate remained at a relatively high rate of 5.4%. Unemployment insurance payouts also hit a record high in June.

"Amid sporadic Covid-19 outbreaks in some regions since the beginning of this year, job demand in the market has reduced and some recruitment campaigns have been cancelled or delayed," Zhang Ying, the director of employment promotion at the ministry of human resources and social security, said at a news conference on Thursday.

"Some young job hunters have encountered new difficulties."

Additional reporting by Xiaoqian Zhu and agencies