Hello. It looks like you’re using an ad blocker that may prevent our website from working properly. To receive the best Tortoise experience possible, please make sure any blockers are switched off and refresh the page.

If you have any questions or need help, let us know at memberhelp@tortoisemedia.com

Friday 25 January 2019

Why China’s mobile giant is ringing alarm bells  

The case of Huawei is about more than cyber security. It raises big questions for the whole of free trade

The Huawei story is vast in scope and, at first sight, unique – spies are trying to run a high-prestige Chinese conglomerate out of town all over the West over worries that its products might hypothetically contain “back doors” for Beijing spies. But the company’s problems illustrate a broader reality check for globalisation.

The advent of 5G and rising concern about cyber security are prompting questions about which companies and countries we should trust with transmitting our data. We are used to an intensely connected world – online and in reality. But have we reached a threshold where we are so internet-dependent that we need to start becoming self-sufficient in key technologies to safeguard ourselves?

The quality of our democracies is at issue – decisions on Huawei are being taken in closed rooms on the basis of secretive intelligence briefings. Is that sort of process justifiable given the importance of these decisions or do those involved need to start becoming more open about their evidence? And what can we do to make sure that security does not become a very modern cloak for protectionism?

Chris Cook reports

The story of Huawei, as the company tells it, almost sounds like the American Dream. In 1987 Ren Zhengfei, a former Chinese army officer, started a small business in Shenzhen with a pocketful of yuan. And, against the odds, he made Huawei a world-beater in telecommunications.

Perhaps it is really the American Dream with Chinese characteristics – its story can be read to reflect China’s progress in recent years. A huge global exporter that moved into ever more complex products, it stands today at the bleeding edge of technology.

It employs 180,000 people, and expects to see $109bn of revenues in the current financial year. It sells millions of telephones – and not just cheap knock-offs. It spent $13.8bn on research and development last year.

Huawei’s representatives outside China are the model of respectability: Bill Owens, a former US admiral, set up one of its American partnerships. Lord Browne, the former BP chief executive, chairs the British operation.

Even so, the company is rapidly being made into a pariah.

In December, Meng Wanzhou, Huawei’s chief financial officer and Ren’s daughter, was arrested when connecting for a flight in Vancouver. The US wants to extradite her for allegedly misleading banks as part of a scheme to permit violations of sanctions on Iran.

The Wall Street Journal has also reported that Huawei faces federal prosecution in the US for industrial espionage.

But perhaps remarkably, these issues are not Huawei’s biggest problem: it is a telecoms company that is assumed in the West to be a tool of the Chinese security apparatus.

Ren’s giant company is no longer a symbol of surging Chinese capitalism, but of the worrying Chinese state. It faces a range of questions. The biggest is this: Huawei may make excellent telecoms equipment – but does it contain “back doors” for Chinese spies?

Huawei is adamant that the answer to this question is no. Yet intelligence communities from a range of democracies are increasingly worried about allowing Huawei equipment into sensitive parts of critical national infrastructure.

Concerns about the company being a front for espionage have even led members of Congress to express concern about its parts being used in solar energy infrastructure – and to propose banning federal employees from using its mobile phones.

For Huawei, this attention could not come at a worse time.

getty images

George Osborne and Huawei CEO and founder Ren Zhengfei in Shenzhen

The coming 5G revolution

This is a critical moment for telecoms. Countries around the world are preparing for 5G – fifth generation mobile networks. The 5G roll-out is the next big thing: an enormously higher bandwidth network will serve as the digital spine for a more automated world. And that means a lot of new gear: phones, antennae, routers.

Companies such as Samsung, OnePlus and Xiaomi (from South Korea, China and China respectively) are already showcasing 5G handsets. Some networks are promising stellar coverage. This is an area where Huawei would expect to be a serious player.

Ren said, in a press briefing last week: “In terms of 5G, we have signed 30-plus commercial contracts today, and we have already shipped 25,000 5G base stations. We have 2,570 5G patents.”

One of Huawei’s great strengths is in the electronic plumbing that makes the networks run. Take what analysts call “mobile RAN” equipment – the gear that allows phones and other products to access the core of the network. It is only one part of any mobile system, but JP Morgan analysis places Huawei as the world leader in this sub-domain. It supplied a third of the $29bn market in 2017.

That is a remarkable figure – all the more so when you consider that, while Huawei does a lot of business in the US, it has never been able to get a foothold as a supplier in large parts of the North American telecoms infrastructure market. It has only a 2 per cent share in RAN equipment there.

This hole in its coverage is no accident: over the past decade, the US Committee on Foreign Investments in the US (CFIUS), which oversees the national security implications of deals with foreign actors, has repeatedly blocked Huawei acquisitions and investments in this area on security grounds.

According to the self-published memoir of William Plummer, a recently departed Huawei executive, the company believes the US federal government – specifically the National Security Agency – put pressure on the telecoms conglomerate AT&T in 2009 to make sure it did not award Huawei a contract.

Plummer wrote: “No matter how small the operator [buying Huawei products], nor how innocuous the Huawei product or service provided… We heard repeatedly of ‘visits’ from mysterious ‘federal agents’, or, in some cases, specifically FBI agents.”

Chris Wray, the FBI Director, told a Senate hearing last year that he would be “deeply concerned about the risks of allowing any company or entity that is beholden to foreign governments that don’t share our values to gain positions of power inside our telecommunications networks”.

The atmosphere is getting worse for the company. American universities are starting to replace Huawei equipment.

Australia, whose proximity, economic ties and political exposure to China make it especially sensitive to these issues, has long had concerns. Deutsche Telekom is re-evaluating using Huawei. Japan, New Zealand, Taiwan and Belgium have all limited Huawei’s reach in some way. Canada is reviewing its status.

Huawei is certain that this is under American pressure. Company employees mutter darkly about the CIA.

In the UK, Alex Younger, the head of MI6, has reflected that dynamic in public comments. “We need to decide the extent to which we are going to be comfortable with Chinese ownership of these technologies and these platforms in an environment where some of our allies have taken a quite definite position,” he told an audience in St Andrews last month.

getty images

President, Xi Jinping, reviews an honour guard in London, England.

Britain has been more open to the company than the US. To allay concerns about it, Huawei has a centre – jointly run with GCHQ – to help Britain to monitor its own (that is, Huawei’s) equipment in the UK.

But pressure is mounting in London. Much has been made of a report from last July. The Huawei oversight centre found “a significant number of point vulnerabilities and more strategic architectural and process issues”. Translation: they have not found anything suspicious, but things are not as locked down as they would like

British Telecom is removing Huawei products from core parts of its 3G and 4G mobile network as it needs replacing, and will not use them at the core of its 5G network.

A review of the British telecommunications supply chain has now been commissioned – and rules on investment into critical infrastructure tightened. In the meantime, Oxford University has announced it will not pursue new sponsorship from the company. So has Queen’s University in Belfast.

There is one UK-specific issue – a gnawing anxiety is growing at the heart of the UK government that Britain is becoming beholden to China. One legacy of the Cameron government is that the country’s energy strategy depends heavily on Chinese investment in a new fleet of nuclear plants.

A senior figure who recently left the UK government said that he was alarmed by a note circulated by a diplomat warning that a UN Security Council vote had the potential to annoy China – and that might be a problem because the country had become a major investor. Unprompted, British officials now worry about upsetting China.

Concerns about Huawei are widely held. Speaking to people within the intelligence communities of the US, UK and Australia, there seems little doubt that they have serious concerns both about Huawei specifically and its potential use as an espionage front by the Chinese security services.

Officials with cyber security remits fear that, if you put tens of thousands of Huawei components into the core of a 5G network, spotting one that is leaking back to China might be extraordinarily difficult.

Two people with direct knowledge of the UK and Australian discussions on Huawei said that they had seen evidence of suspicious behaviour by Huawei products.

How serious was it? They gave no further details.

For all the smoke, there is no visible fire.

getty images

Shanghai’s Lujiazui financial district.

The smoke and the fire

“Imagine someone in a position of authority and presumed intelligence proclaiming that Lady Gaga is Elvis Presley’s alien love child. At your first guffaw, you are met with an all-too-serious “You can’t prove it’s not true, can you?” That’s pretty much Huawei’s challenge; prove the negative.”

That is how Plummer, the former Huawei executive, describes the challenge of knocking down these allegations from Huawei’s perspective.

Last week Ren said: “Over the past 30 years, our products have been used in more than 170 countries and regions, serving more than 3 billion users in total. We have maintained a solid track record in security.”

Huawei is quite clear what it thinks is happening here – a commercial hit-job. When officials were reviewing a potential Huawei investment in 2009, one American rival took out newspaper advertising raising security concerns about the company.

JP Morgan’s analysis of the potential effect of further restrictions on Huawei is unambiguous: Ericsson, Nokia, Ciena and Cisco are its main competitors. If Huawei is held back during the 5G roll-out, they could permanently win a much larger market share.

Defenders of Huawei also point to the Edward Snowden leaks, which revealed that the National Security Agency (NSA), among other things, ran “tailored access operations”. The US targeted, intercepted and physically altered Cisco kit to create surveillance back-doors.

An official account of Huawei – published in English as Huawei: Leadership, Culture and Connectivity – says that security concerns about its products are “based entirely on the fact that Huawei’s founder and CEO… once served in the [People’s Liberation Army’s] Engineering Corps in a technical position”. A lot of American CEOs, the book notes, served in the American military without drawing suspicion.

The company, however, has not responded to reports that Sun Yafang, Huawei’s long-serving chair, once worked for the Ministry of State Security – the Chinese counterpart of the CIA.

The Open Source Center, a CIA-backed body, has also reported claims from Chinese media that Sun used her “connections” at the Ministry to help the company shortly after its birth. Huawei has, furthermore, worked directly for the People’s Liberation Army (PLA).

Critics point to China’s national security law, which obliges Chinese companies to support requests for action from the Chinese security apparatus.

Ren, however, has batted this concern away. Last week, he said: “China’s Ministry of Foreign Affairs has officially clarified that no law in China requires any company to install backdoors. Neither Huawei, nor I personally, have ever received any requests from any government to provide improper information.”

Huawei’s story of itself emphasises its independence. According to Huawei: Leadership, Culture and Connectivity, it wasn’t a state-backed success story but suffered for being in the private sector.

The book says Ren, its founder, is an outsider. “He has no friends in political, military, or business circles. In fact he’s been practically friendless throughout his school years, military service, and well into his tenure at Huawei.”

This is hard to reconcile with other accounts: the Financial Times has reported that, in 1994, Ren briefed Jiang Zemin, then the president and leader of the Communist Party.

Richard McGregor, author of The Party, a history of the Chinese Communist system, has also reported that in 1996, Zhu Rongji, then the vice-premier, brought four state bank bosses with him on a visit to the company and demanded they support it.

There is, furthermore, little disguising the importance of Huawei to the state and party. Shortly after Canada’s arrest of Meng, China arrested two Canadians and sentenced a third to death. Ren has said these decisions are not related to Huawei in any way.

A 2005 report by Rand, the US think-tank, described Huawei as following a “digital-triangle model”. The report, commissioned by the US Air Force, said it received support from the military, state banks and national research programmes in trying to build global market share.

The company’s management and ownership is also opaque: officially Ren retains only 1.14 per cent of its shares. The rest, Ren says, are held by 96,768 shareholding employees. But McGregor reports that Huawei is believed to be majority-owned by Ren and his managers.

To concentrate on details about the company’s structure may be to miss the wood for the trees. The root of suspicion about Huawei rests on a simple premise: China has benefited from the liberal world order, but is not part of it.

getty images

Huawei mobile phone plant in Dongguan, China

The future of globalisation

China likes to present itself to the world as a free-trading nation, but it has some deeply illiberal instincts on trade. The US Trade Representative (USTR) is no honest broker on trade with China. But its recent investigation of Chinese trade practices summarised the country’s overall strategy for building domestic capacity:

Chinese companies should target and acquire foreign technology… The Chinese government and China’s domestic industry should collaborate to develop products using the technology that has been acquired… Chinese companies should ‘re-innovate’ and improve upon the foreign technology.”

In some respects this recalls the approach taken by Japan and Korea as they made their way in earlier decades. But China is doing something slightly different.

The USTR report complains that China has used formal and informal mechanisms to force technology transfers into the country. It is hard to do business in China without giving up trade secrets. Its cyber capacity means the state has even extracted confidential detail from companies that sought to stay out of China.

This description of China’s development works equally as a description of Huawei’s, according to Rand, whose research claims the company was helped early on by reverse-engineering Lucent products, before reinvesting in creating better products.

China is not backing away from this strategy. It is trying to supercharge an economic development process it believes is working, with an agenda launched in 2015 called “Made in China 2025”. The goal of this agenda is to make China self-sufficient in a range of high-tech products by pressing Chinese companies to buy locally in key areas.

According to the USTR report, Made in China 2025 “expressly calls for China to achieve 40 per cent ‘self-sufficiency’ by 2020, and 70 per cent ‘self-sufficiency’ by 2025, in core components and critical materials in a wide range of industries, including aerospace equipment and telecommunications equipment”.

This creates a situation in which foreign businesses can enter the Chinese market only if they share intellectual property, and will still find Chinese customers under pressure not to buy their products.

China has started soft-pedalling the rhetoric on Made in China, but the objective remains. Its determination to build strategic industries and maintain a technological cutting edge has become a concern to America. Washington has responded by trying to limit China’s ability to acquire technology, or build markets with which it can support its drive for self-sufficiency.

That is why trying to establish Huawei’s status as a private company and its personal relationships with the government is, in some respects, beside the point. It is part of the Chinese party-state complex.

getty images

Passengers on the Beijing to Nantong train

In August, Congress passed tougher rules to scrutinise foreign investments. The US government has also carried out consultations on introducing export controls on some high tech goods. In November the Department of Justice sought to clamp down further on Chinese espionage.

These may be wise decisions in their own terms. They are also bipartisan: concern about China is widely shared and will not die down any time soon. Indeed, the Trump presidency’s hard line on Huawei has attracted an unlikely ally: George Soros.

He said this week in Davos that China “is not the only authoritarian regime in the world but it is the wealthiest, strongest and technologically most advanced. This makes Xi Jinping [the president of China] the most dangerous opponent of open societies.”

He sees technology as a key weapon in the Chinese state’s hands. Chinese domination of internet standards and technology is a prospect, he says, that is “a threat to the freedom of the Internet and indirectly open society itself”.

“Instead of letting ZTE [a state-owned Chinese telecoms company] and Huawei off lightly, it needs to crack down on them. If these companies came to dominate the 5G market, they would present an unacceptable security risk for the rest of the world.”

The Huawei story is not just about one company, and whether spies have got to its equipment – or might do in future. It is the start of a bigger argument, which will get much more complex.

What if the next big dispute relates to a simpler product than network equipment? Something that could be safe in itself, posing no cyber security risk, but the product of an Chinese industrial strategy whose intent goes beyond friendly trade.

How should we engage with China as it seeks to continue retooling itself into a global technological leader without playing by the rules of the liberal trade system?

These sorts of questions are coming, so it might be healthy for democracies to prepare for them.

One lesson of Huawei is that governments in the west need to be more open about the basis of their decisions. There needs to be more fire for every wisp of smoke. Otherwise, we make it harder to defend ourselves against phantom “security threats” dreamed up by less scrupulous security services.

The US has already raised security concerns about trade in contexts where more regular trade concepts and remedies might have been more appropriate. That should worry all of us, and not just because it could herald new trade barriers.

Members of the intelligence communities may enjoy being difficult to challenge while taking a central role in economic questions. The World Trade Organisation is not equipped to start adjudicating on  claims by secretive spy agencies.

But if security concerns become an acceptable and unchallengeable means of blocking trade flows with competitors, intelligence agencies around the world will come under pressure to make commercially helpful pronouncements.

That pressure might start to take a toll, even corrupting institutions that currently have healthy internal cultures and good oversight. No one should welcome the dawning of that sort of world – least of all, honest securocrats.