On the recently completed Huawei campus in Dongguan, near Shenzhen in southern China, 17,000 employees and three imported black swans enjoy life in 12 “villages” built in ersatz European style and set in a landscape of lakes and greenery. The black swans are there to remind the people working at the world’s second largest provider of smartphones and the biggest supplier of networking equipment that nothing is certain, and that it is important to prepare for the unexpected.
That thought was vindicated on 1st December last year, thousands of miles and several time zones away from Dongguan’s humid atmosphere, when Meng Wanzhou, Huawei’s COO and daughter of the company’s founder Ren Zhengfei, was detained in Vancouver en route from China to Mexico. She is now facing extradition proceedings to the United States on charges of bank and wire fraud, and conspiracy to commit both in order to evade US sanctions on Iran.
The controversy around this case underlines how this single firm has become a crucible for the Great Power contest between the US and the People’s Republic of China, one that has dragged American allies into the tensions. It raises questions about economic supremacy, defence and security in a world in which China increasingly aspires to the upper hand.
In western capitals, Huawei channels profound anxieties about the motives, strategies and ambitions of the Chinese Communist Party, the Chinese state and the -companies it controls. Beijing insists that the suspicion it has built up Huawei to usurp western technological monopolies—and that its telecoms expose customers to risks of espionage or future sabotage—are unfounded. Huawei’s supporters, including at the highest levels of the Chinese government, argue that such charges betray a declining power’s fear of a rising power’s innovative energy. Huawei itself, meanwhile, insists that it is simply a private company owned by its employees, unrelated to government or Party. A long list of intelligence agents and investigative reports have found that claim less than credible.
The imminent deployment of 5G technology—the speed and bandwidth of which promises to be the foundation of transformative AI and the internet of things—has brought long-running tensions between China and the US to crisis point. The Washington establishment is alarmed, although Trump himself is characteristically inconsistent.
In other western capitals, leaders grapple with profound conflicts of interest—between long-established relationships with the US and the attraction of new opportunities with China, and between the twin imperatives of economics and national security. In Britain, the leak of the National Security Council’s decision in April to allow Huawei to supply some “non-core” 5G technology to British phone companies against the strongly expressed advice of Washington, cost the defence secretary his job. The final shape of Britain’s future relationship with China remains in limbo.
THE PEOPLE’S CHAMPION
The volume of news about Huawei may be recent, but the worries go back to its origin story in the 1980s, when China was beginning its long climb out of the poverty and backwardness of the Mao years. It was a decade of optimism and political liberalisation that would end with the trauma of Tiananmen: rapid growth and globalisation would be China’s story for the next three decades.
Back then, China had no global brands or native telecoms producers. A former middle-ranking officer in the People’s Liberation Army (PLA), with the support of China’s high-level national strategy, would change that.
Ren Zhengfei, a former director of the PLA General Staff Department’s Information Engineering Academy, had left the army in 1984, and initially found work with a state-owned electronics company. Three years later and along with 14 colleagues, all with military and some with intelligence backgrounds, and armed with an $8.5m loan from a Chinese state bank, Ren set up a new company to import telecoms equipment for the domestic market. He also set up a unit tasked with reverse engineering, so that Huawei could begin to manufacture the products itself.
Reverse engineering basic components certainly counts as low-level piracy. But by the early 1990s, Huawei reportedly employed 500 research and development staff to only 200 production staff, a ratio that suggested that this young company had big ambitions, as well as deep pockets that were hard to account for in its existing commercial operations. Huawei would prosper through impeccable connections.
Ren reportedly had directed the academy that conducted telecoms research for the PLA during his time in the army, and his military links would prove invaluable: the army was a huge potential customer and one that had a strategic interest in cultivating national champions in key technologies. Today, most consumers know Huawei for its handsets, but the company was built on the basic networking technology of the digital world—the switches, routers and servers that handle the data and keep the world online. In 1993, the company released its first switch—a device that allows data to be routed round a network—and was awarded the contract to build the PLA’s new telecoms network. In 1996, when the Chinese government decided to invest in national champions that could liberate the country from its dependency on western companies, Huawei, with its military links, was chosen over several rivals.
With that alignment of national and company strategy came a raft of benefits: military and state research institutes helped with funding and staff; state banks offered virtually unlimited lines of credit; and the state subsidised its research. There was support from the rapidly growing city of Shenzhen, which gave priority to the company’s projects, huge state contracts, and the conspicuous blessing of senior Party figures who visited regularly. Being a national champion was like having a continuous adrenaline drip.
In the following three years, Huawei’s revenues quadrupled and net profits rose tenfold. When the company exhibited at a Geneva trade fair in 1999, the surprise was not only that the equipment on display was being made in China, but how remarkably cheap it was. Supported by its many state benefits, Huawei could build its international market share by undercutting its rivals, which helped drive some rival western companies, including the UK firm Marconi, into bankruptcy.
By this stage, Huawei employed 12,000 people and had become China’s biggest manufacturer of the network switching devices that made its first fortune. It boasted revenues of $1.5bn and had sales offices in 45 countries, including one in Libya that was located inside the Chinese embassy. But for prospective foreign partners there were two nagging questions: who really owned Huawei? And who financed and supported it? Given the security sensitivities of telecoms, the answers affected how closely foreign partners would be willing to collaborate.
Evidence of strong backing by the state was not hard to find: Huawei’s contracts for the supply and maintenance of military telecoms made a close relationship with the Party a given. Indeed, as long as the company was mainly operating in China, foreign -partners such as Texas Instruments and 3com could see those connections as an advantage in helping them enter this unfamiliar market. But as Huawei began to expand into global markets in the late 1990s, that dynamic changed.
Scrutiny became more intense and doubts about ownership intensified. The company has always claimed to be owned by its employees, but in the latest of several iterations of its corporate structure, Huawei’s operating company is listed as 100 per cent owned by a holding company; the holding company in turn is 99 per cent owned by the Union of Huawei Investment & Holdings—which the company says is a trade union—and 1 per cent owned by Ren Zhenfei.
But there are no independent unions in China, and union members have no rights over union assets. Huawei’s “employee shares,” touted by the company as evidence of ownership, are a profit distribution scheme with no meaningful control. “Regardless of who, in a practical sense, owns and controls Huawei,” US scholars Christopher Balding and Donald Clarke concluded after digging into this, “it is clear that the employees do not.”
By the end of the 2000s, a report from the European Commission concluded that the China Development Bank’s credit lines to Huawei, including a $30bn facility, supported the company to carry out government policy and to consolidate its commercial position by extending financial support to its customers to buy Huawei equipment. To the likes of Ericsson and Nokia, feeling the pressure of Huawei’s aggressive pricing in international markets, this seemed unfair. Then there is a deeper concern: if Huawei depends on the Chinese party-state, can it ever be a trusted supplier of critical infrastructure in the west?
EYES AND EARS
By the early 2000s, the UK intelligence services were becoming wary. In 2003, the Blair government tasked BT with the modernisation of the country’s telecoms infrastructure. Huawei’s bid for the contract to supply switching equipment was substantially lower than Marconi’s, and BT signalled to government officials that they planned to accept it. Much to the alarm of MI5, officials did not notify ministers until 2006, a year after contracts had been signed. At that point, it seemed too late and potentially too expensive to unscramble the deal.
In 2013, the Commons National Security and Intelligence Committee published a blistering assessment of the decisions surrounding that Huawei contract, and concluded that penny-pinching had produced “a disconnect between the UK’s inward investment policy and its national security policy.” As would become a pattern with Huawei, however, the horse had bolted long before alarm about the open stable door was raised.
By now, the Chinese company was supplying BT, O2, TalkTalk and EE with mobile handsets, routers and other equipment, and its equipment was embedded in the UK’s fixed and mobile telecommunications infrastructure. Huawei also employed 650 people in the UK with big plans to expand. All this had happened, in the view of the Commons committee, without sufficient attention to the national security implications. With the UK saddled with the relationship, its security services looked for a way to manage the risk.
The bizarre solution they had decided on was the Huawei Cyber Security Evaluation Centre (HCSEC), more popularly known as the Cell. This is a monitoring facility set up in November 2010 in Huawei Technologies UK’s headquarters in Banbury, in which personnel from the UK’s National Cyber Security Centre (and previously GCHQ), work with the company to monitor the security and integrity of Huawei code, in order to evaluate and mitigate the risks of Huawei’s involvement in the UK’s critical infrastructure.
The structure is highly collaborative—the deputy chair of the HCSEC Oversight Board, for instance, is a senior executive from Huawei. HCSEC reports to the UK government every year and the company makes much of the fact that GCHQ has not found evidence of back doors that could be exploited for sabotage or espionage. It is like a game where one side agrees to snoop on itself, and the other enlists the help of the subject of its prying.
The board’s 2018 report was unexpectedly damning. There were “shortcomings in Huawei’s engineering processes” it complained, which “exposed new risks in the UK telecommunication networks and long-term challenges in mitigation and management.” These flaws persisted despite repeated requests to the company to address them, leading to the mealy-mouthed but damning conclusion that “the Oversight Board can provide only limited assurance that all risks to UK national security from Huawei’s involvement in the UK’s critical networks have been sufficiently mitigated.”
Back in 2013, however, Downing Street neighbours David Cameron and George Osborne were not inclined to worry about the national security risks associated with China. Osborne in particular was enthusiastically chasing a no-holds-barred pursuit of Chinese investment and Ren Zhengfei found a warm welcome at No 10. Huawei announced a £1.2bn research investment in the UK and the company’s press release quoted Ren in saying: “Over the past 11 years we have found [the UK] government to be transparent, efficient and practical. The UK is an open market, which welcomes overseas investment.”
Ren was less welcome elsewhere. Australia had long banned Huawei from its own internet infrastructure and in 2012 a US intelligence report had concluded that both Huawei and ZTE, China’s second biggest telecoms company, represented major security threats to “multiple critical infrastructure systems (that) depend on information transmission through telecommunications systems.” These already included electric power grids; banking and finance systems; natural gas, oil and water systems; and rail and shipping channels. If this growing reliance on digital infrastructure made Huawei’s participation in 3G and 4G networks problematic from a security perspective, the promise of 5G—a technology you can run the whole country from—increases that risk exponentially: not only will more key services depend on it, but the field of attack will be hugely expanded.
Developments such as self-driving cars will depend on 5G, in a future where 5G-powered artificial intelligence and big data applications will also loom large. Owning the foundational technology will not only establish the dominant standards, but it will also potentially allow Huawei access to the vast quantities of data that will travel on those networks. Achieving a dominant position at the start of a new technological dawn could give a player like Huawei a 50-year advantage, along with a capacity to disrupt the critical infrastructure of any adversary.
US security concerns might have been managed inside a framework of trust and co-operation between the US and China. But growing nationalism on both sides has eaten away at such trust. The US realised, belatedly, that it had neglected the development of 5G and effectively ceded the territory. Once Washington had woken up to the danger, it fumbled for a response just as long-simmering frustrations with the terms of trade with China, and the Pentagon’s alarm at Xi Jinping’s move to authoritarian nationalism, were about to erupt.
ENEMIES OF THE PEOPLE
The arrest of Meng Wanzhou in Vancouver last December brought matters to a dramatic head. The charges she faces, if extradited to the US, are that Huawei effectively controlled a company called Skycom, set up to trade with Iran in contravention of US sanctions. The company insists that the case is politically motivated.
In some respects, they are right. The sanctions-busting charges can be viewed as an Al Capone move: prosecuting a mobster for tax evasion because it was easier than securing a conviction on racketeering. Other moves had been contemplated: in 2010, under the Obama administration, US counterintelligence agents and federal prosecutors had explored possible espionage cases against Huawei executives in its American facilities. But prosecuting criminal espionage charges risked exposure of confidential sources and methods and the outcome was never certain. It is much easier to go after them for sanctions busting.
The Chinese government’s response was swift—and as a defence of the interests of a private company, unusual. Nine days after Meng’s arrest two Canadian citizens—Michael Kovrig, a highly respected former diplomat, and Michal Spavor, a businessman—were detained in China. The Canadian court allowed Meng to live in one of her well-appointed Vancouver mansions and to go shopping as she chose. The Chinese authorities, by contrast, jailed the Canadians in harsh conditions, denied them access to lawyers, and later formally arrested them on vague security charges that could carry heavy sentences. Even more unfortunate were two other Canadians: Robert Lloyd Schellenberg, a 36-year-old who appealed a 15-year sentence on drug charges in January 2019, only to be sentenced to death; and Fan Wei, who was sentenced to death on drug charges in April.
Trump, meanwhile, has hinted that Huawei—and Meng—could be bundled into a larger trade settlement, a suggestion that has caused dismay in Canada for undermining the legal process that Canada has defended at considerable cost, and among hawkish Republicans in Congress who see the security threat as paramount.
While Huawei continues to insist it would never bow to demands for surveillance from Beijing’s intelligence services— despite two laws that mandate any Chinese individual or entity to do so on request—the response of the west to the firm illustrates the dilemma democracies face in their dealings with China. How to deal with what the European Commission describes as an economic partner that is simultaneously a strategic competitor, and one that plays to very different rules? Australia, long a hardliner on Huawei, has banned the company from its 5G, as has the United States. The US continues to pressure other governments, including Germany and the UK, to follow suit.
A second strand of US strategy is more complicated and has been inconsistently applied: blacklisting Huawei from buying the technology it needs from US companies. It meant Huawei could no longer buy sophisticated US chips, and Google could no longer supply the Chinese company with updates to the Android operating system. Handset sales—which represented about 50 per cent of Huawei’s business—dived as retailers and consumers contemplated the possibility that Huawei phones might slowly die for want of software updates.
Denying Huawei access to the advanced technology that it needed to buy from US companies is a doomsday weapon: it may seriously damage Huawei, but global technological supply chains are so intertwined that there is no cost-free move for US interests. The two sides are linked in a bitter embrace: US manufacturers relied on China to produce their equipment at low cost, while Huawei imported 40 per cent of its advanced chips from the US.
Besides, US policy today is only as consistent as its capricious president. Trump lifted a similar ban on China’s second largest tech company ZTE, also imposed by the Department of Commerce as a punishment for sanctions busting in 2018, following a phone call from Xi Jinping. After meeting Xi at the G20 summit in Osaka, Trump suggested that he would lift the ban on Huawei buying US components, only to be contradicted almost immediately by his own officials. The position is as clear as mud.
Huawei, meanwhile, has adopted a tone of resilient defiance: a new image has appeared in its Shenzhen headquarters—a grainy photograph of a Second World War Soviet plane that has been riddled by enemy fire, but still manages to fly. The company claims to have its own operating system, ready to launch, along with stockpiles of advanced imported Intel chips needed for 5G networks, which will see it through until it produces its own.
Officially the skirmishes over ZTE and Huawei have strengthened and justified China’s resolve to be self-sufficient in advanced technologies. Practically, its capacity to reach its goal is far from certain. Huawei has filed patents for its own Hongmeng operating system, but building and maintaining an operating system that can compete outside China’s protected domestic market is a challenge. An untried system is unlikely to find much favour beyond the patriotic Chinese customer base.
As for the imported chips, Huawei’s stockpiles will run down if they cannot be replenished. It will be a long summer for Huawei’s staff: all leave has reportedly been cancelled for 10,000 engineers and they have been ordered to work around the clock to produce substitutes for foreign software and circuitry.
5G AND FIVE EYES
If America’s aim was to prevent China dominating 5G infrastructure, it may have already failed. Huawei claims to have 46 commercial 5G contracts in 30 countries and to have shipped 100,000 5G base stations. The company argues that without its equipment, clients will be seriously disadvantaged. Alternatives may exist but the choice is still, as it was for the UK in 2003, between security and cost. It’s a dilemma that the west still gives little sign of knowing how to navigate.
In May, the UK government issued a fence-sitting statement on Huawei and 5G as arguments raged between intelligence officers and technical experts about whether allowing Huawei to install “peripheral” 5G equipment while, somehow, excluding it from “the core” would solve the security problem.
In Washington, the Pentagon insists that it cannot operate within a digital system that is not secure and controllable. If the UK were to choose Huawei, therefore, it would risk being out of established alliances, including the so-called “Five Eyes” Anglosphere intelligence sharing network, which has been one of the cornerstones of UK security since the Second World War.
Ostensibly commercial and technical decisions have huge implications for the UK’s future alliances. They are not decisions to be taken lightly, or in the middle of other political distractions, such as a Tory leadership election in which these critical dilemmas have been entirely ignored. Yet, as UK companies announce contracts for Huawei 5G equipment, the government’s final decision languishes in the long grass.
For the UK the Huawei dilemma offers a foretaste of the difficulties of navigating the clash between the world’s two biggest economies outside the EU. Despite the complexities of their industrial interdependence, the two giants are locked into a deepening confrontation that risks forcing others into unappealing compromises between prosperity and security. We are ill-prepared and ill-equipped to cope with that horrible choice.
