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Tuesday, Jun 02, 2020

How did Huawei fall foul of the US government and find itself at the epicentre of a new tech war?

This is the first in an eight-part series looking at how Huawei has found itself at the epicentre of the US-China tech war. Four years after Huawei set up shop in the US, a RAND report tied Chinese telecommunications companies like Huawei and ZTE directly to Beijing

Like many Chinese entrepreneurs, Huawei Technologies’ founder Ren Zhengfei knew he would have to crack the US market before the company could truly become a global operation.

Ren, who studied the management techniques of US tech giants like IBM, had been trying to make headway in the US since the early 2000s but was getting resistance from lawmakers there who viewed the company as an extension of Chinese government intelligence efforts.

By January 2018 however, Huawei felt that its efforts were finally paying off.

Its consumer products chief Richard Yu was slated as a keynote speaker at the giant CES tech fair in Las Vegas, where he planned to announce to the world that US telco giant AT&T would soon start distributing Huawei’s smartphones, a deal that potentially would have given more than 100 million American subscribers the option of using a Huawei phone with their service plan.

However, days before the announcement some US lawmakers found out and urged AT&T to cut its ties with Huawei. Under pressure, the US telco pulled out of the deal the day before CES opened.

Within hours of the deal’s collapse a frustrated Yu said in a text message to the South China Morning Post that Huawei “had been harmed again”. At the keynote on the second day of CES, he called the snub a “big loss” for Huawei, but an even bigger loss for American consumers because they would not have the choice of Huawei devices.

To analysts, the scuppered deal was a sign that the US was determined to never let Huawei enter the American market. To Ren, it was a confusing move that belied America’s strengths, not only in technology, but its rule of law and separation of powers.

“There were no milestone events in this development process, and we’ve always viewed the US as a powerful country,” Ren, who serves as the company’s chief executive, told the Post in an interview last month. “We stumbled into where we are today, and we will probably stumble into tomorrow in a similar manner.”

Perhaps the clash was inevitable given China’s rise. The country’s GDP per capita has grown to nearly US$10,000 or forty-fold in just three decades, according to the World Bank, creating in the process tech giants like Huawei in telecoms, Tencent in social media, Alibaba (owner of the Post) in e-commerce and DJI in recreational drones.

In 2017 US President Donald Trump upped the ante in a range of disputes spanning trade, currency and technology, including slapping a US$1.19 billion fine on Huawei rival ZTE for breaching US sanctions, a move seen as a shot across the bow as far as Huawei was concerned.

The US suddenly appeared determined to tar Huawei as a national security threat to America and its allies, whereas China and Huawei sensed a move by Washington to take down a new technology champion.

Seven months after the AT&T decision, Washington barred government agencies from purchasing equipment and services from the company.

In December the same year, Huawei chief financial officer Meng Wanzhou, the eldest daughter of founder Ren, was arrested in Canada at the behest of the US for allegedly violating sanctions on Iran and committing bank fraud. Months later, in 2019, the US and Huawei hit each other with lawsuits.

The hammer blow to Huawei came in May 2019, when Washington put the Chinese company on a trade blacklist, effectively banning it from doing business with US firms. That meant it could not buy hardware components like semiconductors or access critical software such as Google services on Android, putting its smartphone business outside China at a huge disadvantage.
After all, who outside China would want a smartphone without access to Google, Gmail, or YouTube currently?

The rift between Huawei and the US also comes as superfast 5G networks – the connectivity backbone for the internet of things, big data and industrial processes such as smart manufacturing – are set to roll out this year.

Huawei is the world’s largest telecommunications equipment provider and a leader in 5G – overcoming the likes of Nokia, Ericsson and crosstown rival ZTE.

The US, which lacks a telecoms champion after the demise of Lucent Technologies, is reluctant to let China get ahead and has stepped up its campaign against the Chinese company, telling allies that Huawei’s equipment is not secure.

However, this did not stop the UK in January from approving limited use of Huawei’s gear in its forthcoming 5G networks. This move may portend well for Huawei in Europe, its second-most lucrative market after China, if the rest of Europe follows the UK’s lead.

But how and why did the relationship between the US and Huawei sour?

Interviews with current and former Huawei employees, as well as US government officials and analysts, point to a cultural divide, some missteps by Huawei in its early days in the US, and above all Washington’s deep-seated mistrust of communist-ruled China.

Over the course of this series of articles, the Post will examine Huawei’s corporate structure, profile Ren himself, discuss cybersecurity issues at the centre of the rift with Washington, and look at the impact of the “de-Huawei-isation” campaign conducted by the US.

In 2001, Huawei executive Charlie Chen set up the company’s first US office but it was tough going and employees struggled to sign up American telco customers, many of whom knew little about the company, much less how to pronounce its name.

Two years later, Huawei formed a joint venture with US firm 3Com to provide enterprise networking products, like routers and switches, but a lawsuit just months before alleging that Huawei had copied source code from Cisco’s router software and a separate IP theft case involving Motorola, cast a pall over Huawei’s reputation in the US.

Former employees of Huawei say that the Cisco lawsuit became a big concern for potential clients, who would ask if the allegations were true. Over a decade later, Huawei’s critics still tout the case as proof that Huawei steals intellectual property from rivals. However, both companies agreed to an out-of-court settlement in 2004.

By 2005, just four years after Huawei set up shop in the US and as George W. Bush entered his second term as US president, a RAND report commissioned by the US Air Force said Huawei had “deep ties with the Chinese military” and that it received support from the government.

Huawei has always rejected these claims, stating that it is a private company. In fact, Ren said in 2019 that he would rather close down the company than share sensitive client data with the Chinese government.

However, some sceptics remain unconvinced.

“If China wants its companies to be treated as neutral, international firms judged on their technology and not the location of headquarters, then the government needs to change the laws and regulations to provide confidence that the risks are limited,” said Michael Wessel, a member of the US-China Economic and Security Review Commission.

The RAND report caused many in the US to become wary of the company. Huawei’s subsequent attempts to take a stake in 3Com fell through in 2008 after lawmakers raised concerns over Huawei’s possible ties with the Chinese military.

But the incident that really tipped Washington over the edge with Huawei, according to industry observers, was in 2010 when the Chinese company was vying for a contract with US telecom operator Sprint to upgrade its mobile network.

“Sinophobic politicians, driven by defence and intelligence careerists, and further encouraged by Huawei competitors, launched an all-out and very public assault on the company through the Fall of 2010, drawing on the decades of misinformation that Huawei had, through its historically insular culture, allowed to fester into ‘fact’,” according to a memoir by Bill Plummer, who worked as Huawei's US-based vice-president for external affairs from 2010 until 2018, when his employment was terminated by the company.

To show it was open and transparent, Huawei offered to deliver its equipment via a third party firm that would also conduct an independent audit of the hardware, firmware and software before shipping it to Sprint.

Separately, Huawei also hired The Cohen Group, founded by former US Defence Secretary William Cohen, to negotiate with the US Director of National Intelligence and agree on a framework through which Huawei could provide its equipment.

But when Huawei later independently announced that its third party partner would be Amerilink, a firm headed by former Nortel CEO William Owens, it effectively torpedoed The Cohen Group’s discussions with Washington. As a result, the government deemed Huawei untrustworthy and talks fell apart as Amerilink was viewed as insufficiently independent from Huawei.

“Notwithstanding Huawei’s seemingly sincere intent, Amerilink was the lightning rod around which political and competitor adversaries launched their attempts to tank Huawei’s Sprint bid,” Plummer wrote in his self-published book.

That Huawei would act independently despite having external consultants, was behaviour seen before by some of its foreign employees. Several former staff who worked outside China recounted to the Post their lack of autonomy in decision making, with headquarters in Shenzhen having the final say, even if it went against what experts in local markets recommended.

Huawei’s interactions with Amerilink would have other consequences.

The following year, in 2011, Huawei was asked by the Committee on Foreign Investment in the United States (CFIUS) – which oversees foreign investment transactions to ensure they do not jeopardise national security – to divest its acquisition of a small US start-up called 3 Leaf Systems.

Huawei’s failure to declare the transaction was seen by regulators as a red flag despite the company’s claim that it did not think it was necessary for a small deal involving intellectual property assets and the hiring of several employees from the firm.

Huawei initially disagreed with the CFIUS recommendation to divest, saying to do so could cause “further damage to the Huawei brand and reputation,” which effectively meant a final decision was in the hands of US President Barack Obama. However, the company later backed down and agreed to divest.

In October 2012, the US House intelligence committee released a report – the result of a year-long investigation – on Huawei and its Chinese rival ZTE, stating that the two companies posed a national security threat because their equipment could be used to spy on Americans by tapping into private communications on behalf of the Chinese government. Huawei has repeatedly denied such claims.

The report went on to recommend that the US block any merger and acquisition activity in the US that involved the two companies, and advised the government to avoid using equipment from Huawei and ZTE.

“At this point, Huawei warned staff in the US that the FBI could come in any time to seek our cooperation for investigations,” said one former Huawei employee, who worked in the company’s US office and asked to remain anonymous. “The FBI would regularly speak to our colleagues responsible for M&A.”

Five years later Huawei was cited several times in a Pentagon report on how Chinese investments in emerging technology were giving Beijing access to the “crown jewels” of US innovation. The report caught the attention of lawmakers when it was first circulated in Congress, adding to the perception of some in the US that Huawei was a national security threat.

Republican Senator Marco Rubio, a fierce and persistent critic of Huawei and the Communist Party leadership in Beijing, told the Post in January: “The presence of Huawei and other non-market Chinese actors in the telecoms space undercuts everyone’s ability to prosper. Even Nokia, Ericsson and Samsung, for example, can’t compete when Huawei’s prices don’t have to cover cost.”

“We have to stop pretending that a company like Huawei, which received US$75 billion in subsidies and other financial support from the Chinese government, is just like a private sector company in the United States and that its rise has been fuelled simply by successful business practices,” he said.

For Ren, who openly admires American business culture and who is often seen carrying around rival products from Apple, the current US fight against Huawei is not representative of the nation as a whole.

“The US sanctions were enacted by a relatively small number of people. They don’t represent the American people or US companies,” he told the Post.

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