Czech Billionaire Could Get Caught Up in Huawei Spying Scandal

(Bloomberg) -- When Czech billionaire Petr Kellner joined a delegation to Beijing in 2014 that included President Milos Zeman, he was looking to dig deeper into the China gold mine. The lucrative success he has enjoyed since may turn out to be an unexpected headache.

Kellner, the richest person in the ex-communist wing of the European Union and owner of PPF Group NV, could find that his Chinese consumer lending business, now with more than $13 billion in assets, will inadvertently become caught up in the spying scandal over Huawei Technologies Co. That’s because PPF’s Czech phone companies are under growing pressure to avoid using the Chinese tech giant to develop its 5G network, making the Home Credit Chinese business a potential target of retaliation.

“PPF’s position in China is politically very delicate because their existence there is completely dependent on the state regulators,” said Martin Hala, an expert in Chinese policies and head of the Prague-based Sinopsis think-tank. “Their agreement with Huawei on building 5G networks is non-binding, but the question is what the price would be for them if they withdrew from it.”

The Czech Republic, like other NATO members, has been under increasing pressure from the U.S. government, which is pushing for a ban on Chinese companies from the 5G wireless networks, autonomous vehicles and other nascent tech markets. The issue will be at center stage when Czech Prime Minister Andrej Babis meets President Donald Trump in Washington on Thursday.

Huawei rejects all allegations and is taking the initiative with a legal offensive. PPF, which also owns telecom assets in Hungary, Bulgaria, Slovakia, Serbia and Montenegro, said it complies with all laws in countries where it operates. It added in a statement to Bloomberg that it never comments on “business strategy or political matters.”

Czech Billionaire Could Get Caught Up in Huawei Spying Scandal

Mel Carvill, a member of the Home Credit board of directors, told Seznam TV in an interview on Feb. 22 that the unit is in “good standing in China” and sees “no sign of any threat” as yet, though he cautioned that “there is always the possibility of collateral damage” if diplomatic relations between the two countries sour. He also pointed out that Home Credit is also turning to India, which “will be a big driver of growth in the future,” and southeast Asia.

Though the company has never been targeted in China, “I think you would think me rather silly if I was to say that if relationships between countries break down everything will be fine,” said Carvill.

The stakes in developing 5G, which can handle almost-instantaneous transfers of large data packages, can’t be higher, said Daniel Bagge, the Czech cyber attache at the country’s embassy in Washington, and protecting the technology’s security needs to “as robust as possible.”

“This will be a major step that will change the nature of industries not just in the Czech Republic but also on a global scale,” Bagge said in an interview. “We are basically talking about another industrial revolution.”

5G Auction

Like most countries, the Czech Republic may auction off frequencies for 5G networks as soon as this year. But local authorities in December warned state and infrastructure companies against using Huawei products. Zeman, an ardent advocate of closer ties between the two countries, has said the Czech push against the company could hurt Kellner’s investments in China.

The tension over Huawei is global. The U.S.’s efforts to block Huawei may lead to civil court proceedings as it presses European governments to follow suit. In Germany, Europe’s biggest economy, Chancellor Angela Merkel’s government has declined so far to impose an outright ban on Huawei equipment.

While the warning from the Czech cyber-security agency has prompted some institutions to amend public tenders to exclude Huawei, Prime Minister Andrej Babis has said the EU as a whole must tackle the issue. The bloc’s 28 countries all have different rules on how to protect communication systems, and that allowed Huawei to grab market share from western rivals such as Nokia Oyj and Ericsson, where local laws didn’t bar the Chinese company.

Kellner’s CETIN AS, the main Czech operator of communication networks, says only a minority of its current technology comes from Huawei, and its LTE mobile grid and fixed-line devices are dominated by Nokia products. O2 Czech Republic AS, the country’s biggest provider of phone and internet services which is controlled by PPF, says it’s analyzing its systems’ resilience in cooperation with the cyber-security agency, but hasn’t found any issues so far.

Czech Billionaire Could Get Caught Up in Huawei Spying Scandal

The aftermath of the Czech push against Huawei offered a closer glimpse of how much both PPF and Huawei rely on politicians.

Czech Industry and Trade Minister Marta Novakova told the news website Seznam in January that executives from Kellner’s conglomerate voiced concerns about the “potential impact on PPF’s business in China.” Later that month, Zeman welcomed Huawei’s representatives and the Chinese ambassador at his Prague Castle residence a day after it was reported that the Czech tax authority had excluded the company from a public tender for a software supplier.

Tepid Relations

Before Zeman’s election in 2013 and his Beijing summit with Xi Jinping a year later, the two countries’ relations were tepid because of Czech support for Tibet and criticism of China’s human-rights record. Jiri Smejc, the chief executive and minority owner of PPF’s lending arm Home Credit, told a 2016 conference the company was “proud to have been part of the initiative that, I believe, has resulted in a renaissance of Czech-Chinese ties.”

During Xi’s visit to Prague the same year, police suppressed peaceful protests against that renaissance and forced some locals to remove Tibetan flags from the windows of their homes and offices. When some Czech politicians received the exiled Tibetan spiritual leader, Dalai Lama, in Prague, Zeman, former Premier Bohuslav Sobotka and the speakers of both houses of parliament apologized to China in a joint statement, saying the meeting didn’t reflect the government’s official policy.

Zeman has since repeatedly criticized the cyber-security agency’s push against Huawei and a Czech intelligence service’s warnings that Chinese and Russian spies are trying to undermine the unity of North Atlantic Treaty Organization, which the Czechs joined in 1999, and the EU.

“Zeman is trying to drag the whole country east while the security services defend our orientation towards the U.S. and Europe,” said Hala from Sinopsis. “PPF and its business interests are major force behind the U-turn of the Czech political stance towards China.”

©2019 Bloomberg L.P.