How Huawei Became a Target for Governments

(Bloomberg) -- Huawei Technologies Co., one of China’s most global companies, is increasingly in the crosshairs of the U.S. government and its Western allies, just as it’s pushing for a leadership role in the new wireless standard known as 5G. The telecommunications giant is facing multiple battles, including the arrest in Canada of its chief financial officer, criminal charges in the U.S. and the prospect of being banned from buying American-made components and shut out of infrastructure projects around the world. The wrangling comes amid a U.S.-China trade war in which Chinese technology companies have been a particular bugbear for U.S. President Donald Trump.

1. Why does the U.S. have an issue with Huawei?

U.S. government officials say Huawei has enjoyed favorable treatment from the Chinese government and may be working for its interests. A report released in 2012 by the U.S. Permanent Select Committee on Intelligence tagged Huawei and ZTE Corp. as potential security threats, saying neither had assuaged concerns that they are subject to political pressure. The report said Huawei refused to describe the “full military background” of Ren Zhengfei, the former People’s Liberation Army engineer who founded the company in 1987. Some Huawei employees have worked on research projects with the Chinese armed forces. U.S. concerns about Huawei drove the 2018 decision by the Trump administration to block Singapore-based Broadcom Ltd.’s hostile takeover bid for the U.S. chipmaker Qualcomm Inc. The transaction could have curtailed American investments in chip and wireless technologies and handed global leadership in those spheres to Huawei.

2. What has the Trump administration done?

It initially moved to curb Huawei’s ability to sell equipment in the U.S. and, more significantly, to buy parts from U.S. suppliers, via an executive order and by adding Huawei to a Commerce Department blacklist that requires U.S. companies to seek a special license to sell their products to Huawei. But it’s also granted temporary reprieves that allow companies to continue to sell parts to Huawei. Microsoft Corp., for instance, said it got a license to sell “mass-market software” to Huawei. Some security hawks in Congress have criticized the granting of those reprieves. On Nov. 21, the U.S. Federal Communications Commission voted to prohibit the use of federal subsidies to buy telecommunications equipment made by Huawei and ZTE and said it would consider requiring carriers now using the products to remove them.

3. Why does the equipment matter?

The U.S. government — like the Chinese and others — is wary of employing foreign technology for vital communications for fear that the manufacturers could leave a backdoor that enables outsiders to access information, or that the companies themselves would hand over sensitive data to their home governments. Vodafone is said to have found and fixed backdoors on Huawei equipment used in the carrier’s Italian business in 2011 and 2012. While it’s hard to know if the vulnerabilities were nefarious or mistakes, the revelation dealt a blow to the Chinese company’s reputation. U.S. Secretary of State Michael Pompeo has said the U.S. might hold back intelligence-sharing with NATO allies if they use Huawei equipment. Still, some allies including the U.K. and Germany have balked at shutting Huawei out completely from 5G network construction, in part because equipment from Nokia Oyj and Ericsson AB is generally more expensive.

4. What does Huawei say?

It has repeatedly denied that it helps Beijing spy on other governments or companies. The company, which says it’s owned by Ren as well as its employees through a union, has in recent years begun releasing financial results, spent more on marketing and engaged foreign media in an effort to boost transparency. Ren, who was famously reclusive, has become more outspoken as he fights to save his company from numerous challenges, including the arrest of CFO Meng Wanzhou, who’s also his daughter. While he said he was proud of his military career and Communist Party membership, he rejected suggestions he was doing Beijing’s bidding or that Huawei handed over customer information. In March, Huawei went on the offensive, filing a lawsuit in federal court against a statute that blocks U.S. government agencies from using its equipment. It also criticized what it called “unreasonable restrictions” on doing business in the U.S.

5. What’s happening with Meng?

She was detained in Vancouver last December at the behest of the U.S. and granted bail, allowing her to stay in a luxury home in that Canadian city while the courts decide her fate. (She lives mainly in Shenzhen, Huawei’s hometown.) The U.S. has filed a formal request seeking her extradition as part of a criminal case alleging that she conspired to defraud banks into unwittingly clearing transactions linked to Iran in violation of U.S. sanctions. Both Meng, who is also deputy chairwoman, and the company have denied wrongdoing. Meng is suing the Canadian government for alleged wrongful detention.

6. How big is Huawei?

In just over three decades it’s grown from an electronics re-seller into one of the world’s biggest private companies, with leading positions in telecommunications gear, smartphones, cloud computing and cybersecurity and operations in Asia, Europe and Africa. With a 2019 sales target of $125 billion, Huawei generates more revenue than Home Depot Inc. or Boeing Co. It’s plowed billions of dollars into 5G and is now among China’s top filers of patents both internationally and domestically. It has helped build 5G networks in more than 10 countries and expects to do the same in another 20 by 2020. In a direct threat to Qualcomm, Huawei is designing its own semiconductors. The Kirin series of mobile processors, made via subsidiary HiSilicon, compete with the Qualcomm Snapdragon chip employed extensively by Samsung Electronics Co. and other global smartphone brands. Huawei’s Kunpeng range is challenging Intel Corp.’s dominance in servers.

7. Who else has made accusations against it?

In 2003, Cisco Systems Inc. sued Huawei for allegedly infringing on its patents and illegally copying source code used in routers and switches. Huawei removed the contested code, manuals and command-line interfaces and the case was dropped. Other accusations that Huawei stole intellectual property from U.S. companies surfaced. Motorola sued in 2010 for allegedly conspiring with former employees to steal trade secrets. That lawsuit was later settled. In 2017 a jury found Huawei liable for stealing robotic technology from T-Mobile US Inc., and on Jan. 28 the Justice Department indicted Huawei for theft of trade secrets related to that case. Meanwhile, Poland, a staunch U.S. ally, arrested a Huawei employee on suspicion of spying for the Chinese government. Huawei fired the employee and denied any involvement in his alleged actions.

8. Are other Chinese companies feeling the heat?

Yes. ZTE almost collapsed after the U.S. Commerce Department banned it for three months in 2018 from buying American technology. The U.S. Justice Department has charged state-owned Fujian Jinhua Integrated Circuit Co., its Taiwanese partner and three individuals with conspiring to steal trade secrets from Micron Technology Inc. The same day, then-Attorney General Jeff Sessions said the Trump administration would be focusing more resources to counter threats of “Chinese economic espionage.”

The Reference Shelf

• The promise of 5G adds to hurdles for Huawei and has the U.S. and Europe at odds.
• An assessment of Huawei’s legal offensive in North America.
• Stuck in Vancouver, Meng awaits her fate in splendor.
• China’s cybersecurity laws vex foreign companies.
• A QuickTake explainer on 5G and another on intellectual property theft.
• Bloomberg Opinion’s Leonid Bershidsky says Huawei is being held to impossible standard.

--With assistance from Grant Clark.

To contact Bloomberg News staff for this story: Reed Stevenson in Tokyo at rstevenson15@bloomberg.net;Gao Yuan in Beijing at ygao199@bloomberg.net

To contact the editors responsible for this story: Edwin Chan at echan273@bloomberg.net, Paul Geitner, Robert Fenner

©2019 Bloomberg L.P.

With assistance from Bloomberg