Another Reason U.S. Fears Huawei: Its Gear Works and It's Cheap
(Bloomberg) -- In the sparsely settled wildlands of eastern Oregon, Huawei Technologies Co. is hardly the big bad wolf of China that U.S. officials have depicted. It’s a lifeline to the 21st Century.
China’s largest tech company makes high-quality networking gear that it sells to rural telecommunications operators for 20 percent to 30 percent less than its competitors do, says Joseph Franell, chief executive officer and general manager of Eastern Oregon Telecom in Hermiston, a watermelon-growing hub of 18,000 people. Huawei’s equipment has helped some two dozen U.S. telecom companies provide landlines, mobile services and high-speed data to many of the poorest and most remote areas in the country. Some of these companies have received federal subsidies, but not Franell’s, which was spun out to senior management last year by the electric cooperative that founded it in 1999. Huawei makes the magic happen.
“Their equipment is very, very good,” says Franell, who chairs the Oregon legislature’s Broadband Advisory Council. “We haven’t found equivalent equipment on the market.”
The administration of President Donald Trump is escalating a fight with a formidable adversary – a face-off that intelligence and cybersecurity officials say has significant implications for the safety and security of the U.S. and its allies. Huawei has become a world leader in manufacturing networking equipment and is striving to dominate the next generation of wireless technology, known as 5G. The Trump administration, convinced Huawei is a Trojan horse for Chinese intelligence, is determined to blunt its growing sales and influence. The heightening tension, which is said to include a potential presidential order that won’t name Huawei but would greatly limit its and other companies’ U.S. business opportunities, stems from a fundamental hardening of U.S. policy toward China that took place in 2017 during Trump’s first year in office.
For a decade, U.S. officials have said Huawei may be acting as an arm of the Chinese state, a private company in name only whose ulterior mission, they claim, is to steal government and corporate secrets through conventional espionage and back-door bugs in its telecom gear. The Obama administration stopped Huawei from acquiring U.S. technology assets and exerted pressure that reportedly helped nix a $5 billion equipment deal with Sprint that would have saved the struggling U.S. carrier $800 million in its first year. Last summer, Congress barred federal agencies and contractors from buying Chinese networking gear, and now the Trump administration is preparing an executive order that could significantly restrict all Chinese telecom sales in the U.S., two people familiar with the matter said earlier this month.
Through it all, Huawei has prospered. The company garners about half its annual revenue of $92 billion outside China, led by Europe, the Middle East and Africa, where cutting-edge technology at affordable prices has endeared the Chinese company to budget-strapped purchasers. Huawei has also become the world’s second-biggest mobile-phone maker, after Samsung Electronics Co. and ahead of Apple Inc. In the U.S., however, the consumer market has effectively closed for Huawei. Last year, Verizon Communications Inc. and AT&T Inc. said they would no longer carry Huawei smartphones because of government pressure, after the FBI, CIA and NSA had warned that the phones were unsafe.
Huawei, for its part, has repeatedly denied any kind of spying or even talking with the Chinese government, let alone acting on its behalf. Executives insist it is a private company, owned by employees, not the state.
“I love my country, I support the Communist Party, but I will not do anything to harm the world,’’ said Ren Zhengfei, Huawei’s founder and CEO, in a rare interview at company headquarters in Shenzhen, China, on Jan. 15.
Trust us, say current and former U.S. officials: Classified information they can’t discuss proves Huawei will purloin customer secrets any time it can. Out in the open, Huawei, after becoming the world’s largest telecom-equipment manufacturer, has elevated surveillance systems to be one of its “strategic business lines,’’ a phrase mentioned 23 times during an August event in Guangzhou, China, to release 30 new types of cameras, according to Jeffrey Ding of the University of Oxford’s Future of Humanity Institute.
Already in 230 cities – including many in China as well as in Mauritius, Serbia, Kenya and elsewhere – Huawei has installed what it calls its “Safe City’’ technology, which involves a network of cameras that can match faces and license plates to central databases.
Cybersecurity experts from both the Obama and Trump administrations agree on the risk. “These companies need to be considered as functional extensions of Chinese intelligence,” says James Clapper, who served as director of national intelligence for President Barack Obama and is now a frequent Trump critic. “This is one case where I agree with this administration.”
The difference is what to do about it. Obama pursued diplomacy to rein in Chinese cyber-theft, signing a landmark agreement in 2015 in which the U.S. and China agreed not to hack each other’s economic secrets. The Trump team scrapped the whole idea of engaging China and supporting its economic development as a means of moderating the country’s conduct. This administration’s approach, confrontation and containment, was outlined in Trump’s first “National Security Strategy,” published in December 2017.
“For decades, U.S. policy was rooted in the belief that support for China’s rise and for its integration into the post-war international order would liberalize China. Contrary to our hopes, China expanded its power at the expense of the sovereignty of others,” the document declared. “We will work with our partners to contest China’s unfair trade and economic practices and restrict its acquisition of sensitive technologies.”
Huawei is the tip of the spear, the administration believes. In recent months, the U.S. has dispatched lawyers, diplomats and intelligence officials to corporate and government offices around the world to press its case that Huawei must not be allowed to run their 5G networks. The technology’s next generation is expected to facilitate connections that are 10 to 100 times faster than current standards allow. Everything from grocery shelves to surgical robots to supertankers on the high seas will communicate instantly via antennas, facilitating automation on a transformative scale. Driverless cars will ping each other to avoid collisions as they whiz within centimeters of one another at high speeds. Factories, drones and mobile phones will coordinate home deliveries in an algorithmic chain without a single human being. Entire movies will download onto a laptop in seconds.
Digital networks will become even more integral in everyday life – and more susceptible to serious mischief. A malevolent state with control over an adversary’s 5G network could wreak mass industrial sabotage and social collapse, U.S. officials say.
“This will be the first major deployment of internet technology which creates more risk than benefit if not properly controlled,” according to a memo written by retired Air Force Brigadier General Robert Spalding, who served on Trump’s National Security Council when it issued the 2017 National Security Strategy.
The crux of the administration’s argument is that Huawei couldn’t say no to demands from China’s government, even if it wanted to. China’s National Intelligence Law of 2017 requires all Chinese companies and citizens to "assist in and cooperate in national intelligence work" if requested. Whether Huawei or any of its employees have done so in the past is now incidental, China hawks argue, given Huawei’s lead in developing 5G technologies for the future.
“When people realized Huawei is effectively the only provider of 5G, they had to do something,’’ says James Mulvenon, a China specialist formerly with RAND Corp. who now works for defense contractor SOS International LLC of Reston, Virginia. "Nobody is looking for a smoking gun anymore. They’re looking at the potentiality argument. If the [People’s Liberation Army] comes to them, they have no way of saying no."
In his interview, Huawei CEO Ren said he would decline any request from Beijing for sensitive information on clients and stressed the potential for cooperation with the U.S. and other countries on 5G and other matters. “Huawei firmly stands on the side of customers when it comes to cybersecurity and privacy,” he said.
The executive order under consideration, for possible issuance in February, wouldn’t mention specific companies like Huawei and wouldn’t ban U.S. sales by the firms, according to a person familiar with the matter. But it would empower the Commerce Department to review products and purchases by companies connected to adversarial countries, including China, this person said. A bipartisan bill recently introduced in Congress would take the more draconian step of banning sales of U.S. parts to Huawei and its Chinese counterpart, ZTE Corp., which could drastically curtail their businesses. Another bill would set up a White House office to coordinate federal efforts to blunt technology threats from China.
The Trump administration is also stalking Huawei in other ways. Its most provocative act so far was asking Canada to arrest Huawei’s chief financial officer, Meng Wanzhou, in Vancouver last month on fraud charges linked to alleged Iran sanction violations, which Huawei denies. Meng, the daughter of Huawei founder Ren, is out on bail awaiting possible extradition to the U.S. Her arrest “would never, never, ever have happened” before the Trump pivot to confronting China, says Spalding, the retired Air Force general. “What you’re seeing is the beginning of a change in how the federal bureaucracy treats China.”
Elsewhere, U.S. investigators in Seattle are looking into possible criminal charges against Huawei for alleged theft of trade secrets from U.S. partner T-Mobile US Inc. The probe includes allegations that a Huawei engineer stole information when visiting a T-Mobile lab in Bellevue, Washington, to see a diagnostic robot called “Tappy” that simulated a person’s phone use, according to one person familiar with the matter. In a 2014 lawsuit, T-Mobile alleged a Huawei engineer slipped one of the robot’s fingertips into his laptop bag during the visit and left with it. The jury sided with T-Mobile in 2017, saying T-Mobile should get $4.8 million in damages for breach of contract. The parties later agreed to drop the case after settlement talks.
China’s foreign ministry said on Jan. 17 that the legal dispute between Huawei and T-Mobile was resolved in court and expressed concern about the motives behind the “reinvestigation.”
On Jan. 11, authorities in Poland arrested a former Polish intelligence official and a Chinese employee of Huawei and accused them of spying for China. Huawei fired the employee the next day and said the incident brought disrepute upon the company.
In other foreign capitals, U.S. officials are playing hardball over Huawei, warning allies that the U.S. will reevaluate what intelligence it shares with them if they don’t end cooperation with the company, according to an American official. U.S. officials, mindful of Huawei’s market advantages, are even trying to develop packages of U.S.-made gear to provide foreign companies an alternative to buying Huawei, according to an official involved in that effort.
The campaign to blunt Huawei’s rise appears to be one of Trump’s most successful diplomatic initiatives. Australia, New Zealand and Japan have acceded to U.S. requests to bar Huawei’s 5G equipment. The allies have also banded together to provide aid to the Solomon Islands and Papua New Guinea to enable them to reject a Huawei submarine cable carrying broadband connections, saying the line represents a national security threat at its connection point in Australia.
In Britain, BT Group Plc has been pulling Huawei equipment out of its core structure since the 2016 acquisition of mobile carrier EE Ltd., which used Huawei gear throughout its systems. It’s also removing Huawei products from the emergency-response network that EE is building in Britain. Germany has said it is considering restricting Huawei’s role in its future telecom infrastructure, while Czech officials have expressed concerns that China is preparing an economically damaging reprisal against the country after Czech authorities issued warnings about Huawei’s risk to national security.
France’s government has been warning about Huawei for some time, according to Orange SA CEO Stephane Richard, who said the company will work with Ericsson AB and Nokia Oyj, not Huawei, on its 4G and 5G networks. Following the arrests in Poland, officials there urged the European Union and the North Atlantic Treaty Organization to find a common approach toward Huawei, rather than leave it to each country to act alone and face possible Chinese retribution.
Some apparent Huawei misconduct isn’t classified. Every night for five years, equipment installed in the Chinese-built headquarters of the African Union in Addis Ababa, Ethiopia, transmitted data from midnight to 2 a.m. back to servers in Shanghai, according to an investigation published a year ago in the French newspaper Le Monde. Subsequently, microphones hidden in desks and walls were stripped from the $200 million building, which was financed by China, and Huawei’s servers were replaced, according to a report by the Australian Strategic Policy Institute. After the Le Monde report, China called the espionage allegations “ridiculous,’’ and Ebba Kalondo, a spokesperson for the African Union Commission, says it was a “non-story.”
Huawei’s English website still boasts of the “greatly enhanced security” its systems provided the Addis Ababa headquarters. The African Union’s “legacy PCs were proving too vulnerable to hackers, phishing, viruses, and other forms of compromise,’’ one Huawei post explains.
Bonnie Girard, who lived in China for a decade while working for a string of European telecom companies, remembers visiting a contract manufacturer in the mid-1990s and seeing Huawei engineers brazenly photographing printed circuit boards being built for Alcatel. The Huawei employees could never have accessed the facility without government approval, says Girard, who now runs consulting firm China Channel Ltd.
Still, Huawei has always been completely transparent with Eastern Oregon Telecom about its hardware and software, says Frannel, the CEO. He says he’s never seen “a shred of evidence that would indicate to me that Huawei is a problem.” And in today’s global economy, U.S. and European suppliers rely on Chinese-made parts nearly as much as Huawei does, he adds. “Banning a brand doesn’t solve our security problem.”
©2019 Bloomberg L.P.