The War on Huawei
The US attacks on Huawei are not effective and will, in the long run, prove futile.
About 10 years ago, a friend of mine invited me to join him for dinner with two Huawei engineers. The engineers were visiting The Gambia with regards to a CDMA project our national telecommunications company was launching with Huawei equipment. Although the CDMA project went bust, Huawei is now the leading provider of telecommunications equipment in The Gambia, as it is in many African and other countries around the world.
I still recall the answers the Huawei engineers gave to two questions I asked them over our dinner. To my first question “What does Huawei mean?” I got the reply “China can.” I then asked: “What makes China tick?” “Two things,” came the prompt, almost scripted, reply: One is China’s huge human resources base, and the other is the fact that everyone in China applies their energy to whatever objective the government sets for the country. From all indications, Huawei has certainly benefited from China’s vast pool of talent, and exploited the global capitalist system to make China, under the leadership of the Communist Party, a first-rate technology country. As a result, Huawei has fallen afoul of the US government, and the ensuing war against it hasn’t been a pretty sight.
The Birth of Cool
The on-going US government war against Huawei should be seen in the context of US-China relations, which has been a bumpy ride for both parties. Although the US did not fully recognize the Communist-led government of mainland China until 1979 (30 years after the Communist Party came to power in 1949), US-China trade has since then soared from $1 billion in 1978 to over $7 billion in 1985. By 1986, the US, which had previously enjoyed a trade surplus with China, had its first trade deficit of $1.6 billion with China. The US trade deficit with China increased to almost $40 billion by 1996, ballooned to $155 billion in 2011, and $594 billion in 2015 before gradually declining to $351 billion in 2018.
As a result of China’s opening up and modernization program which started in 1978, many US companies have entered China, mostly through joint ventures with Chinese companies or government agencies. Investments have thus flowed copiously over the past 40 odd years between the US and China. US investments in China increased from $217 million in 1991 to $4 billion in 2002, peaked at $21 billion in 2008, and declined to $13 and $6.8 billion in 2018, and 2019, respectively. Similarly, Chinese investments in the US (mostly in Silicon Valley and technology companies) increased from less than $50 million in 1994 to $46.5 billion in 2016, before gradually falling to $29.7 billion in 2017 and $3.1 billion in 2019.
In the same vein, China increased its holdings of US government debt from $85 billion in March 2002, to a high of $1.3 trillion in September 2013. The huge volume of US government debt held by China has been a cause for concern, both in the US and China and for expectedly different reasons. While the US is concerned that China might use its holdings as leverage against the US, some Chinese have worried about the safety of their holdings in the US.
Although China remains the largest foreign creditor of the US, its holdings of US government debt have been on a downward slide since March 2018, against the backdrop of its trade war with the US. A key feature of this trade war has been an on-going war on Huawei Technologies Co., Ltd, (Huawei), the world’s largest telecommunications company, and the poster child of China’s modernization and global expansion.
Enter the Dragon
Huawei was founded in 1987 by Ren Zhengfei, an engineer and former Deputy Directory of the engineering corps of the People’s Liberation Army (PLA) of China. Although the company initially focused on re-selling imported private branch exchanges (PBX) switches, it soon started a research and development (R&D) unit to reverse engineer the switches. By 1993, the company had the most powerful PBX in China, and in short order, won a contract to build a national communications network for the PLA.
In 1996, Huawei started its expansion into foreign markets, with a contract to provide phone network products to Hutchison Whampoa of Hong Kong. Between 1998 and 2003, Huawei contracted IBM Consulting to improve its management and product development, thus helping propel Huawei’s expansion around the world. IBM’s contribution to Huawei’s astounding growth and drubbing of its competitors is akin to the assistance provided by Dr. W. Edwards Deming to Japanese automakers who took Deming’s quality-management philosophy to heart, while their US competitors largely ignored it — and later on paid dearly for their mistake.
Huawei continued its march into foreign markets in 1999 when it established an R&D center in Bangalore, India, to develop telecommunications software. The following year, Huawei established an R&D center in Sweden, followed by its establishment of four R&D centers in the US in 2001. In 2017, almost half (80,000) of Huawei’s employees worked in, and 15 percent of the company’s $92 billion in annual revenue was spent on R&D. Huawei outspent two of its US competitors Apple and Cisco in R&D in 2018, both in absolute and relative (as a percentage of annual revenues) terms.
Although Huawei’s annual revenue grew by leaps and bounds from $2.67 billion in 2002 to $11 billion in 2006, it still was far less than half of the $28 billion annual revenue of Cisco, Huawei’s main rival, in 2006. The contribution of international sales to Huawei’s annual revenues also increased from around 21 percent in 2002, to 65 percent in 2006, as a result of its increasing forays into international markets. Huawei’s meteoric rise continued unabated, with its annual revenue increasing over two-fold from $35 billion in 2012 (when Cisco had $46 billion in revenue), to $75 billion in 2016, almost double the $49 billion earned by Cisco. Huawei’s annual revenues surpassed $100 billion for the first time in 2018, marking the company’s fastest growth in two years. In contrast, Cisco, once the most valuable company in the world, saw its annual revenue stagnate at $49 billion in 2018.
Huawei is now firmly established as one of the leading telecoms infrastructure and consumer products companies in the world, with 180,000 employees in over 170 countries and regions. The company is a global leader in next, and fifth generation (5G) telecommunications technology which will increase theoretical peak data transmission speeds 10-fold from 100 Mb per second in 4G, to 10 Gb per second. But 5G is not only about speed, but also a paradigm shift in technology as from, say a typewriter to a computer. 5G underpins the emerging global ecosystem of fully connected intelligent sensors and devices and will overhaul economies and industries, as well as blur geographic and cultural boundaries.
No wonder telecommunications companies are racing to build their 5G infrastructure, the market for which is expected to increase from $1 billion in 2019 to $6.5 billion by 2025. In the same vein, the number of 5G mobile subscribers is expected to increase from 0.7 million in 2019, to 1.3 billion in 2025, and that 5G will enable up to $13.2 trillion in global sales across a wide variety of industries by 2035.
5G also has serious implications for security, national security especially, and hence the US government’s angst about Huawei. Furthermore, given the astounding success of Huawei in such a relatively short time, and its dominant role in 5G technologies, it is not surprising that the company was caught in the dragnet of the US trade war with China. Huawei was identified as far back as 1996 by both the Chinese government and military as a “national champion” further arousing suspicion that what has now become a global behemoth is still in bed with the Chinese government.
Following the Oct. 2007 Party Congress, where then President Hu Jintao identified civilian-military integration and the development of dual-use technologies as a national priority, the US Department of Defense (DoD) identified Huawei, Datang, and ZTE as information technology companies that maintain close ties with the PLA and collaborated with it in research and development. And the war on Huawei was on!
The Empire Strikes Back
Huawei is now firmly in the sights of the US government which is now waging what effectively is a war on the company. Although it is the matter of 5G infrastructure that has brought increased the US government’s resolve to take on Huawei, the fact of the matter is that tensions have been brewing for some years now.
In 2001, Huawei reportedly helped the Saddam Hussein regime to strengthen Iraqi air defenses against attacks by US and allied jets enforcing a no-fly zone over northern Iraq. However, Huawei has claimed that this was a case of mistaken identity, and it has been reported that it was Hua Mei, a Chinese-American company, that provided the equipment to Saddam. Shortly after, Cisco sued Huawei in 2003 for stealing its source code (human-readable computer code) and documentation for its routers. Although the case was eventually dropped by Cisco, Huawei’s reputation was bruised after agreeing to discontinue products named in the suit and to change documentation and source code Cisco complained about.
Huawei appeared again on the US national security radar, following the conclusion of a 2005 RAND Corporation report for the US Airforce that Huawei was one of the private Chinese companies that formed a “digital triangle” that worked together secretly, and consisted of i) Chinese information technology companies, ii) government R&D institutes and funding infrastructure, and iii) the Chinese military. Four years later, the US National Security Agency (NSA) launched its “Shotgiant” effort to penetrate Huawei’s networks and was able to access the company’s source code and emails (including those of its CEO Ren).
Furthermore, concerns of the Committee on Foreign Investment in the United States (CFIUS), a federal inter-agency panel that reviews international takeovers of US companies, and of members of Congress about Huawei’s threat to US national security led to the cancellation in 2008 of the company’s plan to buy 3Com in a $2.2 billion deal in which Huawei partnered with Bain Capital. Similarly, Huawei was barred in July 2010 from acquiring 2Wire, a home networking company that provided hardware, software, and services to telecommunications companies.
In November 2010, Huawei was shut out of bidding for a $5 billion contract for a Sprint Nextel network upgrade, even though it partnered with Amerilink Telecom, a US company headed by Adm. Bill Owens, a former Vice Chairman of the Joint Chiefs of Staff, and former CEO of Nortel Networks. It did not help either, that eight US Senators expressed their opposition, on US national security grounds, to the bid in an August 2010 letter to the US Treasury Secretary, the Director of National Intelligence, and other US government officials.
Huawei suffered another blow in February 2011 when, because of national security concerns of the US government, it cancelled its attempts to buy 3Leaf Systems, Motorola’s mobile network infrastructure unit. Shortly after, Ken Hu, the Chairman of Huawei USA, and Deputy Chairman of Huawei Technologies wrote an open letter denying allegations that Huawei had close ties with the Chinese military, and that it was a threat to US national security. In conclusion, Mr. Hu expressed his hope that the “United States government will carry out a formal investigation on any concerns it may have about Huawei.” Despite these denials, Huawei was blocked by the US Department of Commerce in October 2011 from bidding for a contract to help build a new wireless emergency network for first responders such as ambulances, firefighters, and police.
Mr. Hu got his wish in November 2011 when the bi-partisan House Permanent Select Committee on Intelligence (HPSCI) of the US Congress initiated an investigation into “the counterintelligence and security threat posed by Chinese telecommunications companies doing business in the United States.” The investigation focused on Huawei and ZTE and concluded in an October 2012 report, that both Chinese companies failed to provide enough information to satisfy a “full and fair investigation,” and that the risks associated with Huawei and ZTE providing equipment to critical US infrastructure could undermine the country’s core national-security interests. The report provided five recommendations, including the need for continued suspicion of Chinese companies entering the US telecommunications market, and for greater transparency of Chinese companies.
Shortly after the HPSCI released its report, it was reported that a similar 18-month White House review of Huawei’s activities in the US found no evidence that Huawei spied for the Chinese government, even though, an anonymous source said, “certain parts of government really wanted” evidence of spying by Huawei. However, a White House spokesperson denied that the White House had conducted a classified inquiry that cleared any telecommunications company.
In March 2013, President Obama signed a funding bill to prevent a US government shutdown but included a requirement that federal government agencies can only purchase information technologies from Chinese companies after they have assessed the “cyber-espionage or sabotage” risks posed by these products. Later that year, retired Gen. Michael Hayden, former head of the US Central Intelligence Agency (CIA) and the NSA alleged that Huawei was a significant threat to Australia and the US, and had spied for the Chinese government, and that intelligence agencies had hard evidence of the company’s nefarious activities. These allegations were, however, vehemently denied by Huawei officials who insisted that Gen. Hayden and others accusing Huawei should make the evidence they have public.
Huawei’s troubles continued in 2014, with T-Mobile US filing a lawsuit against it and alleging that it had stolen technology behind T-Mobile’s smartphone testing robot, Tappy. Huawei admitted that there was some truth to T-Mobile’s complaint, and added that the two Huawei employees implicated had been fired. The case was resolved in May 2017, with the Huawei being fined $4.8 million in damages, and the conviction of the company for industrial espionage.
Huawei continued to work hard in the US in 2017, especially with regards to increasing the uptake of its smartphones in the country. Thus, the company announced it was working with AT&T to distribute its flagship smartphones in the US market, where 90 percent of smartphones are sold through telephone carriers. These efforts were, however, strongly opposed by 18 members of the US Congress in a letter to the Federal Communications Communication (FCC).
Huawei’s efforts to develop its smartphone market in the US ultimately proved futile because both AT&T and Verizon dropped plans to sell its smartphones to their customers, supposedly under US government pressure. A Huawei official said the collapse of the AT&T deal was a “big loss” for both his company and the American people, who would not have “the best choice.” Huawei was to suffer more setbacks in 2018 with increasing efforts by the US government to limit the use of its products in the US.
Somethings Cannot Change
In January 2018, US Representative Mike Conaway introduced a bill to ban US government agencies from buying phones and equipment from Huawei and ZTE. Similarly, two US Senators introduced a bill in February 2018 to prohibit the U.S. government from contracting with companies that use equipment or services from Huawei and other Chinese telecommunications companies. Although the bills got little support, similar ones were introduced in the US House of Representatives and Senate in January 2019 to create a central government agency to assure supply chain security and combat foreign theft of US technologies.
The pressure on Huawei increased in February 2018, when the heads of six US government intelligence agencies testified before a Senate Intelligence Committee hearing that they did not trust Huawei and ZTE, and that they would not advise Americans to use Huawei products or services. In response, Huawei said that it was trusted by customers and governments in 170 countries around the world, and posed no greater cybersecurity risk than other vendors. Nevertheless, the FBI Director said that China was seeking to become a global power, and as such, posed a “whole-of-society threat” that requires an equivalent response from the US. That conclusion certainly raised the bar; at least far more so than the concern expressed every year, for five years, from 2008 to 2012 by the US DoD in its Annual Report on Military Power of the People’s Republic of China about the close collaboration between Huawei and ZTE and the PLA.
In March 2018, Best Buy, the largest electronics store chain in the US said it would stop selling Huawei products. A month later, the FCC voted in favor of a proposal to forbid the use of the Universal Service Funds (USF) of the US government to buy telecommunications equipment from companies considered to be a national security risk.
Although Huawei vigorously opposed the proposed FCC ban, it saw the writing on the wall. At the company’s annual meeting with analysts, Eric Xu, Huawei’s Deputy Chairman said that “Some things cannot change their course according to our wishes,” and that you can feel more at ease when you let them go. Huawei started dialing down its US presence, announcing a layoff of five workers, and reducing its lobbying efforts in Washington DC after almost a decade of efforts to counter accusations against it.
Huawei continued to face more pressure in the US, with the US DoD ordering in May 2018 that stores on US military bases stop selling the company’s devices as well as those of ZTE. According to the DoD spokesperson, Huawei and ZTE devices potentially pose “unacceptable risk to [DoD] personnel, information and mission,” and as such, it was not prudent to continue selling these devices to them.
In August 2018, President Trump signed into law the $716 billion “John S. McCain National Defense Authorization Act,” (NDAA) which prohibits US government agencies from procuring telecommunications and video surveillance equipment or services produced by Huawei Technologies Company or ZTE Corporation, or any of their subsidiaries or affiliates. Shortly after, US colleges and universities started falling in line, with Stanford University imposing a moratorium on its use of new research support from Huawei.
More US colleges announced in 2019 that they were dropping the company’s equipment in compliance with the NDAA. Among these universities were the University of California (UC) Berkeley, UC San Diego, as well as Princeton and Ohio State Universities. Half a dozen other universities such as the University of Wisconsin-Madison (my alma mater), UC Los Angeles, UC Davis and the University of Texas at Austin had, as at March 2019, reviewed or were reviewing their telecommunications equipment for compliance with the provisions of the NDAA.
In January 2019, the US Department of Justice hit Huawei with 23 indictments for alleged theft of trade secrets and fraud. The indictments consisted of an indictment for 10 counts of theft of trade secrets conspiracy, attempted theft of trade secrets, seven counts of wire fraud, and one count of obstruction of justice. In addition, the DOJ unsealed a 13-count indictment against Huawei, two of its affiliates, and Meng Wanzhou, its Chief Financial Officer (CFO), and daughter of the company’s founder, Ren Zhengfei. The defendants were charged with bank and wire fraud and conspiracy to commit both, violations of the International Emergency Economic Powers Act (IEEPA), and conspiracy to violate that Act, as well as conspiracy to commit money laundering. Furthermore, Huawei and Huawei USA were charged with conspiracy to obstruct justice, while Ms. Meng (who took her mother’s surname) was charged with bank fraud, wire fraud, and conspiracies to commit bank and wire fraud. Huawei also got hit in January 2019 by an FBI sting operation at the Consumer Electronics Show (CES), and an FBI raid on a Huawei lab in connection with its investigation of the company’s suspected theft of US intellectual property.
On May 15, 2019, President Trump issued an Executive Order (EO) declaring a national emergency in the face of the “unusual and extraordinary threat” posed by foreign adversaries to the use of “information and communications technology or services” in the US. The EO did not name China or any other country, or Huawei, and left it to the Secretary of Commerce to identify the foreign adversaries. A day later, the Department of Commerce did just that, and added Huawei and 68 of its non-U.S. affiliates in 26 countries to the Entity List of companies, organizations, or individuals which pose significant threats to the national security or foreign policy interests of the United States.
Google’s parent company, Alphabet, dealt a strong blow to Huawei on May 19, 2019, when it cut off Huawei from future updates of Google’s propriety apps (e.g. Google Play Store, Gmail, and YouTube) and Android operating system, which ran 87 percent of all mobile phones in the world in 2019. Other companies, including three of the world’s leading chip makers, Intel, Qualcomm, and Broadcom announced they were cutting off their relationships with Huawei. The next day, Huawei got a 90-day reprieve from the restrictions imposed by its placement on the Entity List, and Google was able to resume working with it.
But Huawei was not out of the woods yet, because two important US-based technology standards organizations, the Wi-Fi Alliance (which certifies and promotes Wi-Fi technology), and the SD Association (which sets standards for SD memory cards) both imposed restrictions on it. Thus, the Wi-Fi Alliance temporarily restricted Huawei’s participation in its activities, while the SD Association removed Huawei from its membership. Both organizations restored Huawei’s membership shortly afterward. Similarly, the Institute of Electrical and Electronics Engineers (IEEE), which is also US-based, first restricted Huawei scientist from reviewing its papers, only to reverse that decision a few days later in early June 2019. Facebook also got into the act, restricting Huawei from preinstalling its Facebook, WhatsApp, and Instagram apps on its new phones.
In August 2019, on the eve of the end of the 90-day reprieve granted to Huawei in May 2019, President Trump declared that he does not want to do business with Huawei because it was a threat to national security. Nevertheless, the US Department of Commerce extended the reprieve on August 19, 2019, for another 90 days, but added 46 more Huawei affiliates to the Entity List.
The extension of the reprieve did not, however, result in a let up in the pressure on Huawei. In October 2019, Huawei’s Mate 30 phones lost access to the so-called backdoor to loading Google apps such as Gmail, and Google Maps. In the same month, the FCC said it will cut off funding to wireless companies that use Huawei and ZTE equipment, echoing its earlier proposal in March 2018 to prohibit the use of its $8.5 billion USF to purchase equipment or services from companies seen to be a threat to national security. In October 2019, the FCC went a step further and proposed the removal of equipment and services provided by these designated companies from networks funding by the FCC’s USF.
In November 2019, the FCC made good on that threat, and banned the use of its USF to purchase equipment and services from Huawei and ZTE which were, by the same token, were deemed by the FCC as threats to US national security. A bipartisan group of US Senators also called on the President to stop the licenses that allow US companies to do business with Huawei, following the November 19, 2019 extension of the 90-day reprieve of Huawei from the provisions of the Entity List. In December 2019, many got their wishes, following the passing of a bill by the US House of Representatives barring the government from buying Huawei equipment. The House bill strengthened the FCC ban on Huawei equipment by requiring it to establish a $1 billion fund to enable small and rural communications providers to replace “suspect network equipment” with more secure products.
On February 2020, the US Senate unanimously passed the “Secure and Trusted Communications Network Act of 2019” which was passed by the House in December 2019 to formally ban the use of US government funds to buy equipment from vendors such as Huawei which pose a national security risk to the US. The Senate bill also provides $1 billion to replace Huawei equipment already installed in networks in the US, and only requires the signature of President Trump to become law.
Going Global
The US government took its war against Huawei to its allies and partners around the world, starting in December 2018 with the detention in Canada of the Huawei CFO Meng Wanzhou, as she transited there on her way to Mexico. Ms. Meng was detained by Canadian authorities at the behest of US authorities who wanted her extradited to the US to face charges of violating US sanctions against Iran. China demanded her immediate release, and in retaliation, detained two Canadians in China, while another was re-tried and sentenced to death.
Although Meng was granted bail in Canada, the US government piled on the pressure and filed a request for her extradition in January 2019. To make matters worse, the US request for Meng’s extradition came along with indictments against Huawei and two of its subsidiaries for bank and wire fraud, as well as sanctions violations and other charges. 2019 wasn’t off to a great start for Huawei.
The Meng case in Canada foretold the increased mistrust of Huawei in many countries, especially those that are close allies of the US. Thus, the US and two other members (Australia, and New Zealand) of the five-member Five Eyes intelligence alliance have outrightly banned Huawei equipment from their 5G networks because of allegations that the company poses a significant risk to their national security. Canada, another member of the Five Eyes alliance, is yet to decide on whether to ban the use of Huawei equipment, even though its military favors a ban on the company’s equipment.
The UK, a key member of the Five Eyes alliance has, on the other hand, had a more ambivalent attitude toward Huawei, which has supplied 3G and 4G telecommunications equipment to the country and made an all-out effort to allay British fears about using their equipment. In 2010, the Huawei Cyber Security Evaluation Centre (HCSEC) was established in Britain to reduce any risks associated with the use of Huawei equipment in the UK’s national telecommunications infrastructure. The HCSEC is fully part of, and funded by Huawei, and is overseen by an Oversight Board chaired by the National Cyber Security Centre (NCSC). The HCSEC Oversight Board also includes a representative responsible for cybersecurity on the General Command Headquarters (GCHQ), the national intelligence and security agency of the UK.
In July 2018, the Oversight Board of the HCSEC reported that it could only provide limited assurance that all national security risks posed by using Huawei equipment in the critical network infrastructure of the UK have been “sufficiently mitigated.” About three months later, British telecoms companies, BT and Vodafone, decided to replace Huawei equipment from their core networks, although they were to retain Huawei equipment in their less sensitive infrastructure.
Although it was reported in February 2019 that the UK government had concluded that any Huawei threat to national security could be mitigated, the HCSEC Oversight Board concluded in its annual report of March 2019 that it could only provide limited assurance that all risks posed by Huawei to national security of the UK could be sufficiently mitigated in the long term.
In February 2019 also, the US took its war on Huawei on the road, with Vice President Michael Pence leading the charge at the 55th Munich Security conference. When Vice President Pence in his address mentioned the threat posed by Huawei and other Chinese telecom companies, Yang Jiechi, a top Chinese diplomat, and member of the Central Committee of the Communist Party of China retorted that the US should have a “little bit more confidence in [itself],” be a “little bit more respectful [of] other people,” and give fewer “lectures.” US Secretary of State, Mike Pompeo embarked on a three-nation tour of Hungary, Slovakia, and Poland in February 2019, warning them of the risks associated with using Huawei equipment, not least of which was the risk of rupturing their abilities to work with the US DoD.
Two months later (in April 2019), the US Central Intelligence Agency (CIA) joined the US government’s war on Huawei, when it warned the Five Eyes allies of the US that Huawei received funding from Chinese state security agencies, namely, the Central National Security Commission of the Communist Party of China, the People’s Liberation Army, and what it called a “third branch of the Chinese state intelligence network.” That warning, however, did not stop Prime Minister Theresa May deciding in April 2019 to allow Huawei in the UK’s non-core 5G infrastructure. On the other hand, ARM, the Japanese-owned, UK-based chip designer with research facilities in the US (and hence subject to US sanctions against Huawei), suspended doing business with Huawei in May 2019.
But the Huawei problem was not going to be resolved anytime soon in the UK. In July 2019, Prime Minister May’s government delayed making a final decision on the Huawei matter because of uncertainty about the implications (for the UK) of US sanctions on Huawei. In effect, the May government kicked the can down the road for the next government to take care of.
Prime Minister Boris Johnson, who took the mantle from Prime Minister May, also prevaricated on deciding on the Huawei issue. First, he hinted during the 2019 UK General elections campaign, that he might shut out Huawei out of the UK’s infrastructure to appease other Five Eyes partners. Following his emphatic victory at the elections, Prime Minister Johnson got a nod from the UK’s security chiefs to allow Huawei in the UK’s non-core 5G network. On January 28, 2020, the UK government announced that it would restrict high-risk vendors such as Huawei from the core of the UK’s 5G network, and limit them to no more than 35 percent of the equipment 5G market. The UK government thus defied, and dealt a huge blow to the US government, which had earlier on waged a massive campaign, and engaged in arm-twisting to get the UK government to ban Huawei from the UK’s 5G network.
Huawei also faced huge challenges in other European countries such as Poland and the Czech Republic in its efforts to develop markets for its 5G products. Following the arrest of a Huawei employee in Poland on spying charges, Poland was expected to ban the deployment of Huawei’s 5G equipment in the country. However, indications are that Huawei might be able to allay Polish fears about the security risks posed by their 5G equipment if, as it proposes, a cybersecurity center is established in the country. Although Huawei equipment has not been outrightly banned in the Czech Republic, the formal warning issued in December 2018 by the Czech National Cyber and Information Security Agency (NCISA) that Huawei equipment poses a national security threat would make it more difficult for Huawei to provide 5G equipment to the Czechs. Ever on the defensive, Huawei categorically denied the allegations, and demanded that the NCISA provide proof of their allegations.
In contrast to the push back it is experiencing in Europe, the US effort to shut Huawei out of 5G networks around the world is a resounding success in Australia and New Zealand, as well as Japan. The precursor to Australia’s ban on Huawei’s participation in the country’s 5G network came in 2012 when the Australian government excluded Huawei from bidding for contracts to build the AU$38 billion National Broadband Network on cybersecurity grounds.
It is thus not surprising that Australia banned Huawei from its 5G rollout in August 2018, citing security concerns. This decision was based on a literal interpretation of the 2017 National Intelligence Law of China in the context of Australia’s Telecommunications and Other Legislation Amendment Act 2017, and Security of Critical Infrastructure Act 2018 which, in combination, empowers the government of Australia to ban any company operating critical infrastructure from buying equipment or services from suppliers deemed to be a threat to national security.
In November 2018, New Zealand became the third Five Eyes country to ban Huawei from its 5G networks when it rejected, on national security grounds, an application by Spark New Zealand to use Huawei’s 5G equipment. A month later, the Japanese central government issued a ban in December 2018 on the procurement of personal computers, servers and telecommunications equipment by Japan’s government and Self-Defense Forces to prevent systems failures or leakage of information to China. Although the ban did not mention any company by name, it was reported that it was informed by information provided to the Japanese government by the US government regarding the security risks posed by Chinese-made equipment. Accordingly, many concluded that Huawei and ZTE were the prime victims, if not targets, of the ban especially given reports that Japan’s major telecommunications providers would not use Huawei products in their 5G networks.
Can’t Crush Us
In early 2019, Huawei was in hot soup, and feeling the heat. After all, their CFO and daughter of the company’s founder was languishing in Canada at the request of the US government, and three of the Five Eyes countries (the US, Australia, and New Zealand) and Japan had banned it from their 5G networks. The US government was also on a full-court press against the company, after declaring the company a threat to national security, and slapping it with 23 indictments for fraud and theft of trade secrets. The US government also waged a worldwide war against Huawei, informing its allies and partners that they either had to do its bidding and ban the company from their 5G networks, or lose the privilege of cooperating with the US in sharing intelligence and fighting crime.
In response, the normally reclusive Ren Zhengfei, Huawei’s founder and CEO came out of the woodwork in February 2019 and granted an exclusive interview to the BBC. Ren told the BBC that he was confident that the world would not abandon Huawei because they had advanced technologies, and defiantly added that there is “no way the US can crush [Huawei].”
Huawei acknowledged the existential threat posed to it by US government sanctions, learning from the near-death experience of their compatriot, ZTE, following sanctions by the US between 2017 and 2018. Accordingly, Ren admitted in June 2019 that Huawei sales would drop by $30 billion over the following two years. Mr. Ren also said that Huawei’s smartphone sales had declined 40 percent compared to the month before because of US sanctions, and that the company’s annual sales would be no more than $100 billion for 2020 and 2021.
Nevertheless, Huawei went on to defy the odds toward the end of 2019, with more countries allowing them into their 5G networks, and many companies and countries opposing the ban on Huawei products. Huawei continued developing new products, launched a new software development ecosystem, started weaning itself off US components and — Surprise, surprise! — broke its record in annual sales.
Many countries balked at the US efforts to shut Huawei out of their 5G networks. Although the US reportedly told Germany it would limit the amount of intelligence it shares with German security agencies if Huawei builds Germany’s 5G infrastructure, Germany decided in April 2019 that it would not exclude Huawei from its 5G networks because it had yet to see evidence of the security risk allegedly posed by the company. This position was reiterated in October 2019, although the ruling Christian Democratic Union (CDU) of Chancellor Angela Merkel ruled in November 2019 that the German parliament would decide on the matter of involving Huawei in building Germany’s 5G network. Despite this, Telefonica Deutschland, one of Germany’s top mobile carriers, chose Huawei and Nokia to build out its 5G network, in anticipation of government approval of the use of Huawei’s equipment in their network.
In November 2019, France emphatically stated that it will not follow the US position and exclude Huawei from her 5G networks. Rather, France decided it would vet all equipment for security threats, and treat each supplier on a case by case basis. No wonder, the CEO of Orange, the leading telecoms operator in France said in December 2019 that some fears about Huawei equipment are “complete nonsense.” Similarly, Italy said in December 2019 that it was ready to approve the use of Huawei equipment in its networks following steps taken to mitigate any threats from the company’s equipment, even though a parliamentary security committee had recommended a few days earlier that Huawei should be excluded from the country’s 5G networks.
Huawei is also succeeding in getting other countries to approve their equipment for use in their 5G networks. China, Huawei’s home country, is set to become the world’s largest 5G market by 2025, and Huawei is well-positioned there, having already gained (along with its Honor brand) 74 percent of 5G smartphone sales in the country. Although India is yet to approve commercial 5G deployments, Huawei was allowed to participate in its 5G trials, despite US pressure to shut them out, and in the face of China’s threats of dire consequences for India if it does so. Furthermore, an official of the Association of South-East Asian Nations (ASEAN), a regional economic group of 10 countries ranging from China to Singapore said they would consider using Huawei equipment in their 5G networks, despite the security concerns expressed by the US.
Huawei is also making headway in Latin and South America, where it plans to establish a $100 million data center in Chile, and started 5G trials in Peru in March 2019. Huawei is also expecting to participate in the trials and commercial deployment of 5G in Brazil. In Africa also, Huawei is expected to be the main vendor for their 5G deployments, having built 70 percent of the continent’s 4G networks, and recently signed a Memorandum of Understanding with the African Union Commission to help develop 5G and related technologies in the 55 member countries of the African Union.
In the US itself, Huawei gained the sympathy of many companies, especially rural telecommunications companies that use its equipment. For example, the Rural Wireless Association pushed back against the applicability of some provisions of the National Defense Authorization Act (NDAA) to the FCC Universal Service Fund, while the Competitive Carriers Association expressed its opposition to the FCC ban on the use of its funds to purchase Huawei equipment. Furthermore, both organizations opposed the FCC order for them to rip and replace Huawei equipment from their networks, citing the exorbitant costs that this would entail
In the same vein, US component makers quietly continued selling to Huawei, using a loophole in the ban against the company, while Google argued that the ban on Huawei actually threatens US national security, and Microsoft said the ban does not make sense. Intel, and Qualcomm which, along with Micron Technology make earn $11 billion in component sales to Huawei, also did their bit, and met with the Department of Commerce to discuss ways of easing the ban on Huawei.
For its part, Huawei has fought back by developing new products and services across all its divisions. Barely one month after it was indicted by the US government, Huawei launched Mate X, the world’s first foldable 5G smartphone at the Mobile World Congress (MWC) in February 2019. Other smart products launched by Huawei at the MWC 2019 are the updated MateBook X Pro, the new mainstream PC notebooks MateBook 13 and MateBook 14, as well as the Huawei 5G Consumer Premises Equipment which (CPE) Pro equipment which supports both 4G and 5G wireless connections. Similarly, Huawei announced in May 2019 its launch of Artificial Intelligence-backed enterprise cloud database, GaussDB. Hauwei also announced in July 2019 that its sub-brand, Honor, will launch the world’s first smart TV in 2020.
At its annual Huawei Developer Conference in August 2019, Huawei announced plans for its own mapping service to replace Google Maps and launched HarmonyOS, its operating system many see as a replacement of Google’s Android OS. Huawei is also developing Huawei Mobile Services (HMS) to provide the functionality of Google Mobile Services (GMS) apps such as Gmail, YouTube, and Google Drive which run on Google’s freely available, barebones, and Open Source Android OS. HMS, which is at an advanced stage of development, has received rave reviews, and is closing in on Google in terms of functionality. The same cannot, however, be said of OpenEuler, the Open Source OS Huawei recently released, and is said to be the perfect candidate to replace the Android OS.
In anticipation of “trade difficulties,” and shortly before it was indicted by the US government in January 2019, Huawei started stockpiling chips and other vital components from US manufacturers to support 12 months of operations toward the end of 2018. Huawei also re-organized and diversified its supplier base following its placement in the US government Entity List in May 2019, calling on its suppliers to move their production to mainland China and beyond the reach of the long arms of the US government. By September 2019, Huawei had remade its supply chain to the point that every component of its Mate 30 series smartphone was from non-US sources; mostly, if not all, from China. In the same vein, Huawei announced in September 2019 that it had started making 5G base stations without any US components.
Huawei also set up a $1 billion fund to entice developers in India and other parts of the world to develop applications for its HMS. As part of this program, Huawei is offering developers up to $20 thousand per app they develop for their HMS, in contrast to US companies which charge developers to upload applications on their platforms. If all goes well, HMS will completely replace GMS apps on Huawei’s next flagship smartphone, the P40, when it is launched in March 2020.
Huawei’s efforts have paid off handsomely since the start of the US government sanctions against it. For example, it shipped its first 10,000 5G base stations in November 2018, and by the end of March 2019 sold over 70,000 base stations worldwide; a seven-fold increase in just about five months. Three months later, Huawei shipped over 150,000 base stations, and aimed to ship 600,000 and 1.5 million 5G base stations by the end of 2019, and in 2020, respectively, whether or not the US government maintained its sanctions against the company. Numbers aside, Huawei was ranked the global leader in 5G Radio Access Network (RAN) product portfolios in all four evaluation criteria in the second half of 2019.
Huawei has also done very well in the race to secure 5G contracts around the world. In November 2018, Huawei had 20 5G commercial contracts with operators in Europe, Middle East, and East Asia, and signed an additional 20 more contracts with leading global carriers by end of March 2019. By June 2019, Huawei had 50 5G commercial contracts and as at October 2019, it had over 60 commercial contracts for 5G with leading global carriers.”
Although Huawei’s smartphone sales were expected to be significantly dented by the US government’s sanctions against it, the reality is to the contrary. Indeed, Huawei’s smartphone sales increased from 39.3 million in the first quarter (Q1) of 2018 to 52 million in the third quarter of 2018, and reached an annual total of 206 million in 2018; up 35 percent compared to 2017. By July 2018, Huawei displaced Apple as the second-largest smartphone vendor in the world, after Samsung.
Huawei continued on a tear in Q1 2019, selling 59.1 million smartphones, a 50 percent increase from Q1 2018. By October 2019, Huawei sold 200 million smartphones, reaching its 2018 sales volume 64 days earlier in 2019 despite the US government sanctions against it. Huawei sold 240 million smartphones, over 6.9 million 5G smartphones, and 2 million wearables, including Huawei Watch GT 2, in 2019. Although some attributed Huawei’s increased sales of smartphones to Chinese patriotism, others have pointed out that Huawei has done well by providing consumers with innovative and quality products at affordable prices.
These sales translated to huge revenues for Huawei. Although US sanctions came into full force, and began to bite in 2018, Huawei’s annual revenue that year exceeded, for the first time, $100 billion and reached $105 billion. Furthermore, Huawei revenues in Q1 2019 reached CNY 179.7 billion, with a year-on-year growth rate of 39 percent. In the same vein, Huawei’s revenue for the first half (H1) of 2019 reached $58.3 billion; a 23.2% increase over H1 2018. And more good news was to come, with annual revenues for 2019 reaching an estimated $122 billion, up 18 percent from 2018. Although Huawei’s 2019 revenues were less than expected, it showed that the US government sanctions had little, if any, impact on the company’s performance.
The East will still shine
The US might have shot itself in the foot by banning Huawei 5G equipment from US infrastructure, and launching a global campaign to get other countries to follow its footsteps. The US threats on Huawei increasingly ring hollow in the absence of concrete proof to support its allegations against the company, and Huawei’s resilience and increased prosperity in the face of the threats. Furthermore, the options at the disposal of the US government to deal with Huawei are increasingly few, and effete. As a result, Huawei has gotten stronger, not weaker, despite the US government’s war on it.
Huawei has become more independent, not dependent, on US products and services. When the US government war on Huawei started in earnest in January 2018, the company’s smartphones were totally dependent on Google’s Android and Google Mobile Services (at least outside China). Huawei also depended more on American, than Chinese suppliers in 2018, with the US accounting for about 36 percent of Huawei’s 92 core suppliers, compared to 24 percent for mainland China. Barely two years later, Huawei is now making smartphones and 5G base stations without US-parts, its Harmony OS is maturing, and its HMS is set to replace Android on its next flagship smartphone, the P40, set to launch in March 2020.
Huawei’s resilience is largely due to its fanatic focus on research and development (R&D), and it has reaped the rewards of this tenacity. Huawei spent $14.8 billion (about 14 percent of its annual revenues) on R&D, and was ranked fifth globally (behind Alphabet, Samsung, Microsoft, and Volkswagen) out of 2,500 companies in terms of R&D spending in 2018. The company, which sees R&D investments as a “marathon, not a sprint,” has 87,805 patents (one of the largest patent portfolios in the world), of which 11,152 were granted in the US, and over 6,600 patent families granted in Europe. Huawei also has 20 percent of global 5G patents (more than the percentage of patents held by US companies combined), and plans to monetize them through licensing deals. Huawei has started research on 6G, although it moved its 6G research center from the US to Canada as a result of the US government ban on it.
More and more, Huawei is seeing the US market as dispensable. In his BBC interview in early 2019, the Huawei founder and CEO Ren Zhengfei said that the US only represents a portion of the world. Furthermore, Mr. Ren said, the world cannot abandon Huawei, and “if the lights go out in the West, the East will still shine.” From all indications, Mr. Ren has resigned himself to the prospect of Huawei being shut out of the US market — and they would be OK with that.
In October 2019, the US government spread its war on Huawei to 20 Chinese government agencies, and eight more Chinese companies by adding them to the US Entity List. The Chinese government agencies were placed on the entity list for their “human rights violations and abuses in the implementation of China’s campaign of repression, mass arbitrary detention, and high-technology surveillance” against Uighurs, Kazakhs, and other Muslim minority groups, while the eight companies were implicated for enabling the human rights abuses of the Chinese government. Furthermore, the US government said, these human rights violations are “contrary to the national security or foreign policy interests of the United States.”
The US government war on Huawei has woken up not only Huawei, but the Chinese government and entrepreneurs, and made them more determined than ever to break free from the US shadow, and the prospect of being held to ransom again in the future. It thus is no surprise that the Chinese government is backing BOE Technology Group, which is poised to be second only to Samsung in the production of smartphone displays. BOE enabled Huawei to produce the Mate X smartphone, its reply to Samsung’s foldable smartphone the Galaxy fold. And BOE is just the tip of the iceberg of China’s efforts to gain supremacy in display technology. Chinese entrepreneurs also have gotten the message, and are diverting funds to R&D. Thus, some 500 Chinese companies now focus their spending on R&D and capital expenditure, while reducing travel, entertainment, and marketing budgets, according to a UBS study.
It is now clear that the US government’s war on Huawei has been an epic failure of American diplomacy because it has weakened US ties with its major allies, emboldened many countries to ignore the threats of the US government, and failed to hobble Huawei. The decision by the UK (a key Five Eye partner) to allow Huawei to have a limited role in its 5G rollout, was followed the following day by EU guidelines that did not call for member states to exclude Huawei from their 5G networks. As a result, it is expected that many EU countries, including Germany (Europe’s largest economy), and non-EU countries (e.g. Canada, a Five Eyes member) will now have greater freedom to choose Huawei equipment for their 5G deployments, instead of bowing to pressure from the US government not to do so.
The US government’s war on Huawei is also failing on the home front, given the rifts it has created between US government agencies. In January 2020, the US DoD and the Treasury Department scuttled plans by the Commerce Department to impose more severe restrictions on Huawei. In a twist of irony, the DoD (which is supposed to defend the US against all external threats) and Treasury Department argued that imposing additional restrictions on Huawei would mean that their US-based suppliers would have fewer resources to invest in R&D, thus making them less competitive, and less effective in enhancing US national security. In other words, imposing additional sanctions on Huawei would threaten the US national security it is meant to protect, thus echoing a similar statement from Google about six months earlier.
As the NSA Director said at the US Senate Intelligence Committee hearing in February 2018, the Huawei challenge to the US is “only going to increase, not lessen, overtime [sic].” This is so not only because 5G is going to be the technology that will reshape modern economies and warfare, and run our digital lives, but also because it is an industry in which the US is far behind China. Since 2015, China has spent $24 billion more than the US on wireless communications infrastructure, and Chinese companies could end owning over 40 percent of critical 5G patents. It is thus understandable that the US government concluded that Huawei could be a threat to the US telecommunications infrastructure, just as the Huawei founder, Mr. Ren, concluded in 1994 that “switching equipment technology was related to national security …”
Clearly, the US government has a right to be concerned about national security implications of the use of Huawei equipment in US telecommunications infrastructure. However, as the results of its efforts show, it has not been using the right approach to mitigate the risks (real or imagined) associated using Huawei equipment. It is now clear that the strategy of fear-mongering without a willingness or ability to justify that fear has not worked, not even on a key and long-time US ally like the UK.
In hindsight, the US government should have done as the UK, which set up the Huawei Cyber Security Evaluation Centre in 2010 in partnership with Huawei, and has since then enabled them to “know more about Huawei, and the risks it poses, than any other country in the world.” The US government should have also made a stronger case for the risks associated with the use of Huawei equipment by, for example, emphasizing the possibility of Huawei’s denial of network availability in the event of a crisis. Instead, the US government focused on the risk associated with compromising information on Huawei run networks, which is relatively low because of the widespread use of highly effective encryption techniques in modern communication.
The US government is waking up to the reality that Huawei (which is deeply embedded in 5G standards-setting bodies) is no push-over, and not the ZTE it almost killed a few years ago. As such, it is planning for a world in which Huawei runs the majority of 5G networks, and devising strategies to live with these so-called “dirty networks” it cannot trust. Huawei, on the other hand, is sitting smugly, proving what their engineer told me all those years ago over dinner in The Gambia: whatever they put their mind to, they will mobilize people, and work hard to achieve it. The US government might well be realizing, a bit too late, that this determination is baked in the Huawei psyche.
