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The Huawei Hoopla

ICTs, Chinese Tech, and the Need for Geo-Cyber Strategy

Executive Summary

Much of the debate about Huawei and calls by certain countries to ban the Chinese firm’s technology centers around geopolitical issues and largely ignores or glosses over everyday business impact. For a growing numbers of firms, from tiny startups to huge corporations, the continuing battle over Huawei, and the larger issues of Chinese theft of intellectual property, and legal requirements, create dramatic consequences for both long term strategic planning, and even everyday tasks.

What do businesses need to worry about? How can they assess their exposure to the Huawei tech specifically, and Chinese IP theft generally? How can they separate the information pushed out by a sophisticated Huawei public relations campaign from the limited confirmed information about the highly politicized fight over Chinese involvement in Western telecommunications infrastructure?

And at a practical level, what is a business to do if it suspects it is a victim of Chinese efforts to steal sophisticated, potentially weaponizable, technology?

This report summarizes the current political crisis surrounding Huawei, how countries are responding, and what businesses in the network and computing components space need to be aware of as the fluid situation develops.

Given the renewed focus brought to the subject of the geopolitics of ICTs in recent years, countries must do a better job of evaluating the companies retained to build their infrastructure and the risks involved of outsourcing the work to companies connected to foreign, and sometimes adversarial governments.

Similarly, companies hoping to participate in the rollout of 5G networks in dozens of countries must understand their dependence on foreign equipment and components, and ensure they have access to alternative suppliers.

Huawei

HUAWEI BACKGROUND

Guangdong-based Huawei Technologies Co., Ltd., the world’s largest telecommunications equipment company, has been a source of pride for China since its founding in 1987 by Ren Zhengfei, formerly an engineer with the People’s Liberation Army.

The company’s internal structure is far from clear - its leadership claims it is almost entirely employee-owned, and it opened up some of the company’s books in 2014, claiming that 80,000 of its 150,000 employees owned 99 percent of the firm via virtual stock. Recent research by scholars Christopher Balding and Donald Clarke reveal that Huawei Tech is owned by Huawei Holding, which is itself controlled by Huawei investment & Holding Company Trade Union, a trade union committee, which owns 98.86% of Huawei Holding.

Details of who holds that 98.86% are impossiblee to ascertain, leading many to suspect government involvement. Former Chinese military officer Zhengfei controls only the remaining 1.14%. Huawei Tech, whose equipment is used in 170 countries, and by 46 out of the top 50 of the world’s telecoms, per company statistics, is therefore very likely controlled at the highest levels by government and Party officials.

Following the revelation that Jack Ma, former CEO of Chinese conglomerate Alibaba, was in fact a Chinese Communist Party member, there are now very strong suspicions that Huawei’s leadership is similarly tied to the Party, with preferential status and firm government intervention explaining Huawei’s meteoric rise and ability to hold an inordinate market share.

There is also deep suspicion that a company chosen to spread Chinese ICT infrastructure throughout the globe, and thereby enhance China’s image abroad, would be allowed to do so without Party involvement, direction, or assistance.

For companies without such alternatives, the challenges to everyday activity and long term survival are increasingly existential - many are finding their progress stalled as major economies reconsider decisions to award contracts to companies with connections to the Chinese government, including most notably, Huawei.

Already, the delays are causing major problems for smaller carriers that do not have the luxury of waiting out a contentious trade war, and suspending pending business deals - several are likely to shut down or become acquisition targets. The situation throws into even starker relief the need for companies to create corporate geo-cyber policies that acknowledge, analyze and create tools to address their business’s exposure to the forces of geopolitical flux.

Although there has been widespread acknowledgement of the extent to which Chinese firms are both known and suspected of stealing IP, the recent trade war between the United States and China brought the long-standing feud over corporate intellectual property theft to the forefront due to several factors.

First, China codified and unified legal frameworks in several major pieces of legislation, formalizing the fact that Chinese firms are required by law to support Chinese intelligence services. This nullifies Huawei's repeated claims that they would never share information with the Chinese government.

Second, Huawei is involved in the global rollout of 5G cellular networks, which will fundamentally enhance the way data moves, and given fears of spying and backdoors, raises the likelihood that Huawei will collect and pass on sensitive data to the Chinese government.

Third, a major concern of those advocating Huawei bans is the extent to which rule of law remains elusive in China, making it difficult to sue the company in Chinese courts, or to ensure that any judgements made in outside courts are actually implemented.

Finally, the Trump administration is far more confrontational with an offensive approach toward China, after a decade of largely passive back channel talks, is affecting the global economy, through higher tariffs on Chinese goods, higher costs for US firms that rely on Chinese parts, and US farmers affected by retaliatory measures by China to cut crop imports.

Brief History of US & China Developments on Huawei

As the US and China continue talks designed to reach an agreement by March 1, 2019, the situation is further complicated by what appear to be retaliatory law enforcement actions:

2012

Initial US Congressional finding determines Huawei and smaller Chinese firm ZTE are security threats due to ongoing issues with Chinese intellectual property theft.

2013

Huawei denies CIA allegations that it spies on behalf of the Chinese government.

July 2018

UK government concludes that it is suspicious of Huawei’s threats to national security

August 2018 - November 2018

Australia and New Zealand ban Huawei from their respective 5G network rollouts.

December 1, 2018

At the request of US authorities, Canadian authorities arrest Huawei CFO Meng Wangzhou (AKA Sabrina Meng, AKA Cathy Meng, daughter of founder Ren Zhengfei) in British Columbia, Canada while transferring on charges of lying about the company’s involvement with Iran.

December 10, 2018

Canadian Michael Kovrig, an employee of Crisis Group, a think tank, was arrested in Beijing on suspicions of harming national security.

December 13, 2018

It is announced that Michael Spavor, head of the Paektu Cultural Exchange, which promotes travel and investment in North Korea, was arrested in Dandong, China, also on suspicions of harming national security.

January 28, 2019

US Department of Justice unsealed 2 indictments charging Huawei with federal crimes, including charges that Huawei CFO Meng Wanzhou engaged in fraud, and that Huawei paid T-Mobile employees to steal company secrets.

February 4, 2019

Akahn Semiconductor revealed to Bloomberg Businessweek that it is cooperating with the FBI on an investigation into Huawei’s alleged attempts to steal diamond-coated glass technology.

March 1, 2019

Deadline to reach a deal between US and China.

April 25, 2019

Huawei held a press call to explain ownership, but failed to provide any evidence for its claims and couldn't reconcile what it was saying with what Balding and Clarke found.

Huawei and the Trade War

Though the political debate is more or less clear, the debate over how exactly Huawei engages in spying and other criminal activities is somewhat murkier, with Chinese officials pushing back with arguments of the West’s own history of collecting intelligence via hardware and software as detailed in revelations from Edward Snowden and others.

Despite Huawei executives’ claims of corporate independence and refuting of allegations that they are for all intents and purposes a state-owned firm, there is substantial evidence to suggest fears over Huawei’s espionage activities and intellectual property theft are justified.

In January 2019, Reuters published documents alleging that Huawei is connected to two equipment retailers believed to be fronts for Iran and Syria - Skycom Tech Co. Ltd, and Canicula Holdings Ltd respectively.

The situation was further complicated by the fact that the US Department of Justice filed formal charges against CFO Meng Guangzhou and Huawei in a 10-count indictment made public on January 28th. The suit alleges that Huawei, in working with US mobile carrier T-Mobile, offered the US company’s employees bonuses in exchange for stealing company secrets. Two men- one American, one Canadian, detained in China in the days following Meng’s arrest in what are considered retaliatory actions, remain in Chinese custody.

Most recently, an investigation revealed Huawei’s alleged attempt to steal diamond glass technology pioneered by Gurnee, Illinois-based Akahn Semiconductor. The company’s CEO called the FBI to report that a sample of the company’s highly advanced diamond coated glass, which could be used in weapons technology, given to Huawei’s San Diego office as part of supplier negotiations was returned months late and very damaged. Upon questioning by Akahn executives, their Huawei contact admitted, seemingly flippantly, that the sample had been sent to China for research, an action explicitly disallowed under the terms of the company’s agreement to inspect a sample.

The broken and charred sample was then sent to the FBI for analysis, where investigators concluded that the evidence showed Huawei tampered with the sample in hopes of reverse engineering the technology, a clear violation of the norms around research sample inspection procedures.

Aligning Corporate Geo-Cyber Policies with Home Country Foreign Policies

As countries seek to align their foreign policies to meet the challenge of China’s increasing power, companies may feel like pawns caught in the crossfire, but by formulating cohesive corporate geo-cyber strategies, they can be more proactive in navigating a global political environment undergoing increased flux.

It is no accident that the US and Canada, as well as the UK, Australia, and New Zealand are at the forefront of the fight against Huawei. Of those countries, two members of the Five Eyes intelligence alliance (FVEY), Australia and New Zealand have now banned Huawei equipment outright.

Australia’s Foreign Investment Review Board (FIRB) went as far as to proclaim that there is no such thing as a private company in China, citing the fact that every Chinese company must support intelligence services and priorities by law. And Australia’s TPG, a prominent mobile carrier, has already cancelled its planned rollout, which depended on the ability to install Huawei hardware and no alternative is currently available.

The UK government is forcing Huawei to abide by additional security measures to continue operating in the country, and UK’s BT Group PLC, the largest carrier, is actively removing Huawei equipment from its core (non-5G) network, much of it installed during a major upgrade two years ago by a company later acquired by BT. Ultimately, the UK's National Cyber Security Center (NCSC) believes the security risks of using Huawei equipment can be managed, and an outright ban is unlikely.

An April 24, 2019 leak, believed to originate from within the UK’s National Security Council, revealed high level discussions about Huawei’s participation, and an expected decision to allow Huawei to engage in non-core elements of the UK 5G network.

Huawei

THE FIGHT FOR 5G

The 5G network rollout presents a major capital expense for companies involved but is unavoidable for those who wish to remain competitive. The process consists of two main expenditures - the spectrum auctions to secure 5G rights, and network upgrade spending.

Most major carriers have already spent vast sums during spectrum auctions, and while many are still ongoing, most companies have already invested heavily in 5G rights which they cannot profit from until the network rollouts are complete.

As the US, Canada, and the UK consider how to deal with Huawei, the effect on national 5G rollouts will be widely felt, given that at one point Huawei held 22 commercial contracts, connected with over 50 carriers, to participate in 5G network rollouts around the world. Without Huawei equipment, most telecoms believe their 5G rollouts will be delayed by two to three years.

This presents an opportunity for smaller equipment sellers to scoop up a larger market share, with companies in the Netherlands and other Nordic countries queuing for the chance to replace Huawei in these rollouts, though their limited size and inventory will slow the process considerably.

As the US mulls a full ban, following the Trump administration’s executive order banning contractors from using Huawei equipment, and banning Huawei and ZTE phones sales on US military bases, US telecoms are already acting.

AT&T and Verizon, two of the largest US telecoms, have stopped direct sales of Huawei phones as a result of government pressure. Canada faces severe pressure to follow with a ban of its own, but as of the beginning of February, the Trudeau government claims a decision has not yet been made.

In mid-April, the US Federal Communications Commission (FCC) chairman Ajit Pai announced plans to ban China Mobile, another flagship Chinese company, from being able to offer mobile services to Americans, citing security risks. The final decision will take place after a vote by the full commission, scheduled for May.

Five Eyes pressure presents a significant challenge for countries that have not formalized their decision with regards to Huawei, given that protecting their intelligence sharing relationships with FVEY countries outweighs considerations like lost profit for domestic carriers relying on Huawei equipment.

In France, a last-minute measure aimed at increasing security checks on telecommunications equipment and requiring companies to obtain approval for the use of certain equipment, failed to pass on February 6, 2019. Though legislators claimed the issue of Huawei is highly sensitive, they felt unable to vote on such a measure without proper time to consider the matter, and debate has been reopened as of April 24th. Any future ban or additional measures would take months to implement, however, meaning Huawei can continue to operate there for the moment, and in any event, any bill will leave the door open for France’s national security agency to have a say in the matter.

Japan and Poland have also banned Huawei from involvement in their 5G networks, while Germany and Indonesia are considering bans. Italy, widely considered likely to ban Huawei, is now in the toss up column, as the industry ministry denies that special powers will be invoked to institute a ban.

The Czech Republic, a major buyer of Huawei tech, which even granted a contract to Huawei to support presidential communication requirements, as part of a larger push to attract Chinese investment, is facing a dilemma. Despite President Milos Zeman's high praise of the firm, the Czech Republic's cyber security agency, the Nukib, issued a directive warning of the dangers of using Huawei tech in the country's 5G network process, shocking the Chinese firm, which threatened to retaliate. The Nukib's main concern, like that of many other intelligence agencies is China's 2017 National Intelligence Law, which requires all Chinese companies to actively aid China's intelligence agencies, wherever they operate.

Telecoms struggling to find workarounds are lobbying their governments to introduce further security measures, instead of banning Huawei, but it is unclear where such measures would alleviate those governments’ concerns about risks to national security. Within the EU, the European Commission is continuing to debate a ban on Huawei throughout the EU, rendering some individual country’s debates null if it passes such a measure, and banning Huawei from all 5G rollouts. However, it is far more likely that, in the absence of truly damning evidence, the EU will simply continue to push members to share information about 5G risks, and create mechanisms to address any risks by the end of 2019.

How a Corporate Geo-Cyber Strategy Can Help Companies Pivot

Although smaller firms have limitations that larger firms can bypass, businesses of all sizes benefit from crafting a cohesive corporate geo-cyber strategy. Taking the time to design and deploy such a strategy allows businesses to not only understand their exposure to geopolitical events that may threaten operations, but also offer a range of tools to address such situations, and to find the opportunities that emerge from changes in the operating environment.

In the case of Huawei, it is vital for companies to acknowledge their dependencies on certain hardware providers, vendors, and anticipated ICT infrastructure rollouts, so that they may then plan for a range of scenarios, including those that are less probable but more likely to have a substantial effect on their ability to operate, expand, and profit.

In addition, it is crucial for firms of all sizes to have processes in place in the event that they suspect they are victims of Huawei’s efforts to steal technology, such as suspicious handling of samples, evidence that research has been stolen, or revelations that employees might be passing information to Chinese firms for money or under threat of blackmail. Such breaches could deal a fatal blow to a promising startup, or present a threat to national security if a major corporation’s newly developed dual use technology is stolen and weaponized. In addition, failure to properly disclose these breaches to authorities could result in further penalties and even incarceration, that would create financial losses and disruptions to operations, as well as extensive reputational damage.

These protocols are best developed in interactive simulations that allow employees at all levels to experience many different scenarios and test them of their ability to follow company protocol in identifying breaches, thefts, or other concerning events, and ensuring they respond effectively. By diagnosing how the organization currently addresses potential problems around corporate espionage, state-sponsored hacks, and other breaches, simulation facilitators can help companies identify the right workflows for helping employees report suspicions, collect supporting documents and artifacts, preserve a chain of custody, and correctly escalate and report the matter to the right executives. The chosen leaders can then ensure they have all the right information to pass on to authorities and aid in an investigation. Furthermore, by better understanding the issues with regard to a particular vendor, companies can be better informed as to whether to support bans or lobby their governments for added security rules and other measures which would limit financial losses and alleviate expected delays to major strategic initiatives.

Other Countries’ Risk Calculus

When considering a corporate geo-cyber strategy, companies need to consider not just their home country’s foreign and domestic priorities, but also those of the countries along their supply chain and in their client pipeline. According to Edgar Baum, founder and CEO of Avasta, an intangibles measurement firm, who traveled extensively in China and is an expert in brand equity, countries fall mainly into three broad categories when evaluating their level of risk in working with Huawei.

For countries that are still developing, and eager to build up their infrastructure, many consider the risk low given that they have little IP or sensitive information to steal. For countries that find themselves in a position that requires some measure of alignment with either China or the West, the risk is seen through a geopolitical lens - weighing the dangers of IP theft and the benefits of Huawei’s technology with the need to court favor with China or the US. Finally, countries allied with the US find themselves falling into one of two political camps - those who see Huawei’s technology as indispensable for quick 5G rollouts and other telecommunications infrastructure initiatives, and those who feel allowing Huawei to build networks that fall under national security auspices to be a grave danger.

By understanding the calculus of each country along their supply chain and along their sales pipeline, companies can see more clearly where they need to diversify sources, anticipate disruptions, and explore new markets previously thought to be out of reach.

Second and Third Order Effects

Huawei’s ability to seize and retain a very large market share comes partly as a result of its ability to undercut the competition, something other firms in the market cannot do because of size and financial limitations. Through this strategy, Huawei won favor with dozens of smaller carriers as a result of its ability provide equipment at low prices these carriers can afford. The scrutiny around the Chinese equipment giant could drive these smaller carriers out of business, as the costs of ripping out and replacing Huawei equipment would be prohibitive.

In the US, the Rural Wireless Association has lobbied the federal government not to ban Huawei, as 25 percent of its membership would be crippled by replacement costs. Meanwhile, the international trade group representing the interests of 750 mobile operators, the Groupe Spéciale Mobile Association (GSMA), is planning a crisis meeting in late February to consider the many implications of newly instituted or highly likely bans in key global markets.

In the United States, as well as several other countries relying on Huawei to bring Internet connectivity and mobile networks to rural areas as part of long-standing domestic priorities, the foreign policy priorities around forcing China to address rampant IP theft issues fall in direct opposition. It will fall to the governments of countries that ban Huawei to find policies that can help cushion the blow of the bans and help smaller firms, which are working to achieve domestic policy goals, survive the tumult.

Some major firms are not waiting for their home governments to decide on bans, and are already working to address worries about Huawei dependence in key markets. France’s Orange is voluntarily pulling Huawei equipment in some of its European markets, and British mobile company Vodafone is doing the same with its core network in Spain. However, Vodafone is not changing practices in its African or Middle Eastern markets, given that the governments in those regions have not articulated concerns about dependence on Huawei.

Though smaller companies may wish to delay taking action until clearer bans or approvals are revealed, the reputational and financial costs of delaying a decision may outweigh the costs of the upending deals sooner and finding alternatives that do not carry associated reputational risks.

For companies like Stockholm-based Ericsson and Nokia, the global suspicions directed against Huawei are a boon to business, since both are based in Western-friendly Sweden. But to be able to capitalize on the opportunities presented by the current geopolitical climate, Ericsson will have to ramp up its efforts and find ways to work with firms that could only afford discounted Huawei equipment, but cannot absorb Ericsson’s higher prices.

Additionally, it will need to adapt its offering to replace Huawei’s smaller, lighter equipment, which has long been the choice of urban carriers and networks in densely packed cities, where it is easier to install. Nokia, a smaller player in the market, will face similar difficulties in recapturing market share lost by Huawei. Companies working with these larger firms will see greater demand on components and raw materials, helping them pivot to new opportunities.

Conclusion

The current political crisis over Huawei demonstrates the extent to which businesses around the world are exposed to geopolitical risk, but also the ways that a changing status quo can quickly present previously inaccessible opportunities. Companies can better prepare for such changes by investing in the creation of a comprehensive Corporate Geo-Cyber Policy which assesses their dependencies and vulnerabilities, while identifying the circumstances in which opportunities may emerge. By having a more comprehensive snapshot of the business, executives can craft cohesive policies that allow the business to more quickly and strategically pivot away from negative circumstances, and boost capabilities in places where more opportunities abound.

Brief History of US & China Developments on Huawei

As the US and China continue talks designed to reach an agreement by March 1, 2019, the situation is further complicated by what appear to be retaliatory law enforcement actions:

2012

Initial US Congressional finding determines Huawei and smaller Chinese firm ZTE are security threats due to ongoing issues with Chinese intellectual property theft.

2013

Huawei denies CIA allegations that it spies on behalf of the Chinese government.

July 2018

UK government concludes that it is suspicious of Huawei’s threats to national security

August 2018 - November 2018

Australia and New Zealand ban Huawei from their respective 5G network rollouts.

December 1, 2018

At the request of US authorities, Canadian authorities arrest Huawei CFO Meng Wangzhou (AKA Sabrina Meng, AKA Cathy Meng, daughter of founder Ren Zhengfei) in British Columbia, Canada while transferring on charges of lying about the company’s involvement with Iran.

December 10, 2018

Canadian Michael Kovrig, an employee of Crisis Group, a think tank, was arrested in Beijing on suspicions of harming national security.

December 13, 2018

It is announced that Michael Spavor, head of the Paektu Cultural Exchange, which promotes travel and investment in North Korea, was arrested in Dandong, China, also on suspicions of harming national security.

January 28, 2019

US Department of Justice unsealed 2 indictments charging Huawei with federal crimes, including charges that Huawei CFO Meng Wanzhou engaged in fraud, and that Huawei paid T-Mobile employees to steal company secrets.

February 4, 2019

Akahn Semiconductor revealed to Bloomberg Businessweek that it is cooperating with the FBI on an investigation into Huawei’s alleged attempts to steal diamond-coated glass technology.

March 1, 2019

Originally stated deadline to reach a deal between US and China.

April 25, 2019

Huawei held a press call to explain ownership, but failed to provide any evidence for its claims and couldn't reconcile what it was saying with what Balding and Clarke found.

Selected Sources

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