Saturday, October 13, 2012

Huawei in America - John Gapper (Financial Times)

Financial Times October 10, 2012 7:23 pm

Too late for America to eliminate Huawei

Ingram Pinn illustration©Ingram Pinn
To read the scathing condemnation of Chinese telecoms equipment suppliers fired from Washington this week, you would think we still lived in another world. In that world, telecoms networks were built by national monopolies such as AT&TFrance Telecom and British Telecom, and outsiders stayed away.
But we don’t.




You know things have come to a pretty pass when US politicians throw their weight behind a French company because the alternative is worse. That would be the effect of barring Huawei and ZTE from the US market on the grounds that they are shifty front organisations for the Chinese government and the People’s Liberation Army.
It would aid Alcatel-Lucent, the troubled 2006 merger of the French company with Lucent, descended from Western Electric of Cleveland, Ohio, which was bought by AT&T in 1881. Things have since moved on and Huawei Technologies and ZTE of Shenzhen in southern China are the new Western Electrics.
The US House of Representatives intelligence committee, with its demand to bar Huawei or ZTE from gaining US contracts or merging with US companies, is living in the past. The time to declare telecoms a strategic, protected industry like defence, was 20 years ago; now is the time to make a deal.
“Huawei and ZTE represent something new: a former third-world country producing first-world technology. The American corporate psyche finds this difficult to handle,” says John Quelch, dean of the China Europe International Business School in Shanghai.
It was obviously tough on the House intelligence committee, which has thrown many accusations at both companies, in particular Huawei, which has grown to share industry leadership with Ericsson of Sweden since it was founded in 1987 by a former PLA officer.
This sounds dodgy, given the PLA’s ambitions in cyber espionage and mass efforts by Chinese hackers to acquire US military and industrial secrets. Former executives of Nortel Networks, the Canadian group that was Huawei’s rival until it went into Chapter 11 bankruptcy protection in 2009, complained of constantly being hacked from China in the 2000s.
“A number of states are engaged in economic espionage and China is the most prolific,” says Mike McConnell, a former head of the US National Security Agency who is vice-chairman of Booz Allen Hamilton, the consultancy. “Research and development costs a lot and it is cheaper to steal it.”
The chief accusation is that, if permitted to build networks for operators such as AT&T and Verizon, Huawei would build traps into the software and hardware. Its friends in the Communist party could then use them to hack databases or to bring the networks down in a war.
It is foolish to ignore the potential security holes in telecoms networks. The NSA has itself been accused of spying on US and foreign internet traffic by monitoring traffic passing over American networks.
But barring Chinese companies does not solve it. Alcatel-Lucent has a venture in China with Shanghai Bell and much of the equipment used by Ericsson and others is made in China. If the party and the PLA wanted to be sneaky they would tamper with these components.
Nor is there direct evidence of malfeasance against Huawei and ZTE in the report, although one section is classified. Meanwhile, the committee alleges that the companies breach patents and enjoy support from China in the form of soft loans.
Both could be true but they are the stuff of trade and intellectual property disputes rather than an intelligence concern. The committee undermines its case by sounding as if it seeks any excuse to exclude Chinese competitors.
The companies have not helped themselves. Huawei is a reclusive outfit that did not publish the names of its directors until a few years ago. Sun Yafang, its chairwoman, is reported to have once worked at the Ministry of State Security and, like other companies, it has an internal Communist party committee whose exact purpose is mysterious.
Yet Huawei is not easily categorised as a state stooge. It is not state-owned (ZTE has closer links with Guangdong province) and was among start-ups that flourished in Shenzhen’s economic zone in the 1990s. It is still private and claims to be wholly employee-owned. “Huawei is an independent, quite arrogant, company,” says Duncan Clark, a Beijing-based consultant.
In some ways, it is a symbol of the very China the west has an interest in encouraging. China’s government declared in 2006 that telecoms was one of seven strategic industries over which state-owned enterprises should retain “absolute control” yet Huawei was built by an entrepreneur who admires Silicon Valley.
Huawei seized 20 per cent of the global market, according to Bernstein Research, by producing equipment at lower prices than western rivals, triggering a wave of consolidation. In the US, where competition has been effectively curbed, Ericsson and Alcatel-Lucent have a duopoly.
The best thing for US consumers would be to admit Huawei and ZTE with safeguards. In the UK, Huawei’s equipment is examined by former staff of GCHQ, the UK intelligence service, before being used by BT. The US and Australia, which has barred Huawei from a planned network, could go further.
The US might require Huawei to list in London or New York to illuminate who owns the company; submit technology to the NSA; and separate its US division like a defence group. It could even demand the dissolution of its Communist party committee. What it cannot do is recreate the past.
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