Huawei: the indispensable telecoms company – Financial Times


When the UK decided this week to give China’s Huawei a role in its new generation of telecoms infrastructure, a prominent American senator was forthright in his denunciation.

“Allowing Huawei to build the UK’s 5G networks today is like allowing the KGB to build its telephone network during the cold war,” said Tom Cotton, a Republican senator from Arkansas. “The Chinese Communist party will now have a foothold to conduct pervasive espionage on British society and has increased economic and political leverage over the United Kingdom.”

Even the UK government, in its justification for its decision, acknowledged that Huawei was a controversial choice. Dominic Raab, foreign secretary, described the Chinese telecoms company as a “high-risk vendor” because of concerns about potential cyber attacks on telecoms networks.

So why, given the months of stern warnings from Washington and its own domestic warnings about risks to national security, did London allow Huawei to supply equipment for its fifth-generation telecoms infrastructure? The answers say much about China’s emerging primacy in global technology, the failure of US efforts to kneecap the Chinese corporate champion and the UK’s own uncertain circumstances — in the week that it is finally leaving the EU.

Engineers from EE the wireless network provider owned by BT Group Plc, inspect Huawei Technologies Co. 5G equipment overlooking St. Paul's Cathedral during trials in the City of London, U.K., on Friday, March 15, 2019. Europe would fall behind the U.S. and China in the race to install the next generation of wireless networks if governments ban Chinese equipment supplier Huawei Technologies Co. over security fears, according to an internal assessment by Deutsche Telekom AG. Photographer: Simon Dawson/Bloomberg
BT relies on Huawei for much of its current 4G infrastructure © Simon Dawson/Bloomberg

But the most straightforward explanation for London’s momentous decision is that Huawei — backed by the lobbying power of Beijing — is fast becoming an irresistible force. The British government has risked the wrath of Washington over Huawei for the simple reason that it has little other choice.

“Huawei’s siren song is difficult to resist: next-generation telecommunications delivered cheaply today,” says Jonathan Hillman, senior fellow at the Center for Strategic and International Studies, a Washington-based think-tank.

“The true costs will come later, but as the UK’s decision shows, the US cannot tie other countries to the mast. Cost rather than security is carrying the day, and competing will require offering more attractive alternatives,” he adds.

The appeal of Huawei in the UK is primarily commercial. UK telecoms operators such as BT and Vodafone already rely on the Chinese company for much of the current 4G infrastructure. EE, which is owned by BT, has used Huawei for two-thirds of its 4G radio equipment and Vodafone uses the Chinese company’s kit for most of the country outside London, according to industry executives.

Crucially, 5G technology uses existing 4G equipment as its base, meaning that Huawei enjoys an entrenched position. Declining to use it for 5G would mean replacing the Huawei 4G equipment that is currently installed, at considerable cost to the telecoms operators, something neither the UK nor the operators can easily afford.

READ  Ex-MI6 chief criticises threat to withdraw security cooperation with EU - The Guardian

Indeed, even under the agreement struck this week — which imposes a 35 per cent market share limit on Huawei in 5G — BT will be hit with £500m in costs over the next five years as it strips out some of the excess Huawei 4G equipment, executives say. Sweden’s Ericsson and Finland’s Nokia are expected to be the chief beneficiaries.

DONGGUAN, CHINA - APRIL 12: Huawei's new sprawling 'Ox Horn' Research and Development campus is seen from the air on April 12, 2019 in Dongguan, near Shenzhen, China. Huawei is Chinas most valuable technology brand, and sells more telecommunications equipment than any other company in the world, with annual revenue topping $100 billion U.S. Headquartered in the southern city of Shenzhen, considered Chinas Silicon Valley, Huawei has more than 180,000 employees worldwide, with nearly half of them engaged in research and development. In 2018, the company overtook Apple Inc. as the second largest manufacturer of smartphones in the world behind Samsung Electronics, a milestone that has made Huawei a source of national pride in China. While commercially successful and a dominant player in 5G, or fifth-generation networking technology, Huawei has faced political headwinds and allegations that its equipment includes so-called backdoors that the U.S. government perceives as a national security. U.S. authorities are also seeking the extradition of Huaweis Chief Financial Officer, Meng Wanzhou, to stand trial in the U.S. on fraud charges. Meng is currently under house arrest in Canada, though Huawei maintains the U.S. case against her is purely political. Despite the U.S. campaign against the company, Huawei is determined to lead the global charge toward adopting 5G wireless networks. It has hired experts from foreign rivals, and invested heavily in R&D to patent key technologies to boost Chinese influence. (Photo by Kevin Frayer/Getty Images)
Huawei’s futuristic campus in Dongguan, southern China, is full of cutting-edge technology such as artificial intelligence and self-driving cars © Kevin Frayer/Getty

The other commercial attraction of Huawei, telecoms executives say, is its technology. Although dogged by allegations that it has stolen intellectual property, the Chinese giant has emerged as not only the world’s biggest telecoms equipment maker but also its most advanced. In 2018 it spent $15.1bn on research and development, far more than Nokia and Ericsson combined.

Visits to the company’s futuristic headquarters in Dongguan, southern China, reveal labs full of technicians developing cutting-edged technologies such as artificial intelligence, self-driving cars and the latest generation of computer chips.

Such prowess has helped the company take a global lead. So far, it has sealed 65 contracts to install 5G equipment with telecoms operators around the world, with almost half of these in European countries. Its 5G smartphones were also the world’s top sellers last year, stealing a march on Apple, the US tech giant, which has yet to launch its own 5G phone.

Such global ambitions may be further enhanced by the UK decision on 5G, particularly in the case of Germany, says Dan Wang, a Beijing-based technology analyst at Gavekal Dragonomics.

“[The UK] decision creates a useful template for Angela Merkel, who has been looking for a way to keep buying Huawei equipment while placating hardliners among German security experts, some sections of German industry, and parts of her own Bundestag coalition,” says Mr Wang.

Senator Tom Cotton, a Republican from Arkansas, walks to a vote on Capitol Hill in Washington, D.C., U.S., on Wednesday, December 6, 2017. Photographer: Zach Gibson/Bloomberg
Tom Cotton, Republican senator from Arkansas: ‘Allowing Huawei to build the UK’s 5G networks today is like allowing the KGB to build its telephone network during the cold war’   © Zach Gibson/Bloomberg

The main reason that 5G has become such a geopolitical flashpoint is because the technology represents far more than just an incremental upgrade in connectivity. For its backers, 5G will provide the backbone for a significant part of the modern economy.

“5G decisions reflect one of those quietly pivotal moments that crystallise a change in world affairs,” writes Simeon Gilding, a former senior officer in the Australian Signals Directorate, a branch of Canberra’s intelligence services.

READ  Innovation Birmingham campus announces expansion - UKTN

“This is partly because the technology itself promises to be revolutionary, connecting not just humans but every device with a chip in it with superfast, high-bandwidth and low-latency communications,” Mr Gilding adds. “That means if you have the keys to 5G networks, you will be trusted with the nervous system running down the backbone of every country which uses your gear and contracts you to service it.”

Not everyone in the telecoms industry is so convinced about 5G’s potential. But against such a strategic backdrop, the lack of a US telecom equipment manufacturer capable of producing the full-range of 5G kit ranks as a glaring anomaly. To understand how this came about, it is necessary to go back to the mid-1990s when the US passed a Telecommunications Act that weakened US champions such as Lucent Technologies by enticing a flurry of new entrants into the market. With its profit margins under pressure at home, Lucent targeted sales in a fast-growing Chinese market to prop up a flagging share price.

But Chinese authorities insisted that all foreign equipment makers would — as the price of admission — be obliged to hand over technology and knowhow to state research labs and business partners. One by one, the chief executives of the largest telecoms equipment companies trooped through Beijing in the early 2000s pledging to localise their technologies and production bases.

LONDON, UNITED KINGDOM JANUARY 30: Britain's Prime Minister Boris Johnson meets with U.S. Secretary of State Mike Pompeo at Downing Street on January 30, 2020 in London, United Kingdom. The U.S. Secretary of State is on a two-day visit to the U.K to discuss a number of issues including the role of Huawei in British 5G Networks, the extradition request for Anne Sacoolas and Donald Trumps plans for the Middle East. (Photo by Tolga Akmen WPA Pool/Getty Images)
Mike Pompeo, US secretary of state, left, has sought to draw a line under Washington’s face-off with Boris Johnson, UK prime minister © WPA pool/Getty

John Roth, chairman of Nortel Networks, the Canada-based company with more than 100 years of history, summed up the sentiment that was typical in the industry. “We have a long-term commitment to China’s market, to help develop a local, world-class telecommunications industry,” he said in 1999.

One of the beneficiaries of this transfer-rich environment was Ren Zhengfei, Huawei’s founder. These days the 75-year-old is one of China’s most lionised corporate leaders but back then he was so poor that he did not have his own home, living instead in a rented apartment 30 square metres in size. Any spare cash he had, he says, was spent on a team of researchers who kept bed rolls under their desks so they could pull all-nighters.

Ironically, Nortel succeeded in seeding China’s technological edge but failed to safeguard its own. It filed for bankruptcy in 2009, releasing a flood of research talent that an eager Huawei snapped up. Indeed, much of the intellectual property that underlies Huawei’s current 5G offering came along with the top Nortel scientists in Ottawa.

READ  As Trump holds back, tech firms step in on election security - ActionNewsJax.com

Lucent had also foundered in 2006 and was sold to a French rival, leaving North America without a heavyweight telecoms equipment player. The company that was once the technology champion behind Bell Labs is now part of Finland’s Nokia.

Traffic passes corporate headquarters Wednesday, Jan 14, 2009, as Nortel Networks Corp, applied for bankruptcy protection in Toronto, Ontario, Canada. Photographer: Norm Betts/Bloomberg News.
Canada-based Nortel succeeded in seeding China’s technological edge but failed to safeguard its own and filed for bankruptcy in 2009 © Norm Betts/Bloomberg

For some time, all looked set fair for Huawei to step into the breach. But Washington had other ideas. In a series of steps culminating in last year’s decision to put Huawei on an “entity list”, it has ejected the Chinese company from the US market, aside from a marginal presence in rural communities.

The blacklisting sharply restricted the export of US high-tech components to Huawei. The US also tried to persuade the other security allies that make up the “Five Eyes” intelligence alliance — the UK, Australia, Canada and New Zealand — to eschew Huawei equipment as they build their 5G networks.

The British decision this week on 5G has revealed in stark terms the burgeoning nature of Chinese influence.

London’s decision is momentous because the UK is supposed to have a “special relationship” with the US, standing shoulder to shoulder on strategic matters. But instead London has turned away, largely ignoring Washington’s dire warnings that Huawei could insert “backdoors” into the 5G software code that it runs in the UK, thereby opening up the country’s secrets to snooping.

Part of this response derives from the fact that the UK, facing a chill post-Brexit landscape, feels it must hedge, balance and adopt diplomatic contortions to maintain cordial relations with the world’s sparring superpowers.

So far, the Trump administration has decided to avoid a public stand-off with the UK over Huawei, but London can expect American pressure on the subject to continue.

Speaking on a visit to the UK on Thursday, Mike Pompeo, US secretary of state, insisted that China was the “central threat of our times”.

But he added that America’s close ties with the UK were “not at risk”. “I’m confident we can work together to implement that decision and work to get this right,” he said.



READ SOURCE

LEAVE A REPLY

Please enter your comment!
Please enter your name here