Huawei Peril

China Just Issued Stark New Threats Over Huawei: This Time Nokia And Ericsson Are In Its Sights
By Zak Doffman

China has issued threats to other countries before, warning of the economic consequences of discriminating against its telco champion Huawei in the award of 5G contracts. 

And so it’s little surprise that Beijing has done so once again, this time in France, where multiple media reports suggest a government shutout of the Chinese manufacturer from its network rollout.

What’s different this time, though, is that those threats have been aimed at Nokia and Ericsson, Huawei’s core competition. 

“China has always given Nokia and Ericsson fair treatment in the deployment of 5G networks in China,” said a statement on the website of Beijing’s embassy in Paris, “and has even allowed them to take part in the deployment of the core networks.”
In a long statement that ironically claimed that French action would go against “the principles of a market economy and free trade,” Beijing said that any “difference in treatment of companies according to their country of origin will constitute overt discrimination and disguised protectionism.”
And so the threat: “We do not wish to see the development of European companies in the Chinese market affected by the discrimination and protectionism of France and other European countries with regard to Huawei.”
France’s seeming decision to exclude Huawei has been seen in some quarters as a further rebuff to the U.K. and its decision to include the Chinese equipment in a limited capacity, much to the aggravation of the U.S. government and President Trump. 

There is a further irony that Paris can be seen to be taking U.S. warnings more seriously than London. One is Washington’s closest security ally, the other has been much more critical of U.S. security policy in the past. 

They seem to have got this the wrong way around.
Confirmation in France that its biggest operator, Orange, had selected Nokia and Ericsson came just days after London’s alternative view made headlines around the world. 

The French decision has become part of an intensifying campaign within the U.K.’s governing Conservative Party, as politicians look to push the government to overturn its decision. 

There is genuine alarm in the U.K. at the longterm implications of the decision, to say nothing of the damage it looks set to do to elements of the relationship with Washington.
For its part, Huawei has welcomed the U.K. decision. 

The Chinese embassy statement even referenced the security evaluation center set up in the U.K. to monitor Huawei as an example of how best security practice.
The Chinese statement talked up the technical advantages Huawei has over its European rivals, before reverting to more ominous tones. “China has never shown France the slightest concern about national security—we hope our two countries can maintain mutual trust in these areas.”
In December, I reported that China had been exposed threatening Germany and Denmark with economic penalties if the countries reversed awards to Huawei and followed U.S. advice to exclude the company. 

These threats of “serious consequences” were more blatant than this more nuanced tone in France.
But that said, there is obviously a further mix here of company and state, as China lobbies for Huawei this way, mixing business and politics. 

This does not help claims of independence. 

This is not a country beating its enterprise drum as would normally be the case, this is blunt politics and international influence at work. 

This is unlikely to wash well in France, and it may backfire, giving the U.K. hawks more ammunition to use in their campaign against the government.
“This makes no logical sense,” senior Conservative Sir Iain Duncan-Smith wrote in Sunday’s (February 9) Daily Telegraph on the U.K.’s own decision. 

“It is inconceivable that such a decision should be made in the face of all the evidence of the threat that China poses to us and our allies.”
The news from France will no doubt fuel the next wave of such protests.

Germany Investigates 3 Suspected of Spying for China

Raids were carried out on the homes and offices of the three people
By Melissa Eddy

The Chinese Embassy in Berlin. A spokesman for Germany’s federal prosecutor said the Chinese intelligence service was involved in the inquiry.

BERLIN — German authorities raided the homes and offices of three people suspected of spying for the Chinese government, officials said on Thursday, giving no details about their identities or the nature of the alleged espionage.

“This is a preliminary investigation against three known persons,” said Markus Schmitt, a spokesman for the German federal prosecutor, Peter Frank. 

None of the three have been arrested, he said.
The raid comes amid an intensifying debate in Berlin over the country’s relationship with Huawei, the Chinese technology giant used for espionage by Beijing.
On Thursday, Angela Merkel met with senior lawmakers in her party as part of continuing efforts to resolve a dispute over whether to allow Huawei to help build the country’s 5G next-generation mobile network.
Germany has been concerned about the threat posed by Chinese hackers seeking to steal information from the country’s companies, research facilities and ministries. 

But if sufficient evidence is found in the current case, it would be one of the first in years involving old-fashioned human espionage.
German officials were sifting through evidence gathered in the raids, which were carried out early Wednesday on nine homes and offices in Brussels and Berlin, as well as in the German states of Baden-Württemberg and Bavaria, Mr. Schmitt said.
The Chinese intelligence service is also involved in the inquiry, Mr. Schmitt said.
The German newsmagazine Der Spiegel, which first reported the raids, said that the three people targeted were suspected of passing private and social information to China’s ministry of state security.
Der Spiegel said that one of the three was a German national who had worked as a diplomat for the European Union until 2017, when he switched to a well-known consulting company. 

The other two work for a different consulting company, the report said.
Although some of the searched properties are in Brussels, a spokeswoman for the Brussels-based European Commission said on Thursday that none of its premises had been searched. 

She also said it had not received any requests to work with the German authorities or to hand over any evidence.
“No searches were conducted in the premises of our buildings, we haven’t been contacted by the German authorities,” said the spokeswoman, Virginie Battu-Henriksson.
European Union diplomats are normally senior envoys from their own member states who join the bloc’s diplomatic ranks. 

Many go on to join lobby firms or think tanks after retirement. 

If proven that the suspect was indeed spying for China, it would be a first for the bloc’s foreign policy branch.
China is one of Germany’s most important trading partners, and the two countries collaborate on international issues like climate change and hold regular government-level discussions.
But the relationship has come under scrutiny since the Chinese acquired several German technology companies in 2016. 

The next year, Germany’s domestic intelligence agency accused China of using LinkedIn and other social media sites to infiltrate the government in Berlin.
A year ago, Poland arrested two people, including a Chinese employee of Huawei, and charged them with spying for Beijing.

Perfidious Albion

Using Huawei in UK 5G networks would be 'madness', US says
British told allowing Chinese firm access would put intelligence sharing at risk
By Dan Sabbagh

A special delegation of US officials presented an incendiary dossier which they said featured new evidence of the security risks of relying on Huawei technology. 

Using Huawei technology in UK 5G networks would put transatlantic intelligence sharing at risk, senior US officials have told British ministers, warning that allowing the Chinese firm access would be “nothing short of madness”.
The extraordinary American ultimatum came as a special delegation led by President Trump’s deputy national security advisor, Matt Pottinger, presented an incendiary dossier they said featured new evidence of the security risks of relying on Huawei technology in future phone networks.
The intense and public lobbying presents an immediate headache for Boris Johnson, the prime minister, who had been expected to make a final decision about Huawei shortly, having been repeatedly advised by the UK’s security establishment that any security risks can be contained.
Ahead of the UK decision the head of MI5, Andrew Parker, said over the weekend that he saw “no reason to think” that using Huawei technology should threaten intelligence sharing with the US, suggesting that Britain was poised to give the Chinese company the go-ahead.
But that assertion was flatly contradicted by a senior US official who was part of the delegation, who said: “Congress has made it clear they will want an evaluation of our intelligence sharing.”
A second member said that the US president hoped not to fall out with the UK over the issue but added: “Donald Trump is watching closely”.
Last spring, the UK had indicated it would allow Huawei to supply non-core technology such as mobile phone masts and antennas in future 5G networks, after a cabinet committee had voted by 5 to 4 in favour.
But even that would not be enough to allay Washington’s concerns, the US officials said.
Huawei has consistently denied that it has ever been asked by the Chinese government to introduce secret “back doors” into its technology, and has even offered to sign a “no spy agreement” with countries adopting it.
But the US insists there is a surveillance risk.
The officials, who had flown in specially from the US, would not spell out what the “relatively recent information” that they had shared with their UK counterparts was, but it is understood to be of a technical nature.
Although the long-standing intelligence-sharing relationship between the US and the UK would not be immediately compromised, they said that members of Congress would want to review it in future legislation.
A final decision will also be seen as a crucial early signal in how far the UK wants to move towards the US orbit as trade talks with both Washington and Brussels loom after Britain formally leaves the EU at the end of January.
As well as Pottinger, key officials in the US delegation of six included Chris Ford, an assistant secretary in the US state department, and Robert Blair, the special envoy for international telecoms.
The delegation claimed that Chinese spies, working for the People’s Liberation Army, also worked simultaneously for Huawei – and that the company “had played a role” in supporting the “re-education camps” for the country’s Muslim Uighur minority.
British sources initially said that they were only going to meet civil servants, but the US delegation said they had spoken to at least one cabinet minister.
Huawei is one of three companies that supply equipment to Vodafone, BT and other mobile phone companies for high-speed 5G networks, alongside Ericsson of Sweden and Nokia from Finland.
Its kit is recognised by UK phone companies as being cheaper and more advanced than rivals, and some believe that the Trump administration wants to weaken China’s advanced position in the market for trade reasons.

Perfidious but naïve Albion

Boris Johnson’s Bad Bet on China
The controversy around Huawei shows you can’t benefit from the Chinese economy without acquiescing to Chinese politics.
By ISAAC STONE FISH

Boris Johnson in London in 2016.

It was an odd juxtaposition. 

At a NATO summit in London on Dec. 4, British Prime Minister Boris Johnson promised he would keep the controversial Chinese telecommunications giant Huawei away from Britain’s 5G network if it jeopardized the United Kingdom’s work with its intelligence-sharing partners, the United States, Canada, Australia, and New Zealand. 

“I don’t want this country to be unnecessarily hostile to investment from overseas but, on the other hand, we cannot prejudice our vital national security interests,” Johnson said. 

Then, perhaps fearing he had ventured too far, less than 24 hours later Johnson pulled out a phone and took a selfie with two TV anchors — a Huawei phone.
Though his staff later claimed the phone didn’t belong to him, the incident got wide coverage in British press. 

The British government will reportedly announce how to handle Huawei after the Dec. 12 election, which pits the widely reviled Johnson and his Conservatives against his widely reviled challenger Jeremy Corbyn and the Labour Party. 

Corbyn, who is unlikely to win, has spoken little about China or how to deal with state-backed companies like Huawei.
But Johnson, in his more than a decade in the public eye, has a long track record on China. 

Johnson believes he has a brilliant solution that policymakers elsewhere have missed: by acknowledging the political and security risks of a close economic relationship with China, London can then overlook those risks in favor of trade. 

“China is a rival,” Johnson said in a leaked June 2018 recording, while he was foreign secretary, “but China is a rival whose growth and whose incredible developing power can be used to our advantage.” On the one hand, he said in the same recording, Britain should “treat China as our friend and our partner,” on the other hand, “they will try to stiff us.” 

Johnson seems to believe the United Kingdom can benefit from China economically while not acquiescing to it politically—to have its cake and eat it too, as the prime minister is fond of saying.
This position is naïve. 

It ignores the most important reality of a Chinese Communist Party–controlled China: Politics always trumps economics. 

Building a trade relationship isolated from a political relationship is a lovely ambition, but Beijing’s Leninist political system precludes it. 

“No part of the Communist Chinese state is ultimately able to operate free of the control exercised by its Communist Party leadership. This is a simple statement of fact,” writes Richard Dearlove, the former head of Britain’s Secret Intelligence Service, in the foreword to a critical May 2019 report on the risks of Huawei in the British system, “and no amount of sophistry can alter it.”
The debate over Huawei typifies the British government’s China myopia. 

Founded in 1987 by the former army engineer and Party member Ren Zhengfei, the telecoms giant has always had close links to the party. 

Ren’s management thinking naturally carries “very deep imprints of the Communist Party culture,” according to a 2017 Chinese book based on more than 100 interviews with top Huawei executives, and written by a friend of Ren’s. 

The U.S. and other governments have long been suspicious of Huawei’s ability to act as a proxy for Beijing; in 2012 the House Intelligence Committee called Huawei a national security threat and the U.S. government, and in August 2018 President Donald Trump signed a law de facto banning government agencies from using Huawei products.
In December 2018 Canadian police, at Washington’s request, arrested Meng Wanzhou, Huawei’s CFO and Ren’s daughter, on charges related to sanctions violations in Iran. 

Tensions between the two superpowers spiked. 

London attempted to seesaw between the United States, Britain’s largest trading partner and most important ally—potentially an even more important one post-Brexit—and the rising economic power of China. 

In April, embattled then–Prime Minister Theresa May decided to allow Huawei to build noncore elements of Britain’s 5G network. 

Then, after the U.S. government condemned the move, the British government announced it hadn’t yet decided and May fired Defense Minister Gavin Williamson, blaming him for leaking the decision (he denied the charge).
This hedging stretches back to 2010, when British security officials reportedly began noticing unusual “chattering”—communicating data to unknown sources—in Huawei equipment used in the country. 

That year, the British intelligence service GCHQ partnered with Huawei to establish the Huawei Cyber Security Evaluation Centre, also known as the Cell. 

The Cell is supposed to inspect Huawei equipment for malicious code. 

Huawei funds the Cell, and most of the employees are from Huawei. 

Despite this sponsorship, the Cell’s latest annual report, from March 2019, states that it can “only provide limited assurance” that Huawei does not jeopardize U.K. national security. 

And then, in May of this year, Huawei Chairman Liang Hua absurdly offered to “sign a no-spy agreement” to placate London.
If Huawei is trustworthy, why does it need to be monitored? 

And if it’s duplicitous, how would a “no-spy agreement” constrain it? 

“It is far easier to place a hidden backdoor inside a system than it is to find one,” writes the former British diplomat Charles Parton in a February 2019 paper. 

“In the battle between Chinese cyber attackers and the UK’s Huawei Cyber Security Evaluation Centre, the advantage and overwhelming resources lie with the former.” 

It’s hard to escape the conclusion that the Cell strengthens rather than weakens Huawei’s ability to harm British national security.
A well-connected senior member of a prestigious British think tank faults the 2010–2016 Chancellor of the Exchequer George Osborne, who in September 2015 publicly advised Britain to “run towards China.” 

Under Osborne’s influence, in 2015 the United Kingdom became the first major Western country to join Beijing’s Asian Infrastructure Investment Bank (despite “a very hostile briefing from the Obama White House telling us not to do it,” a former adviser to the British treasury told me.) 

Former Prime Minister David Cameron, who launched what he called a “golden era” of relations between Britain and China, resigned in June 2016 after the Brexit vote and tried to raise a fund to invest in projects with China’s Belt and Road Initiative. 

Embarrassingly, he failed.
Johnson has played his part as well. 

In 2008, four years before London hosted the Summer Olympics, then-Mayor Johnson joked in Beijing that “ping pong was invented on the dining tables of England in the 19th century and it was called wiff waff.” 

Or, as he joked in 2013 after announcing a Chinese company would refurbish the Port of London Authority building, which stands in for the offices of the spy agency MI6 in the James Bond film Skyfall, “if that isn’t openness to China, I don’t know what is.” 

He added, “we have sold you our offices of the secret service. Saves time, I imagine.”

Soros calls Trump’s China stance his greatest foreign policy achievement, warns on Huawei

By Edmund DeMarche

George Soros, the left-wing billionaire, offered partial praise for Trump in an op-ed published Monday night over his tough stance on China but went on to urge Congress not to allow Trump to use Huawei—the second-largest smartphone maker in the world—as a bargaining chip in his fight for reelection.
Soros, who famously shorted the British pound in 1992 and made a $1 billion profit, penned the op-ed in the Wall Street Journal. 

He said perhaps Trump's only foreign policy win during his presidency was "the development of a coherent and genuinely bipartisan policy toward Xi Jinping’s China," and his administration's move to declare Beijing a "strategic rival."
Soros also praised the administration's move to place Huawei on the Commerce Department’s so-called "entity list," which prevents U.S. companies from dealing the telecom giant.
Soros wrote about the tense competition in the 5G market and said the U.S. has a commanding lead over China. 

But he warned that Trump "may soon undermine his own China policy and cede the advantage to Beijing."
He said he believes Trump wants to free himself from any constraints by Congress and be able to remove Huawei from the list at his own discretion. 

China has insisted that Huawei be removed from the list as a prerequisite for any trade agreement.
"In my view, he wants to arrange a meeting with Xi Jinping as the 2020 election approaches and make a trade deal with him, and he wants Huawei's status on the table as one of his bargaining chips," Soros wrote.
Soros called on Congress to act and pointed to Rep. Mike Gallagher, R-Wis., and Sen. Mitt Romney, R- Utah, for introducing amendments that would require Congress’ blessing for removal.
"As founder of the Open Society Foundations, my interest in defeating Xi Jinping’s China goes beyond U.S. national interests," he wrote. 

"As I explained in a speech in Davos earlier this year, I believe that the social-credit system Beijing is building, if allowed to expand, could sound the death knell of open societies not only in China but also around the globe."

Criminal Company

How Huawei became America’s enemy No. 1
By Tripti Lahiri & Mary Hui

Since it was founded by former People’s Liberation Army engineer Ren Zhengfei in 1987, Huawei has grown to become the world’s top provider of telecom equipment, with over $100 billion in revenue and 180,000 global employees. 

That extraordinary success has come with barely a footprint in the US market, where the company has been a target for anxiety about Chinese hacking since the 2000s. 

Today, Huawei is the poster child for that anxiety, and finds itself in the eye of a global storm.
Huawei’s troubles in the US started early: It was met with with suspicion not long after it started competing with US router firms in the aughts, and kept hitting snags after that. 

In 2003, networking firm Cisco accused Huawei of intellectual property theft. 

In 2008, a deal with 3Com collapsed over concerns about Huawei’s ties in China. 

In 2014, T-Mobile sued Huawei for stealing, among other technology, part of a robot’s arm.
But in 2017, US president Donald Trump took office, and since then actions against Huawei have come fast and furious. 

On May 15, Trump signed an executive order that effectively bans Huawei from accessing US supply chains, his strongest action yet against the company. 

Less than a week later, Google pulled Huawei’s Android license—after a grace period allowed by the Trump administration for current users, the company’s future phones will be cut off from the most widely used operating system in the world and the Google universe. 

Suppliers from Britain, such as chip maker ARM, are set to follow Google’s lead.
Trump’s endgame is still unclear. 

Is the only safe Huawei a “dead” Huawei? 

Or is this another gambit in his ongoing trade negotiations with China? 

It may be too soon to tell: On May 23, Trump called Huawei “very dangerous” but also said the dispute might be resolved a trade deal.
What is clear is that this showdown has been a long time coming.

2001
Huawei, then a 14-year-old company with sales of $3 billion, sets up offices in the US (pdf). It also opens its first office in Britain.

2003
January: Router-maker Cisco sues Huawei for copyright violations, alleging its source code turned up in Huawei products. It later drops the suit.
November: Huawei’s joint venture with California-based networking company 3Com to make and sell routers and switches begins operations.

2005
The idea that Huawei is linked to the Chinese military surfaces prominently in a Rand Corporation report commissioned by the US Air Force. 

The think tank notes that major IT players like Huawei appear to be private-sector actors (pdf, pages 217-8), but “many of these electronics companies are the public face for, sprang from, or are significantly engaged in joint research with state research institutes.” 

It adds:
Huawei maintains deep ties with the Chinese military, which serves a multi-faceted role as an important customer, as well as Huawei’s political patron and research and development partner.
The report also says sales linked to the Chinese military could be anywhere from less than 1% of Huawei’s revenues to as high at 6%. 

2007
In July, the FBI interviews Huawei’s founder, Ren, in relation to violations of US trade sanctions on Iran.

2008
Huawei’s efforts to take a 16% stake in 3Com collapse amid lawmakers concerns (paywall) about Huawei’s ties to the Chinese military, forcing Huawei and its partner in the acquisition to abandon the bid. 

3Com was a provider of anti-hacking software for the US military, among other contracts. Lawmakers cited the 2005 Rand report.

2009
February: At Barcelona’s Mobile World Congress, Huawei releases its first Android smartphone, under license from Google.
October: Huawei hires an American, Matt Bross, from British Telecom to be its CTO, and to help it make a real foray into the US market. 

Bross apparently runs operations from his basement in St. Louis. 

“I am looking to create an environment where we can grow trust,” he tells Bloomberg in 2011. 

“The fact of the matter is that Huawei is here to stay.” (He leaves Huawei in 2012.)
November: Huawei signs a lease in Plano, Texas, for 100,000 square feet of office space for its North America sales and marketing headquarters. 

“We are honored that Huawei will grow and prosper in Plano for years to come,” the town’s mayor says in a statement.

2010
July: Phone-maker Motorola files a lawsuit accusing Huawei of corporate espionage, but later settles with the company.
November: Citing security concerns, Sprint excludes Huawei (paywall), as well as Chinese telecom ZTE, from bidding for a contract worth hundreds of millions of dollars to modernize its network. Huawei had been hoping this would be its first major US equipment contract win.

2011
February: The Committee on Foreign Investment in the United States tells Huawei to sell (paywall) the assets of bankrupt startup 3Leaf Systems, which it had acquired the previous year. 

Huawei says it didn’t flag the deal to CFIUS because it had only bought some of 3Leaf’s assets, but the panel decides to engage in a retroactive review.

April: Huawei opens a 200,000-square-foot R&D facility in Silicon Valley. 

It continues to grow revenue from equipment sales to mid-tier telecoms in remote areas of the US.

2012
October: A House committee issues a 52-page report (pdf) warning against using equipment from Huawei and ZTE. 

The report states:
In sum, the Committee finds that the companies failed to provide evidence that would satisfy any fair and full investigation. 

Although this alone does not prove wrongdoing, it factors into the Committee’s conclusions below.

Further, this report contains a classified annex, which also adds to the Committee’s concerns about the risk to the United States. 

The investigation concludes that the risks associated with Huawei’s and ZTE’s provision of equipment to U.S. critical infrastructure could undermine core U.S. national-security interests.


2013
Reuters reports that a Hong Kong-based company that tried to sell US computer equipment to Iran’s largest cellphone carrier, in violation of US trade sanctions, is closely linked to Huawei. 

The story says that Ren Zhengfei’s daughter Meng Wanzhou, “a rising star” at Huawei, served on the board of the Hong Kong firm, among other links.

2014
March: The New York Times reports (paywall) that the NSA infiltrated the servers in Huawei’s Shenzhen headquarters, obtaining sensitive information about its giant routers and complex digital switches, and monitoring the communications of top executives.

September: T-Mobile files a lawsuit against Huawei, accusing it of stealing technology, including part of a robot’s arm, from its headquarters. 

Huawei workers spied on and stole part of Tappy, a robot developed by T-Mobile in 2006 to test smartphones. 

Huawei admits that two of its employees had acted "inappropriately".

2015
January: Speaking at the World Economic Forum in Davos, Switzerland, Huawei founder Ren seeks to play down his connection with the Chinese army, saying it was “quite by chance” that he entered the military. 

“We are a Chinese company,” Ren says. 

“Of course we support the Chinese Communist Party and love our country. We comply with the laws of every country we operate in.”
September: Huawei and Google join forces (paywall) to make the Nexus 6p phone.

2016
June: The US Commerce department issues a subpoena (paywall) to Huawei as part of a probe into whether the company violated US export controls on the export or re-export of American technology to Cuba, North Korea, Syria, and Sudan over the previous five years.
December: The Treasury department gets involved with the investigation (paywall) and issues its own subpoena. 

The subpoena comes shortly after the US government restricts sales of American technology to ZTE, saying the Chinese phone-maker violated sanctions against Iran. 

US officials also release internal ZTE documents detailing how the company managed to do business with Iran, and how it modeled its approach off of a rival’s efforts in that country. 

The rival company is not named in the documents, but its description matches Huawei (paywall).

2017
A Seattle jury rules in favor of T-Mobile in its case against Huawei, determining that the latter misappropriated T-Mobile’s trade secrets, and breached a handset-supply contract between the two companies that stipulated each would protect secrets learned through their partnership. 

The jury awards T-Mobile $4.8 million in damages for the breach of contract, but does not award damages for T-Mobile’s trade-secrets claim.

2018
January: AT&T, America’s second-largest wireless carrier, is on the verge of becoming the first carrier in the US to offer Huawei’s handsets, which would be a major breakthrough. 

But it abandons the plan after lawmakers and federal regulators lobby against the idea. 

Concerns around Huawei deepen as the rollout of next-generation wireless technology approaches; a leaked White House memo on 5G names the company a strategic threat. 

Lawmakers want AT&T to cut all commercial ties with Huawei, ending their collaboration on 5G network standards.
April: Huawei lets go of several US staff (paywall), including its vice president of external affairs, William Plummer, a Nokia veteran who joined Huawei in 2010. 

Plummer goes on to detail the company’s (and some of his own) PR missteps in a memoir called Huidu.
May: The Pentagon bans the sale of Huawei and ZTE phones in stores on military bases over concerns that the Chinese government could order the companies to track soldiers’ movements or spy on their communications.
August: The National Defense Authorization Act, which includes language barring government agencies from buying equipment or services from Huawei and ZTE, goes into effect.
October: Two leading US lawmakers—Mark Warner, a Virginia Democrat, and Marco Rubio, a Florida Republican—urge Canadian prime minister Justin Trudeau to bar Huawei from helping build its 5G networks, saying it could pose dangers for US networks. 

The call is part of a broader US effort to get foreign allies to shun Huawei, the Wall Street Journal later reports (paywall), warning the UK, for example, it could be forced to cut off intelligence sharing. 

In November, New Zealand bans Huawei from supplying technology to the country’s 5G rollout, following in the steps of Australia earlier in the year.
December: Huawei’s chief financial officer and the daughter of its founder, Meng Wanzhou, is arrested in Canada at the request of US law enforcement on suspicion of violating trade sanctions on Iran. 

The arrest is seen as a serious escalation of US action against Huawei. 

Trump is criticized for suggesting he could intervene in the Justice Department case against her if it would help secure a trade deal from China. 

2019
January: The US files criminal charges against Huawei, slamming it with two dozen allegations that include conspiring to evade US trade sanctions and steal trade secrets, and also formally seeks Meng’s extradition from Canada. 

Meanwhile, Poland arrests a Huawei employee on allegations of spying for China. 

May 15: Trump signs an executive order banning US telecommunications firms from using the equipment of “foreign adversaries.” 

The order does not name Huawei, but effectively blacklists the company and cuts it off from US supply chains. 

Days later, Google makes a shock announcement that it will terminate Huawei’s license to the Android OS, which powers 86% of the world’s phones and all of the phones sold by Huawei. 

Huawei says it’s developing its own OS, but being cut off from Google’s email and app universe would drastically reduce its appeal overseas. 

Already, mobile carriers are holding off on Huawei 5G phone sales (paywall).
May 20: The restrictions are temporarily eased: The Commerce Department says it will allow Huawei to buy US goods through Aug. 19. 

But that same day, top US chip companies including Intel and Qualcomm cut off vital Huawei supplies, while Microsoft is also said to have stopped taking software orders from the firm.
This month’s moves present the most serious threats yet to Huawei’s future.

National Security

Huawei is a risk so Britain must change course on 5G, ex-MI6 spymaster says

By Guy Faulconbridge, Paul Sandle
Richard Dearlove was chief of the Secret Intelligence Service from 1996 to 2004.

LONDON -- China’s Huawei poses such a grave security risk to the United Kingdom that the government must not allow it to have even a limited role in building 5G networks, a former head of Britain’s MI6 foreign spy service said on Thursday.
The United States is worried that 5G dominance would give China an advantage Washington is not ready to accept.
The Trump administration, which hit Huawei with severe sanctions on Wednesday, has told allies not to use its technology because of fears it could be a vehicle for Chinese spying.

But British ministers have discussed allowing Huawei a restricted role in building parts of its 5G network. 

The final decision has not yet been published.
“I very much hope there is time for the UK government, and the probability as I write of a new prime minister, to reconsider the Huawei decision,” said Richard Dearlove, who was chief of the Secret Intelligence Service from 1996 to 2004.
“The ability to control communications and the data that flows through its channels will be the route to exercise power over societies and other nations,” Dearlove wrote in the foreword to a report on Huawei by the Henry Jackson Society.
U.S. Secretary of State Mike Pompeo told Britain on a visit this month that it needed to change its attitude toward China and Huawei, casting the world’s second largest economy as a threat to the West similar to that once posed by the Soviet Union.
Asked whether the government would reconsider its stance on Huawei, Prime Minister Theresa May’s spokesman said: “As you know, in relation to Huawei, we are reviewing the right policy approach for 5G and when an announcement is ready the culture secretary will update parliament.”

Dearlove, who spent 38 years in British intelligence, said it was deeply worrying that the British government “appears to have decided to place the development of some its most sensitive critical infrastructure” in the hands of a Chinese company.
“No part of the Communist Chinese state is ultimately able to operate free of the control exercised by its Communist Party leadership,” said Dearlove.
“We should also not be influenced by the threat of the economic cost of either delaying 5G or having to settle for a less capable and more expensive provider,” he said.

Rogue Company

U.S. officials and lawmakers say China is the problem not only Huawei
By Joseph Marks

Senate Judiciary Committee Chairman Lindsey Graham (R-S.C.)
Trump administration officials have warned for months that Huawei’s global expansion into next-generation 5G wireless networks would amplify the threat of Chinese digital spying.
But now they’re taking the gloves off, accusing the Chinese government of running roughshod over international norms and its own laws to steal Western innovations. 

The stepped up rhetoric comes as President Trump imposed high tariffs on a wide range of Chinese imports, leading to a major escalation in trade hostilities between the two countries.
The move to 5G makes concerns about spying and sabotage significantly more pressing because its super-fast speeds will allow far more systems critical to public safety to run on wireless internet connections, such as high-tech medical equipment and driverless cars.
If Huawei gains a foothold in U.S. allies’ 5G networks, the Chinese government could force the company to send software updates to spy on Western companies or sabotage critical infrastructure, Chris Krebs, director of the Homeland Security Department’s Cybersecurity and Infrastructure Security Agency, warned lawmakers during a Senate Judiciary Committee hearing Tuesday.
Beijing could also exploit hidden vulnerabilities that already exist in Huawei products to hack adversaries or it could plant spies inside Huawei teams that work abroad servicing the company’s technology, Krebs said.
“It’s not about overseeing Huawei. It’s about overseeing China,” Judiciary Committee Chairman Lindsey Graham (S.C.) said during the hearing.
Administration officials formerly attributed their concerns about Huawei to a 2017 cybersecurity law they said would force the company to cooperate with Chinese intelligence requests. 

But Krebs abandoned that nicety Tuesday.
“This is a single-party government. Everything that flows from the central party is a manifestation of their philosophy,” he said. 

“The [cybersecurity] law is important because it is telling you what they want to do. But they’re going to get what they want anyway, law or not.”
The U.S. and China stepped away from trade negotiations last week amid recriminations, and the heightened rhetoric on digital spying probably will make tensions worse.
The White House, which has struggled to convince allies to restrict Huawei from their 5G networks, may also impose its own ban on Huawei as soon as this week, Reuters reported Tuesday.
Lawmakers are also taking a cue from the administration and moving to restrict China from access to U.S. technological innovations.
On Tuesday, Sen. Josh Hawley (R-Mo.) introduced a bill to bar exporting large categories of technologies to China including artificial intelligence, robotics, semiconductors and advanced construction equipment.
Hawley and five other Republicans also proposed another bill to bar Chinese students from science or engineering schools connected with the People’s Liberation Army from receiving U.S. visas.
“This is a strategy with multiple tentacles,” Sen. Thom Tillis (R-N.C.) said, describing Chinese digital spying efforts, “and we as members of Congress need to understand every one of those and chop them off.”

China’s Next Naval Target Is the Internet’s Underwater Cables

Worried about Huawei’s 5G? Wait till it gets into the game for 95 percent of all data and voice traffic.

By James Stavridis

Underwater eyes on China. 

As the West considers the threat posed by China’s naval ambitions, there is a natural tendency to place overarching attention on the South China Sea. 

This is understandable: Consolidating it would provide Beijing with a huge windfall of oil and natural gas, and a potential chokehold over up to 40 percent of the world’s shipping.
But this is only the most obvious manifestation of Chinese maritime strategy. 

Another key element, one that’s far harder to discern, is Beijing’s increasing influence in constructing and repairing the undersea cables that move virtually all the information on the internet. 

To understand the totality of China’s “Great Game” at sea, you have to look down to ocean floor.
While people tend think of satellites and cell towers as the heart of the internet, the most vital component is the 380 submerged cables that carry more than 95 percent of all data and voice traffic between the continents. 

They were built largely by the U.S. and its allies, ensuring that (from a Western perspective, at least) they were “cleanly” installed without built-in espionage capability available to our opponents. 

U.S. internet giants including Google, Facebook and Amazon are leasing or buying vast stretches of cables from the mostly private consortia of telecom operators that constructed them.
But now the Chinese conglomerate Huawei Technologies, the leading firm working to deliver 5G telephony networks globally, has gone to sea. 

Under its Huawei Marine Networks component, it is constructing or improving nearly 100 submarine cables around the world. 

Last year it completed a cable stretching nearly 4,000 miles from Brazil to Cameroon. (The cable is partly owned by China Unicorn, a state-controlled telecom operator.) 

Chinese firms are able to lowball the bidding because they receive subsidies from Beijing.
Just as the experts are justifiably concerned about the inclusion of espionage “back doors” in Huawei’s 5G technology, Western intelligence professionals oppose the company’s engagement in the undersea version, which provides a much bigger bang for the buck because so much data rides on so few cables.
Naturally, Huawei denies any manipulation of the cable sets it is constructing, even though it is obligated by Chinese law to hand over network data to the government. 

The U.S. last year restricted federal agencies using from using its 5G equipment; Huawei responded with a lawsuit in federal court. 

Washington is pressuring its allies to follow its lead — the American ambassador to Germany warned that allowing Chinese companies into its 5G project would mean reduced security cooperation from the U.S. — but this is an uphill battle. 

Most nations and companies feel that better cell phone service is worth the security risks.
A similar dynamic is playing out underwater. 

How can the U.S. address the security of undersea cables? 

There is no way to stop Huawei from building them, or to keep private owners from contracting with Chinese firms on modernizing them. 

Rather, the U.S. must use its cyber- and intelligence-gathering capability to gather hard evidence of back doors and other security risks. 

This will be challenging — the Chinese firms are technologically sophisticated and entwined with a virtual police state.
And back doors aren’t the only problem: Press reports indicate that U.S. and Chinese (and Russian) submarines may have the ability to “tap” the cables externally. (The U.S. government keeps such information tightly under wraps.) 

And the thousand or so ground-based landing stations will be spying targets as well.
Once Washington has real evidence of risks that it can share with allies, it can put the security of the Huawei underwater cable operations on the international agenda with the same vigor it has applied in addressing the 5G concerns. 

This evidence would be the backbone of a strong strategic communications effort to persuade friendly governments and Western companies that working with Chinese won’t pay off in the long term. 

To some extent this is already happening — last year Australia banned Huawei from involvement in a cable it is subsidizing that will connect it to the Solomon Islands.
The U.S. could also flex its technological muscles. 

Opportunities range from developing less costly alternatives in cooperation with the private sector that can pose price competition to the Chinese; innovating on means to test and protect the information on the cables Huawei Marine does eventually lay; and working to improve end-to-end encryption in all internet-based communications, which would make the task of compromising the security of the information on the cables much more difficult.
As U.S. Admiral Jamie Foggo, a career submariner, told me: “Underwater cables are part of our critical infrastructure and essential to the global economy. The U.S. must protect the integrity and security of them as surely as we provide international freedom of the high seas.” 

So while we certainly need to consider the challenges China poses on the surface of the South China Sea, we also need to look down to the murky depths of the bottom of the sea.

Rogue Nation

We must stop China from gaining control of the Internet
By Newt Gingrich

What will it be like if the Internet that America invented and designed is replaced in the next technological cycle by one that is controlled, developed, implemented, and managed by the Chinese?
This is a real possibility we must confront right now.
The danger of America giving up and allowing the Chinese to win was driven home by a senior United States government official this week. 

The Washington Post published a story headlined: “U.S. officials planning for a future in which Huawei has a major share of 5G global networks.”
The newspaper quoted Sue Gordon, the principal deputy director of national intelligence saying: “We are going to have to figure out a way in a 5G world that we’re able to manage the risks in a diverse network that includes technology that we can’t trust.” 

She added, “We’re just going to have to figure that out.”
I read this while I was having highly productive talks about China, 5G, and Huawei in the Netherlands in a series of conversations arranged by U.S. Ambassador Pete Hoekstra, a former chairman of the House Intelligence Committee.
In six meetings, I communicated what I have been told is the absolute position of the president, the vice president, the national security adviser and the secretary of defense. 

Furthermore, I have been told that the head of the National Security Agency and the head of the Defense Intelligence Agency have both been very clear that Huawei is an enormous national security threat.

A Chinese Internet should be totally unacceptable to everyone who believes in freedom.

I have been focusing on this growing challenge for months, and I devoted two episodes of my “Newt’s World” podcast to 5G, referring to it as the 4th Industrial Revolution.
The Trump administration position has been that 5G is extraordinarily important and so powerful that Huawei and China cannot be trusted to run it. 

Administration officials have gone all over the planet urging countries to block Huawei technology in their networks because it poses a national security risk.
I was in the Netherlands urging the Dutch to block Huawei and develop a European alternative with Ericsson, Nokia, Samsung and advanced secure 5G technology from the United States.
So while I was advocating the rejection of Huawei, The Washington Post reported an administration official suggesting that we have to learn to live with it.
In all fairness, the story was simply reporting the confusion, incompetence and hostility that has characterized the Defense Department bureaucracy’s inability to act effectively against the Chinese threat.
For months, President Trump and his senior national security team have been clear that America must be proactive and aggressive in meeting and quickly overmatching the Chinese challenge.
Meanwhile, for months, senior bureaucrats at the Defense Department have been blocking any effective response.
The large, older telecommunications companies have been encouraging the bureaucrats to take a slow-motion, risk-averse, “don’t worry about Huawei” approach. 

They have also been deliberately distorting the ideas of reformers and misrepresenting a proposal for a wholesale network as a plan for government-run nationalization of the American 5G network.
However, the reformers – the people who are most committed to defeating Huawei – are totally committed to a free market system funded by private capital and implemented by private companies.
Those seriously analyzing the Huawei threat believe that only a wholesale approach – allowing every company to share spectrum in a competitive environment – is capable of dropping prices enough to undercut the Huawei strategy of buying business through Chinese government-subsidized special deals.
I want to be crystal clear: The stakes are enormous. 

It represents the greatest American technological failure since the Soviets launched Sputnik.
I know a great many people are thinking, “What’s the big deal? Who cares if China builds out the global Internet through Huawei’s 5G network?”
The answer is: A Chinese Internet should be totally unacceptable to everyone who believes in freedom.
As I said in the Netherlands: China is a Leninist totalitarian state. 

The Chinese government has put at least 1 million Muslim Uighurs in concentration camps. 

It regularly locks up Catholic priests and bishops. 

It has outlawed the Falun Gong and persecutes them.
China recently put the most popular movie star in the nation (and therefore the world) under “residential surveillance,” or house arrest, for months without trial. 

It is developing and implementing a “social credit” system which will track the private behavior of 1.4 billion people and judge them without trial.
Xi Jinping is chairman of the Central Military Commission, general secretary of the Chinese Communist Party, and president of the People’s Republic of China, in that order.
His military commission post is most important because the People’s Liberation Army is first and foremost an extension of the Communist Party – not the government.
Xi’s No. 1 duty is to the nearly 90 million members of the Chinese Communist Party (by contrast, Donald Trump received 63 million votes to become president).
In excerpts from a 2013 speech that were just released this week, Xi made the case for the life and death struggle between Chinese Communism and the West.
“Our party has always adhered to the lofty ideals of communism,” Xi said. 

“Communists, especially leading cadres, should be staunch believers and faithful practitioners of the lofty ideals of communism and the common ideals of socialism with Chinese characteristics. The belief in Marxism, socialism, and communism is the political soul of the communists and the spiritual prop of the communists to withstand any test. The party constitution clearly stipulates that the highest ideal and ultimate goal of the party is to realize communism.”
In a nod toward Karl Marx and Friedrich Engels, Xi told the Communist Party Central Committee: “Facts have repeatedly told us that Marx and Engels' analysis of the basic contradictions in capitalist society is not out of date, nor is their historical materialism view that capitalism must die out and socialism must win. This is an irreversible general trend in social and historical development, but the road is tortuous.”
“The final demise of capitalism and the final victory of socialism must be a long historical process,” Xi added. 

“We should have a deep understanding of the self-regulation ability of capitalist society, fully estimate the objective reality of the long-term dominance of Western developed countries in economic, scientific, technological and military aspects, and earnestly prepare for the long-term cooperation and struggle between the two social systems.”
Xi concluded the Chinese people and the Chinese Communist Party must “continuously build socialism with superiority over capitalism, and continuously lay a more solid foundation for us to win initiative, advantage and future.”
Huawei is a brilliant example of long-term planning and a decisive effort to “win initiative, advantage and future.”
If the United States does not get its act together, we should expect to suffer a strategic defeat in the emergence of a Chinese-controlled Internet that may define the next half century.
Vice President Mike Pence’s speech to the National Space Council last week captured the right sense of urgency and willingness to change organizations and innovate despite the bureaucracy.
The 5G challenge is an even more immediate crisis than securing our leadership in space – and American leadership in space is critical to our ultimate survival as a nation.
We need the Trump-Pence team to drive into the bureaucracy the Churchillian motto of “action this day.”
Bureaucrats who don’t take beating Huawei seriously should be replaced until we find a team capable of winning for America and for freedom.

"Italy joining China’s Belt and Road project is geopolitically unwise", former prime minister says

Italy’s government provoked controversy as it joined China’s Belt and Road Initiative, becoming the first EU and Group of 7 country to do so.
By Natasha Turak

Ex-Italian PM: Important to pay attention to Belt and Road initiative
Italy’s former prime minister doesn’t approve of the current government’s newly inked partnership with China, calling the decision “unwise” during a conversation with CNBC Monday.
“Politically, geopolitically, I deem (it) really unwise from the Italian government to take such a decision without coordination with the European Union and our allies,” Paolo Gentiloni, who served as prime minister from 2016 to 2018, told CNBC’s “Squawk Box Europe.”
“Europe is showing its divisions toward China, and this is not something that will strengthen our position even on trade.”
The Italian government stirred up fresh controversy over the weekend as it officially agreed to join China’s massive Belt and Road Initiative (BRI), becoming the first EU and Group of 7 country to do so.
Chinese dictator Xi Jinping’s visit to Rome saw a total of 29 deals signed, altogether worth 2.5 billion euros ($2.8 billion). 

They were focused on agricultural, finance and energy sectors, and opened up new access to the Chinese market for major Italian energy and engineering firms.
Gentiloni, who himself visited China in 2017 to discuss the Belt and Road initiative with Beijing’s leadership, echoed the analyses of many observers who described the deals signed as largely symbolic and not an economic paradigm shift for Italy.
“The agreements signed in Italy are not so relevant from an economic point of view,” he said.
“We will not change the mood of our economy with these agreements, and my guess is that perhaps we will not even change the balance of trade between Italy and China, which is unfortunately a balance of deficit on the Italian side.”
But politically, he stressed, “I am worried that we are not showing EU unity, and for this reason I think that the MOU (memorandum of understanding) that was signed from the Italian government was not a wise decision.”
Gentiloni is a founding member of Italy’s Democratic party, whose stances are largely described as a social democratic, center-left and Europeanist. 

Italy is currently led by a euroskeptic coalition whose largest parties are the anti-establishment Five-Star Movement and the right-wing Lega party.

‘Italy is not an African country’
Western critics warn of Chinese debt traps and describe the initiative as a ploy to expand geopolitical and strategic influence, while Beijing pursues links to Europe and Africa via South Asia and the Middle East to expedite and increase the export of Chinese goods.
German foreign minister Heiko Maas criticized Italy’s decision on Sunday, telling local media: “If some countries believe that they can do clever business with the Chinese, then they will be surprised when they wake up and find themselves dependent.”
Still, in defense of his country, Gentiloni dismissed concerns that Italy would become economically beholden to China in the way that some African and South Asian nations have.
“Italy is not an African country … We will not have a Chinese invasion after these agreements,” he said, pointing out that Italy has less Chinese inward investment than the U.K. or Germany.
“We have to be very cautious especially in issues connected to security, telecommunications, but I don’t think these agreements economically will change much in the framework we have.”
Indeed, Italy is not an African country — it has a higher debt-to-GDP ratio and far lower growth than most countries on the African continent. 

Its economy dipped into recession at the end of last year, and the deadly collapse of its Genoa Bridge last August cast a stark spotlight on its dire need for infrastructure investment.

China and 5G: Avoiding ‘dangerous situations
Gentiloni stressed caution toward China when it comes to sensitive sectors like telecommunications, an issue dominating headlines recently amid the U.S. government’s global campaign against Chinese telecoms giant Huawei. 

Washington says Huawei’s role in building 5G internet infrastructure around the world is a security threat and will allow the Chinese government to spy on users, a claim Beijing rejects.
“I think we have to be very cautious and careful, exactly in this subject,” the former prime minister said.
“Strategic infrastructure and telecommunication infrastructure, and this means now 5G ... We have a very modern infrastructure for mobile phones in our country, we don’t particularly need foreign investment, and in any case we have a law — the golden power law — that allows the Italian government to avoid any form of control in our telecoms infrastructure.”
Italy’s “golden power” legislation refers to state powers designed to protect strategic industries, which it says it plans to extend to 5G technologies. 

This would entail requiring Italian companies in both the private and public sectors to declare to the government any 5G technology purchased from non-European countries.
“I hope that the new government will use these means, these tools, to avoid dangerous situations,” he added.

Tech Quisling

Dunford to meet with Google for debate on Chinese ties
By Aaron Mehta 

It is safe to say that the Pentagon and Google are very different places. But that gap could harm U.S. national security. 

WASHINGTON — For the second time in a week, the Pentagon’s top uniformed officer has taken a shot at Google, warning that the tech company’s investments in China are doing long-term damage to America’s security.
But Gen. Joseph Dunford, chairman of the Joint Chiefs of Staff, said he also plans to meet with the tech giant to debate about its roles and responsibilities as a commercial enterprise versus how much the firm owes to America as its home nation.
“In my judgment, Google assisting the Chinese military in advancing technologically is not in U.S. national interests, so it’s a debate we have to have,” Dunford said at a Thursday event hosted by the Atlantic Council.
His comments followed up on statements made in a Senate hearing last week, where he said Google was benefiting the Chinese military by its operations in the communist nation. 

Asked to follow up on those conversations Thursday, the chairman expressed the belief that no company can do work in China without it being siphoned off.
“If a company does business in China, they are automatically going to be required to have a cell of the Communist Party in that company,” he said. 

“And that is going to lead to that intellectual property from that company finding its way to the Chinese military. It is a distinction without a difference between the Chinese Communist Party, the government and the Chinese military.”
“Ventures to help develop artificial intelligence in China are going to do two things. They are going to help an authoritarian government to assert control [over] its own population. Again, our country exists for the individual. China exists for the Chinese communist party,” he continued.
“The second thing it’s going to do is it’s going to enable the Chinese military to take advantage of the technology that is developed in the United States. Why is it developed in the United States? Why is Silicon Valley in the United States? Because of our system of government in enabling of individual ideas to bubble up and advance the world, whether it’s medically, education, artificial intelligence, you name it.”

Dunford added that he has plans to meet with Google executives in the near future, likely next week.
“I just think we need to have a debate about that. We ought not to think that it is just about business when we do business in China,” he said. 

“This is about us looking at the second- and third-order effects of our business ventures in China, the Chinese form of government, and the impact it’s going to have on the United States’ ability to maintain a competitive military advantage and all that goes into it.
“I’m happy to have that debate. This is not about me and Google.”
The issue Dunford identifies is indeed wider than Google, with China a prime target for just about every major American industrial concern. 

His comments also come from a situation where members of the tech and defense communities appear to often talk past each other and regard the other with suspicion.
That said, Google is an easy target inside the Pentagon. 

Not only did parts of the company revolt against working on the department’s Project Maven last year, leading to Google’s exit entirely from the program, but the company has opened a major AI center in China — despite statements from Eric Schmidt, then the head of parent company Alphabet, that the U.S. and China are in an AI arms race.
“In the case of Google they were highlighted because they have an artificial intelligence venture in China. I think it is a reasonable assertion, even in an open venue like this, to assert the benefit of that venture for artificial intelligence for China, one of many ventures of our companies that are there, indirectly benefits the Chinese military and creates a challenge for us to [maintain] a competitive advantage,” Dunford said.
It’s not just AI where China’s influence on the commercial sector is butting up against the Pentagon’s interests.
Asked about the potential risks of a Chinese-built 5G network, Dunford called it a “critical national security issue” that needs to be addressed not just in the U.S. but with allied nations.
“Our relationships rely on trust, and that trust, in part, is the assurance that the data that we exchange, the intelligence we share, the information we share can be done in a way where it’s not compromised. And the issue of 5G addresses both potential vulnerabilities in our systems due to how reliant we will be on 5G for the internet of things, our combat systems, but also exchanging information with our allies and partners,” he said.
"So we very much believe that any future capability along the lines of 5G has to be trusted, and we’re concerned that we’re moving in the direction where if we don’t get out in front in that regard we won’t be able to trust 5G and will be at a competitive disadvantage,” the chairman concluded. 

“I think American industry needs to step out and dominate 5G because it will be in our national interest to do so.”

Inside China’s Plan for Global Supremacy

How the fight for the next communications ecosystem could make a world dependent on Chinese technology, Chinese software, Chinese e-commerce, Chinese venture capital, and the Chinese market

By David P. Goldman


In 2013 my friend Eduardo Medina-Mora became Mexico’s ambassador to the United States. 

We had known each other since 1988, when I was preparing a study of Mexico’s tax and regulatory system for a U.S. consulting firm, and Eduardo was running a small Mexico City law firm after a stint as press officer for the Ministry of Fisheries. 

We kept in touch over the years. 

In 2003, when he headed Mexico’s foreign intelligence service, the CISEN, and I ran the fixed income research department of Bank of America, we compared notes over dinner in Mexico City. 

He went on to serve as attorney general and other senior posts.
Eduardo complained that no one in the Obama administration seemed responsible for Mexico. 

“We don’t even know who to call when a problem comes up,” he told me at his office at Mexico’s Embassy on Pennsylvania Avenue, where I called on him to offer my congratulations. 

“It’s easier for [then Mexican President Enrique] Peña Nieto to get the president of China on the phone than Barack Obama. What would you advise me to do?”
A few months earlier I had joined Reorient Group, a Hong Kong investment banking boutique, as managing director in charge of the Americas. 

I suggested that we remove the batteries from our BlackBerrys to prevent official eavesdropping. 

We did so. 

“You can invite the Chinese in to build a broadband network,” I then offered. 

“That will get the attention of the Americans.” 

It didn’t. 

But I did get a look at how China’s strategy for global economic hegemony worked from the inside.
A year and a half and many machinations later I brought Mexican Ambassador Alicia Buenrostro Massieu to the headquarters of Huawei Technologies in Shenzhen. 

Ambassador Buenrostro, the niece of a former finance minister whom I had known for years, came with as many of her Hong Kong entourage as would fit in a minivan. 

The trip to Shenzhen took a bit less than an hour including a stop to pass Chinese customs. 

The new bullet train from West Kowloon Station in Hong Kong to Shenzhen takes only eight minutes, one more technological wonder among the many that make some Chinese cities look like sets for science fiction films.
Huawei's highly-incentivized employees put in terrifying hours.  

The Huawei campus covers 500 acres and makes Stanford University look dowdy. 

The executive dining center features an enormous artificial waterfall, young women in traditional costume playing ancient Chinese instruments, and three-star quality Cantonese food (or so I’m told; I eat kosher). 

We dined in a small private room with a Huawei executive, whence a guide escorted us to the exhibition hall. 

We passed thousands of Huawei workers returning from lunch. 

“They all have a futon under their desks,” said our guide. 

“They take a nap after lunch because they work until 10 o’clock.”
The Huawei tour took three hours. 

It might be the largest technology museum in the world, bigger than the Henry Ford Museum in Dearborn, Michigan, or the Franklin Institute in Philadelphia, except it shows only new things. 

One exhibit consisted of a 4-by-6-yard wall map of Guangdong City, glistening tens of thousands of small lights. 

“Every one of the lights is a smartphone,” said our guide. 

“We can track the location of every phone and correlate position to online purchases and social media posts.”
And what do you use this information for, I inquired? 

“Well, if you want to open a new Kentucky Fried Chicken franchise, this will help you to find the best location,” said the guide. 

Yeah, right, I thought. 

The Ministry of State Security knows where everyone is at all times and whom they are with; if the phones of two Chinese who posted something critical about the government are in proximity, the State Security computers will detect a conspiracy. 

That was before China installed high-definition video cameras with facial recognition software powered by Huawei chips at 100-meter intervals in major cities.
In response to Huawei’s domination of fifth generation broadband networks, the U.S. government is currently trying to isolate the company. 

Secretary of State Mike Pompeo on Feb. 21 warned that the U.S. would cut off information-sharing with countries that use Huawei systems. 

Last Dec. 1, while President Donald Trump dined with Chinese dictator Xi Jinping during the Group of 20, the Canadian government arrested Huawei’s chief financial officer at an airport transit lounge in Vancouver. 

But I’m getting ahead of my story.

***

At the end of the tour, the Mexicans and I sat on a semicircular bench in a small amphitheater, and a young Chinese man stepped to the podium and turned on a projector. 

You Mexicans have a big economy, he said, but very low broadband penetration, and he showed some charts and graphs to this effect. 

Your economy is backward today, but you can become a great and rich economy, just like China. 

Let us build a national broadband network for you, he urged. 

Then we will bring in e-commerce and e-finance and create a whole new ecosystem that will make you a modern economy. 

He sounded vaguely like the Borg: We will assimilate you. 

Resistance is futile.
Ambassador Buenrostro was astonished. 

After some time she asked, “How long have you been doing this?” 

The man from Huawei said, “Oh, six or seven years.” Buenrostro said, “In Mexico, nothing ever changes.”
The United States is drifting toward the export profile of Brazil, with strength in agricultural commodities and energy but overall weakness in high-technology manufacturing and exports.
Not necessarily, though. 

In 2014 and 2015 I traveled to Mexico to introduce Huawei executives to senior officials of Mexico’s Communications Ministry, hoping to land a role for Reorient Group in financing the project. 

Reorient was a startup created by a Hong Kong entrepreneur whose business acumen and connections were impressive. 

He helped to launch an Africa-centered logistics firm headed by Erik Prince, the founder of Blackwater, with backing from CITIC, China’s largest financial firm.
Mexico might as well have been on the dark side of the moon where Reorient Group was concerned, but I wanted to follow the red thread and see where it led. 

Since 2011, Huawei had been promoting the idea of national broadband networks as the centerpiece of a new economic “ecosystem,” flanked by the likes of Alibaba, the Chinese e-commerce giant, and other services firms.
Huawei’s mantra was the same that I had heard at their Shenzhen headquarters: Invite us in, and we’ll make you rich like China. 

That wasn’t an idle boast. 

In 1987, China’s per capita GDP was $251, according to the World Bank. 

By 2017, it had risen to $8,894, or by 35 times. 

Nothing like that had happened in all of economic history, least of all to the world’s most populous country. 

And it isn’t just individual incomes that have risen. 

China’s high-speed trains, superhighways, skyscrapers, urban mass transit, and ports are gargantuan monuments to the country’s new wealth. 

They make American airports, railroads, and roads look like worn-out relics of the Third World.
Mexico was the first “developing country” I studied as an economic consultant; I would go on to Peru, Nicaragua, Russia and other countries before leaving the field in favor of relative value research on Wall Street. 

The main thing you notice about developing countries is that they don’t develop—or if they do, only small parts of them develop. 

Most people work a subsistence plot with poor implements, or they sit all day in a market stall waiting for someone to come along and buy a liter of cooking oil. 

They barely make enough to eat, and they don’t pay taxes, which means that the government has no money to spend on infrastructure or services. 

More than half of Mexico’s employment is what economists euphemistically call “informal,” that is, off-the-book businesses that have no access to capital.
East Asia is different. 

The Chinese economic model is only a souped-up, bigger and more ruthless version of the Asian model that began with Japan’s restoration of the Emperor Meiji in 1868, and was replicated by South Korea and Taiwan: Move subsistence farmers to the cities and build factories for them to work in. While its per capita GDP rose 35 times, China moved 550 million people from the countryside to the cities, and it built the equivalent of all of the cities of Europe to house them.
Modernization in China isn’t the enclave of a middle-class modernity, as in India, but a movement that reaches into the capillaries of society. 

Entrepreneurs in Chinese villages connect to the world market through mobile broadband, sell their products and buy supplies on the Alibaba platform, and obtain credit from microfinancing platforms. Information and capital flow down to the roots of the economy and products flow back up to the world market.
China now proposes to export its model to Southeast Asia, Central Asia, Latin America, parts of the Middle East and Africa. 

This involves a Faustian bargain of sorts; the same technologies that have lifted billions of East Asians out of dire poverty and the ever-present risk of starvation into prosperity and economic security can also give dictatorial regimes previously unimagined tools for social control. 

China’s Belt and Road Initiative (BRI) has a $1 trillion war chest for infrastructure investments and export loans.
In making such offers, Chinese planners are thinking a generation ahead. 

The scarcest resource in the world is labor, specifically workers who can read an instruction manual, learn skilled or semi-skilled jobs, and show up for work on time. 

Virtually all of the world’s population growth during the 21st century will take place in sub-Saharan Africa and the Indian subcontinent—this last mostly in Pakistan, where the average female has four children compared with 2.2 in India.
The problem is that the productive parts of the world are all aging together. 

There are plenty of young people in the world, but low educational levels, abysmal infrastructure and political instability sideline the regions where population growth is most rapid. 

The people of aging countries with shrinking populations cannot find enough young people to absorb the investments they need to make to fund their prospective retirements. 

China’s own labor force stopped growing a couple of years ago. 

In 2018, kindergarten admissions in China fell by 740,000, the first decline on record, and the birth rate fell to 11 per 1,000 people in 2018 from 13 per 1,000 people in 2016.
The good news is that the prospects are good for a quantum jump in productivity in the developing world. 

The bad news is that China is acting aggressively to position itself as the dominant equipment supplier, investor, joint venture partner and technology provider in this revolution. 

By contrast, the United States is drifting toward the export profile of Brazil, with strength in agricultural commodities and energy but overall weakness in high-technology manufacturing and exports.
5G technology, a source of bitter contention between the United States and China, is a game changer. For the military, it makes possible the control of vast numbers of autonomous weapons systems, like drone swarms that can overwhelm anti-missile defenses. 

For industry, it allows robots and control devices to exchange vast amounts of data at speeds 2,000 times that of 4G LTE. 

It also cheapens the cost of delivering broadband to homes, by transmitting over the airwaves more data than fiber-optic cable now can carry. 

Developing countries will therefore be able to go straight to 5G at much lower cost, and Huawei is both the cheapest and the most technologically advanced provider. 

It spends $20 billion a year on R&D, about double the combined R&D budgets of its only major competitors, Sweden’s Ericsson and Finland’s Nokia.
Not since the invention of gunpowder has China led the world in the introduction of a disruptive new technology, and the United States still can’t believe that it has been leapfrogged. 

For years the conventional wisdom held that the Chinese only could copy but not innovate. 

That wisdom has now been proven wrong.
In 2003, Huawei admitted that it had stolen code from Cisco, then the top producer of internet hardware. 

But Cisco long since exited the hardware businesses, because the “capital light” services businesses offered higher margins. 

Cisco presently has more than $70 billion of cash in the bank. 

That’s roughly the whole of Huawei’s R&D budget for the past six years. 

Why didn’t Cisco spend the money and maintain its dominant position in internet systems? 

The answer lies in Huawei’s business model, which bids 40 percent below the nearest competition. 

Its pricing power almost certainly depends on subsidized credit from China’s state-owned banks. 

That money buys plenty of innovation.

***

When I first worked in Mexico City in 1988, Eduardo Medina-Mora’s little law firm employed a secretary who did nothing all day but dial the telephone, because it took five or six tries to get through to a local number. 

By 2015 the system had improved, to be sure, but Mexico still had the most expensive broadband in the world and one of the lowest penetration rates (in subscriptions per capita) relative to the size of its economy. 

Scrambling to get to a meeting at the Communications Ministry, I used Waze to direct the taxi driver, who did not use the program, because broadband was too expensive.
In 2015, Mexico announced that it would create a wholesale broadband network, the red compartida (shared network), that would lease broadband to any carrier that wanted it. 

The consortium that won the bid to build the $7 billion network, ATLAN, engaged Huawei and Nokia to build the actual infrastructure. 

The first elements of the network went live in March 2018.
By then, I was out of the picture. 

In the summer of 2015, Alibaba’s billionaire founder, Jack Ma, bought Reorient Group through his private equity firm, Yunfeng Capital. 

Early in 2016 he fired all of Reorient’s Western bankers, and there ended my Forrest Gump-like observations of great events in the broadband world.
But as the man with the PowerPoint at Huawei headquarters had told the Mexican delegation, it’s not about selling a broadband network. 

It’s about the ecosystem. 

As Daniela Guzman reported in Bloomberg News recently, “As America recedes into the background, Chinese foreign direct investment in Latin America and the Caribbean has skyrocketed over the last ten years, according to a 2018 report by the Economic Commission for Latin America and the Caribbean. China dropped close to $90 billion in the region between 2005 and 2016. With a growing emphasis on telecommunications, Chinese investment in emerging technology is increasingly the primary fuel behind Latin America’s tech boom.” 

She quoted one South American entrepreneur saying, “When you go to China, you see what’s going to happen in Latin America in five more years. Today, we look at China. We look at Meituan, at Alibaba and Tencent, to see what we can do in the future.”

To get there, Latin American economies will depend on Chinese technology, Chinese software, Chinese e-commerce, Chinese venture capital and, of course, the Chinese market. 

America’s intelligence agencies worry that China will use its dominance in 5G networks to steal data. That probably is true, but far more damaging to America’s position in the world is the prospect that the most productive countries of the Global South will be hard-wired into the Chinese economy.

Chinese domination of the Global South would leave America poorer and weaker than it wants to be, in a position comparable to Britain’s after the dissolution of its empire. 

As Leon Trotsky once put it: You may not be interested in war, but war is interested in you. 

The same applies to industrial policy.
The adoption of a Meiji-style model by a country of a billion and a half people has driven American companies out of most capital-intensive manufacturing industries. 

I do not think that the United States should copy the Asian model, but we have our own precedents for an industrial policy of sorts: the great mobilization of American industry in World War II, the Apollo program, and the Strategic Defense Initiative. 

When the Russians beat us into space with Sputnik in 1957, the Eisenhower administration responded with federal support for higher education in STEM. 

Today only 7 percent of American undergraduates choose engineering as a major, compared with 33 percent in China.
We could also, in theory, unite with Japan, which has more foreign assets than China, and offer an alternative to China’s Belt and Road Initiative “ecosystem.” 

China is arrogant and predatory in its dealings with prospective economic clients. 

We could do better.
The trouble is that we have trouble admitting to ourselves that China might best us. 

We’ve told ourselves for years that the Chinese don’t invent but only steal technology, and that a state-directed system can’t possibly compete with our free enterprise model. 

The West chronically underestimates Asians. 

The Russians couldn’t believe that Japan could stand up to their battle-tested armed forces in 1905, when Japan crushed the Russians on land and sea at Port Arthur. 

In his new biography of Winston Churchill, Andrew Robert reports that months before Japan took the British citadel of Singapore in 1942, Churchill “had privately predicted to the American journalist John Gunther that in the event of war the Japanese would ‘fold up like the Italians’ because they were ‘the wops of the Far East.’ 

Once again, recourse to racial stereotyping had led him badly to underestimate a determined foe. Churchill effectively admitted that he had been wrong when on 15 February 1942 he said in a broadcast, ‘No one must underrate any more the gravity and efficiency of the Japanese war machine. Whether in the air or upon the sea, or man to man on land, they have already proved themselves to be formidable, deadly, and, I am sorry to say, barbarous antagonists.’”
It’s time to stop underestimating China.