the price of paranoia

What Is the Cost of the U.S. Paranoia About Huawei?

Will banning Huawei equipment from being used in the rollout of 5G in the U.S. end up being more costly to our national interest than whatever threat the Chinese telecom giant may pose? Photo: Jaap Arriens/NurPhoto via Getty Images

In 2016, Chinese telecom giant Huawei — the world’s largest manufacturer of telecom equipment and the number-two supplier of smartphones on the planet — was a company whose name many Americans couldn’t pronounce (it’s wah-way, per the company’s own instructional video). Now, the company is regularly in the headlines — though not for the reasons Huawei itself would want.

The company has been dogged for years by U.S. intelligence agencies, which fear it could act as a proxy for Beijing. A U.S. congressional report in 2012 warned that Huawei posed a risk to U.S. national security. But under the Trump administration, the behind-the-scenes fight between U.S. intelligence and Huawei has taken center stage, culminating in the arrest of Huawei CFO and heir apparent Meng Wanzhou in Canada, the Department of Justice charging Huawei with fraud, obstruction of justice, and theft of trade secrets, and President Trump potentially on the verge of signing an executive order that would ban Huawei equipment from the U.S. wireless grid.

The executive order would be a blow to both Huawei and the U.S. telecom industry; the inability to use Huawei equipment will hamper how quickly U.S. companies can roll out 5G networks, whose development is vital for the U.S. to stay competitive in the global landscape. It will also place an increasing strain on traditional U.S. allies, as other countries seem much less willing to issue a blanket ban of Huawei equipment; Germany looks close to proceeding with its plans to use Huawei equipment, and both the U.K. and Canada — both part of the “Five Eyes” intelligence alliance — have signaled they may continue to use Huawei equipment as well.

The question at the crux of this whole debate: Are U.S. intelligence and military officials being properly paranoid, or overly paranoid? And how far is the U.S. willing to go to make sure Huawei stays out of its wireless infrastructure?

The Ascent of Huawei

For the first part of this decade, Huawei was the leading light of China’s tech sector — and particularly, of the industry’s hopes of making inroads into Western markets. In 2012, it knocked off Sweden’s Ericsson to become the world’s largest telecom equipment maker, signing contracts on every continent except Antarctica to build out cellular data networks. In 2018, it took over from Apple as the world’s number-two supplier of smartphones, second only to Samsung. Per its latest earnings statement, the company brought in $108.5 billion in revenue, making it one of the world’s largest privately owned companies and placing it among the ranks of Cargill and Koch Industries.

It’s been a quick ascent for the company, which was founded by former People’s Liberation Army engineer Ren Zhengfei in 1987 in Shenzhen, China. Founded in the shadow of Deng Xiaoping’s open-door policy and during a time when China was attempting to rapidly upgrade its telecom infrastructure, Ren’s key insight was to use aggressive reverse engineering of foreign competitors products to create an R & D and manufacturing pipeline that was contained entirely in China. This sometimes landed the company in hot water; it was forced to settle out of court after Cisco accused Huawei of copying source code for one of its routers, bugs and all.

For most of the 1990s, simply supplying the exploding Chinese domestic market (including winning key government contracts) was enough to transform Huawei from a company most of whose staff (including some top executives) worked in small offices that doubled as dormitories and kitchens, to a rapidly growing high-tech giant. Starting in the late 1990s, Huawei began to expand internationally, first into neighboring southeast-Asian countries and then across the globe. By 2002 it was bringing in a half billion in revenue from foreign sales, and by 2005 it was bringing in more revenue from overseas sales than it was domestically.

Beginning in 2003, Huawei began to develop mobile phones. While phones were initially a small part of its business, the company moved aggressively to change that as Android smartphones entered the market. By 2018, nearly half of Huawei’s revenue came from smartphone sales, with its P20, P20 Pro, and Mate 20 flagship phones all receiving high marks from both reviewers and consumers abroad, especially in Europe and the Middle East.

There are larger Chinese firms in terms of pure revenue, but none with the international reach of Huawei. But the company has always been slightly baffling to outside observers. It has an odd corporate structure, including a system of rotating CEOs picked from the same group of three top executives. And while Huawei is a privately held “collective,” it acts much like a publicly traded company, even issuing annual earnings reports audited by KPMG. Within the industry, Huawei’s telecom equipment and phones are seen as both a good value and exceedingly well-made, but the company’s reputation as a corporate citizen in the U.S. has been shaky for nearly a decade.

The U.S. Fears About Huawei

In 2012, a blistering U.S. Congressional report was released, warning that Huawei was a national security threat, accusing it of stealing American IP, having close ties to the Chinese military, and of violating U.S. sanctions against selling to Iran.

Since then, U.S. concerns have focused on three areas, says Scott Kennedy of the Center for Strategic and International Studies. There’s the issue of IP theft, including the case of Cisco routers and a case settled out of court between Huawei and T-Mobile. There is also the possibility that Huawei may have built hardware or software backdoors into its equipment. “The third type of concern is that Huawei is a telecom company based in the People’s Republic of China led by the Communist Party and Xi Jinping,” says Kennedy. “So it may be forced to serve the interests of the Chinese Communist Party.”

There are two reasons for the U.S. to take the fear of the Chinese government forcing Huawei to spy seriously. One is the passage in 2017 of the Chinese National Intelligence Law, which allows the Chinese intelligence apparatus a broad range of powers, including allowing intelligence agencies to “ask relevant institutions, organizations, and citizens to provide necessary support, assistance, and cooperation.”

But the real reason the U.S. intelligence community may be worried about what the Chinese government could compel Huawei to do is that the U.S. has done the exact same thing in the past. Starting in 2007, the U.S. government compelled some of America’s largest tech companies, including Microsoft, Google, and Apple, to spy on its own citizens under the PRISM program, as revealed in the documents leaked by Edward Snowden.

“I think that was a wakeup call to the Chinese about what the U.S. was doing,” says Kennedy. “In the same way that the 1991 U.S. bombardment of Iraq on CNN showed the Chinese and others how far behind they were in military strength, in 2013 Snowden showed them how vulnerable and how far they were behind in cyber.”

At this point, it seems like the potential ban on Huawei equipment is based on hypothetical scenarios. There’s no evidence in the public domain that Huawei has engaged in espionage in the U.S. on behalf of the Chinese government, and there’s seemingly no assurance Huawei could give that would satisfy China hawks in the U.S. government that the company would be a safe partner to work with; the U.S. has said it doesn’t need to “show proof” that Huawei is a national threat.

Kennedy thinks the U.S. intelligence community does have some information compelling it to advocate so strongly against Huawei. “I don’t have a security clearance, but I don’t think people are just whistling Dixie and making random claims,” he says. “Is Huawei intentionally putting in backdoors or does the existence of their technology in a network create vulnerabilities which then the Chinese military intelligence community can exploit? I think both of those two things deserve a fuller investigation.”

Under the Shadow of Trump

All of this has happened in the shadow of two world-altering events: the election of Donald Trump and the rollout of 5G. While Huawei has been viewed with suspicion long before Trump took office, the ascendance of Trump and the looming spread of 5G has stoked the paranoia of America’s spy networks even further. The sheer amount of data that will flow through 5G networks will dwarf anything that has come before, and the amount of infrastructure 5G will touch — everything from medicine to autonomous vehicles — is vast. And there’s a strong desire among many carriers use Huawei equipment. “Operators have looked at alternatives but have realized that Huawei is currently more innovative and probably better for 5G,” said analyst Dexter Thillien of Fitch Solutions, speaking to the Singapore newspaper the Business Times.

But carriers in other countries who use Huawei equipment risk endangering their relationship with the U.S. In an interview with Fox Business Network in late February, Secretary of State Mike Pompeo was blunt: “If a country adopts [Huawei] and puts it in some of their critical information systems, we won’t be able to share information with them, we won’t be able to work alongside them,” Pompeo said. “We’re not going to put American information at risk.”

Pompeo warned allies that using Huawei equipment would place not only their own infrastructure at risk, but also endanger whether the U.S. chooses to place or keep key governmental and military outposts in their countries. “We won’t even be able to co-locate American resources, an American embassy, an American military outpost.”

Andy Purdy, the chief security officer at Huawei who formerly spent time working for the Department of Homeland Security, sees the U.S.’s hawkish stance towards Huawei as being based purely on a “geopolitical layer,” and not on any real evidence, classified or otherwise.

“The U.S. government liked the world better after the Cold War was over and Russia was broken up,” says Purdy. “The U.S. was a dominant power in the world. We had all the friends. We had all the resources. We had the strength. We could project power around the world and nobody threatened us and nobody really threatened our allies in any significant way. Certainly none that would affect our national security.” The rise of China has changed that. “Many believe that economic power relates directly to national security, so you have China becoming a very strong global power,” says Purdy.

In Purdy and Huawei’s view, the U.S. watched as Huawei rapidly became the world’s largest supplier of telecom equipment, and realized that it had significantly affected the U.S.’s own ability to project power. Thus the ban on Huawei. “I believe the U.S. government does not have evidence that Huawei or the China government is using Huawei equipment to conduct surveillance around the world or anywhere,” says Purdy. “I do not believe the U.S. government has evidence of that.”

“The Trump administration has a distinctive approach to foreign affairs,” says Kennedy. “At a minimum, they’re looking at the world much more as a Hobbesian place, where alliances aren’t as dependable.” This, combined with the free-floating chaos within the Trump administration’s foreign-policy team, have allowed for a sudden increase of pressure on Huawei. China hawks, who were constrained by a clearer hierarchy of priorities under previous administrations, “have been unchained to pursue their pet issues.”

“Under Obama, China was still described as a strategic partner,” says Paul Triolo of the Eurasia Group. Behind the scenes, there were still worries about China and Huawei, but those were put on a back burner in order to work with China on issues like climate change or terrorism. “When the Trump administration came out with its national security strategy in late 2017, China was now described as a threat.” The rapid shift in the U.S.’s stance confounded the Chinese. “The Chinese still can’t really figure it out. They’re like, ‘Wow, what happened?’ In about a year and a half, you go from Mar-a-Lago and Trump and Xi having a great time, and now China is the Evil Empire.”

Ren Zhengfei, once a media recluse who shied away from speaking to the press, has been on something of a charm offensive, recently sitting down with an American journalist for the first time and saying Huawei would not allow the Chinese government to force it to use it as a tool for espionage. “We never participate in espionage and we do not allow any of our employees to do any act like that, said Ren in an interview with CBS This Morning’s Bianna Golodryga. “And we absolutely never install backdoors. Even if we were required by Chinese law, we would firmly reject that.” Ren even seemed willing to let the chance for Huawei to do business in U.S. pass by. “We focus on what we can do,” said Ren. “It’s okay to leave behind what’s impossible.”

The final wrinkle in all of this is Donald Trump himself. While people within the Trump administration have worked for months to get Trump to sign an executive order banning Huawei, and his secretary of state was warning allies about the repercussions of doing business on cable television with Huawei, Trump seemed much more ambivalent. In a pair of tweets on February 21, Trump mused: “I want 5G, and even 6G, technology in the United States as soon as possible. It is far more powerful, faster, and smarter than the current standard. American companies must step up their efforts, or get left behind. There is no reason that we should be lagging behind on something that is so obviously the future. I want the United States to win through competition, not by blocking out currently more advanced technologies. We must always be the leader in everything we do, especially when it comes to the very exciting world of technology!”

When questioned further by the Chinese state-run outlet China Daily, Trump said, “I’d like to have all companies be able to compete. I don’t want to artificially block people out based on excuses or based on security. I don’t want to have a security problem.”

Trump is currently in a round of extensive trade negotiations with China, and it’s possible that China has made it clear that Huawei’s being allowed in the U.S. is one of its key goals, hence Trump’s tweets. Or it may simply be Trump being contrarian. Regardless, it leaves the situation in the U.S. and internationally still very much up in the air.

The Cost of Slowing Down 5G

5G is technology that has the potential to redefine not just how fast you download your Spotify playlist, but also vast sectors of industry and information technology. “The big thing about 5G are the applications built on top of it,” says Triolo. “5G itself is just this really nice, fast, capable infrastructure. But the real money that’s going to be made is the innovation that’s going to be on top of it — autonomous vehicles, remote medicine, AR/VR. That’s the holy grail.”

The U.S. would be tying one hand behind its back by denying its carriers the ability to use Huawei equipment. There are three other major suppliers of 5G equipment — Nokia, Ericsson, and Cisco — and all are seen as lagging behind the complete and higher-quality solution that Huawei offers. And while major U.S. carriers have been planning for a while to operate in a world without Huawei equipment, smaller operators have already installed Huawei equipment, meaning there will be some overhauls regardless.

For Huawei’s Purdy, the answer is simple: the U.S. should sit down and talk with Huawei, the same as it would with any other company supplying equipment vital to national security. “Three of our competitors, Nokia, Ericsson, and Sprint, operate under national security agreements,” says Purdy. “The concept is a recognized risk-mitigation technique that the U.S. government relies on and it’s a fundamental concept. They put those in place, whether it’s a U.K. company, a Japanese company, a Swedish company, or whatever. The U.S. government is — I mean paranoid sounds pejorative, but they want to be extra careful to make sure there is no undue foreign influence on operations of important companies in the U.S.”

As Purdy sees it, Huawei should get the same treatment. The U.S. should determine how best to insulate itself from the potential risks of using Huawei equipment, while reaping the rewards. “I’m not predicting that the U.S. government is going to negotiate with us. I think if they did they’d be surprised that we’re willing to discuss effective mechanisms for assurance and transparency.”

As the world prepares for 5G, it remains unclear what will happen with the U.S. and Huawei. With many U.S. allies seeming unwilling to hold the line on a Huawei ban, the U.S. will have to learn to live with interacting with Huawei equipment on some level. A new U.S. administration may come into power in 2020 with a very different take on how to handle Huawei. There’s a chance that Trump, seeing the chance to declare a win in other areas of Chinese trade negotiations, may simply allow Huawei equipment into the U.S. wireless grid over the protests of his own administration, forcing the U.S. intelligence community to hope that Huawei is true to its word and that the Chinese intelligence state is more beneficent than the U.S. was under the PRISM program.

What would be ideal for American interests would be to have our own Huawei — a telecom company capable of manufacturing the wireless infrastructure that 5G will require at scale. But we don’t; our telecom manufacturing base has vanished over the past two decades. Cisco, based in the Bay Area, can produce some of the 5G equipment needed, but it won’t be able to do so at the pace or level of sophistication that Huawei offers. As long as the threat of an executive order banning Huawei hangs over the U.S. landscape, U.S. carriers have to make business decisions as if Huawei is banned regardless — why install infrastructure if there’s a chance Trump’s signature will mean you have to rip it all out again?

The last major revolution in mobile networks, 4G, saw the birth of companies like Uber, which fundamentally altered vast swaths of the economy around the world. America can build a 5G infrastructure entirely free of Huawei equipment, but the longer our 5G rollout is, the more likely it is that the next major disruptive industry won’t emerge from the United States — and that may be much more damaging to our national interests than whatever danger Huawei may pose.

What Is the Cost of the U.S. Paranoia About Huawei?