Foreign Policy / National Security / Uncategorized

Spy Game: The Case for Excommunicating Huawei and ZTE

The issue rapidly gaining momentum this election season is our future relation with China. It has been a growing issue for decades now, but somehow the American public is finally ready to confront our problematic ally about years of backhanded camaraderie. Outside of the vitriolic personal attacks on character and domestic policy, the presidential campaigns are now looking to prove who can fight back to China the hardest, but public censure can only take you so far. It is now Congress that has placed the opening gambit in the battle against the East Asian Empire.

On October 8, 2012, the Chairman of the Committee on Intelligence, Mike Rogers (MI-08), released an investigative report on the Chinese companies Huawei and ZTE wherein he presented the case of disallowing the telecommunications giants from conducting business in the U.S. The report about the companies raises many concerns, as they are alleged to present vehicles for espionage with ties to the Chinese government. The U.S. just wants answers, yet the eerily reminiscent cloud of McCarthyism lingers on. One thing is certain, though: Huawei and ZTE, much like the Chinese government, want to enter every market of the world, but do not want to follow the same rules as other countries.

The fact is that the activities of Huawei and ZTE are indubitably suspicious. Throughout the 11-month study, the Committee “remains unsatisfied with the level of cooperation and candor provided by each company;” however, the ambiguous rhetoric does not appropriately relay the gravity of the situation. Both Huawei and ZTE are alleged to be mediums of espionage for the Chinese government. This represents an evolution in the spy game with countries now supplanting informants for secret binary code

With this air of mystery surrounding the two companies, their respective histories come into question. The founder of Huawei, Ren Zhengfei, served in the People Liberations Army, and set up his company with little more than the equivalent $5,000 at the time. Compared to his 2011 revenues of over $32 billion, Mr. Ren’s cataclysmic rise is remarkable if not remarkably dubious. For a private company founded in 1987 to have such ascension, specifically because Mr. Ren had no known nepotistic ties to government officials, raises red flags. Remember, the Tiananmen Square incident had not even occurred by the company’s inception, and private enterprise and free speech were laughable thoughts at the time. Under such heavy restrictions, it would be miraculous to have such a rise without government ties under a communist regime. Moreover, according to World Bank’s Gini coefficient estimates (the universal figure assessing inequality) China’s wealth became more concentrated during Huawei’s rise, making it harder for a brand new company to penetrate a national market.

Despite its hazy past, Huawei managed to expand its services from mainland China to all around the world. In fact, more than two-thirds of its revenue last year was earned outside of China. Nevertheless, some countries are clearly more wary than others to accept the corporation. While Huawei works closely with GCHQ, Britain’s signals-intelligence agency, other countries have spurned the country’s entrance into their telecommunications infrastructure. That is where the U.S. comes into play.

Following Australia’s lead, wherein the country barred Huawei from taking part in contracts to build in the government’s new $38 billion national broadband network, the U.S. has refused to allow the company access to its communications networks despite repeated attempts. In fact, in 2007 Huawei partnered with the now well-known Bain Capital to make a $2.2 billion bid for 3Com Corporation, a networking company, only to abandon the deal six months later when the Committee on Foreign Investment blocked the deal. After the unsuccessful attempt, the company again attempted to close a much smaller $2 million deal to buy 3Leaf Systems, a server-technology firm, but was again rebuffed after a retroactive review by the Committee. This second transaction is more telling of Huawei’s true intentions because it is obscure for a company that posted nearly $30 billion in revenue to be so eager to buy such a small company when it would gain no competencies or market benefit from the purchase. Rather, this acquisition could potentially have presented an avenue to conduct business stateside, and learn the market and its nuances from the inside.

With so much international focus on Huawei, it is easy to overlook the second largest telecommunications company in China, ZTE, even though they possess commensurate capabilities. In fact, ZTE may even present a more clearcut case of direct government influence. According to Rogers’ report, the company maintains a Chinese party Committee within the company, and basic information on the committee (e.g. members, functions, relationship with the government) was not disclosed to investigators. Moreover, its rationale on entering the American market is even more mysterious. Senior Vice President Zhu Jinyun, who liaises ZTE’s relationship with the U.S., stated the company was “willing to lose money on projects in the U.S. to get a foothold in the U.S. and to understand technology and standards in the U.S.” The desperation could forebode ill intent.

The even more puzzling aspect is that ZTE already possessed established relationships with large American companies— the very reason they were so eager to enter the market in the first place. Nevertheless, even after a multi-year relationship with Cisco in which they provided equipment to ZTE for distribution in China, the company ceased business with the telecom company due to a separate incident. In this event, the FBI investigated ZTE for selling Cisco networking gear to Iran that could be used for other spying purposes, and then lied about all involvement in the matter. Nonetheless, this is not Cisco’s first negative experience with Chinese telecom companies: In 2004, they settled an intellectual property lawsuit against Huawei, an act the Chinese company is purported to frequent.

The only counterargument to allow the companies’ entrance to the American market is the possible implications for American companies in China. With so many American companies manufacturing in China, the Chinese government may take retaliatory measures to make it more difficult to conduct business there. Despite this reliance, it is not cogent to pledge our allegiance to China because in the case of outsourcing, it is a race to the bottom. If neighboring nations offer cheaper labor in all industries, a fact currently in certain industries, large U.S. companies would move there. Moreover, it is apparent now that the Chinese need the U.S. far more than the converse. Without our large manufacturers, our constant technological advancements and growing opportunities, China would not be in the power position they are today. Our dependence on China is vastly overstated, and to invite potential security risks, even if the claims are not substantiated beyond reasonable doubt, would be a mistake.

If either Huawei or ZTE want to do business in the U.S., they must follow suit of other U.S. companies. They must be transparent in all their activities, welcome audits, list on the stock exchange and respect international trade rules. The firms’ failure to provide details or documentation for intellectual property, taxes, funding, corporate-structure and most importantly its relationship with the Chinese government should negate any chance at an American contract. As of now, both telecom companies already enjoy a big presence in Europe where lower prices outweigh the security risks. Moreover, the European Union decided on Monday to postpone their investigation of the companies, allowing them to prolong their presence in one of the most influential blocs in the world. Huawei and ZTE should accept this opportunity because the increasingly negative attention does not bode well for their Western prospects

The U.S. might be acting preemptively just as it had half a century ago, but the results of the investigation indicate they have enough facts to substantiate their claims. As William S. Burroughs said, “Sometimes paranoia’s just having all the facts.”


Further Reading: House Investigative Report