North-East Asia Insight - Issue 17, August 2019
TREND ASSESSMENT – HUAWEI: MAKE IT (IMPOSSIBLE)?
On 26 July 2019, Chinese authorities alleged that Huawei-linked packages had been withheld by several US firms. Chinese state-aligned newspaper Global Times said that such companies would likely be the first to be sanctioned through China's upcoming entity list. Huawei's fate will be key in determining the foreign companies to be included on the entity list and other reprisal measures taken against foreign companies in China, the outcome of the trade war, and the world's 5G network infrastructure.
As in any war, the US-China trade war has had many casualties and no winner. Global supply chains have been rattled, creating trade diversion and inflicting economic damage on the livelihoods of both soy farmers in the United States and engineers in China. No company embodies the ugliness of the trade war more so, potentially, than embattled Chinese multinational firm Huawei Technologies Co. Ltd. (Huawei). Since the arrest of Huawei’s chief financial officer, Meng Wanzhou, in December 2018 and attendant adverse media coverage, Huawei’s international reputation and ability to conduct business has been further stymied.
Since the United States on 15 May 2019 placed Huawei on its ‘Entity List’ – a de facto export ban – numerous companies – including US chipmakers Qualcomm Inc, Broadcom Inc, Xilinx Inc, and Intel Corp – from several countries have severed ties with Huawei. Shortly after the ban, US President Donald Trump even offered a relaxing of the restrictions on the company as a bargaining chip in bilateral negotiations; perhaps pragmatic in a business sense, but much to the consternation of security and intelligence officials that had gone to great lengths to ensure that the ‘national security threat’ would be thwarted. On 9 July, the US government temporarily relaxed restrictions on Huawei, allowing businesses to sell products to the firm provided they pose ‘no threat to national security’.
The temporary de-escalation of supply chain risks to US companies would not last long, however, as companies are still struggling to understand the terms of complying with the export ban. Beijing is currently drafting an entity list akin to the US’s, and details of this have not been made public. It is likely that companies that have taken actions against Huawei will be added to this list.
One study of CVs of Huawei employees identified several mid-level employees with dual positions at Huawei and the People’s Liberation Army (PLA). Indeed, Ren Zhengfei, the company’s founder and CEO, was a member of the PLA before embarking on a career in the electronics industry in 1983 that would lead to the creation of the multibillion-dollar tech empire. Furthermore, Huawei gained momentum in the early 1990s through a lucrative contract to provide telecoms equipment for the PLA. These facts suggest that the company may still co-operate with the PLA in some capacity.
Cold War 2.0
Western analysts have accused Huawei of maintaining close links with the Chinese military and the ruling Communist Party of China (CPC). The accusations of ties to the CPC are not helped by the opacity of Huawei’s ownership structure. There is compelling evidence to suggest that the company is almost fully state-owned. Furthermore, provisions included in China’s cyber law that was passed in 2017 mean that Huawei, like any other Chinese company, has a legal obligation to provide a backdoor to the Chinese government. In other words, it must turn over private consumer data at the behest of officials for any reason, security or otherwise. This policy exposes users of Huawei products, such as smartphones and tablets, to significant security risks in the form of surveillance.
The potential of surveillance is further enhanced when considering the vast 5G telecommunications infrastructure that the company is rolling out across the world. Countries that have barred Huawei from establishing their 5G networks include some of those in the so-called Five Eyes intelligence sharing network – comprising Anglophone countries such as the United States, Australia, New Zealand, Canada, and the United Kingdom – and their allies. This suggests that a new type of Cold War is being fought, with divisions along technological and economic rather than ideological lines. The business implications of such a conflict are far-reaching, especially for firms in the technological sector and related industries.
Already, efforts to comply with the US export ban have caused several large companies to sever ties with Huawei. Again, these are mostly from Five Eyes countries and their allies, including the US, UK, and Japanese firms, especially in the technology and telecommunications sectors. Actions taken against Huawei thus do not refute China’s accusation that the export ban is politically motivated. It should be noted, though, that such countries are more likely to be impacted, given their status as advanced economies. The severances and some of the ensuing confusion in companies hastily acting to comply with the ban are causing Huawei significant financial losses. In June, Zhengfei estimated that the ban would cause Huawei to lose USD30 billion in revenue over the next two years. Furthermore, US companies with operations in China, such as courier services firm FedEx and electronics maker Flex, have disrupted Huawei’s operations by preventing the company’s overseas shipments from entering China and withholding its goods within the mainland.