Caixin
Dec 19, 2018 08:19 AM
TECH TALK

Huawei Bans Cast Spotlight on China’s New Generation of Corporate ‘Mutants’

I’m not usually a big fan of conspiracy theories, even as these last few weeks seemed to see country after country jumping on a U.S.-led bandwagon banning the use of Chinese equipment in their new 5G telecom networks. But a great piece of reporting from our content-sharing media partner the Australian Financial Review (AFR) shed some light on the matter last week, showing that indeed this was more than a series of random dominoes falling one after the other.

The bottom line is that the U.S. was leading a campaign against Chinese tech giants Huawei Technologies Co. Ltd. and ZTE Corp., and leaning heavily on some of its closest allies to follow suit by keeping their new networks free of equipment from the pair. The timing was no coincidence either, since all of these major markets are in the process of building new 5G networks that will serve as crucial communications infrastructure for at least the next four or five years.

We’ll review all the developments shortly in this behind-the-scenes story that would make Ian Fleming and John le Carré proud, and also look at what may come next in this Washington-led campaign.

But as a long-time follower of this sector, I really feel a need to give my own opinion up front and say that Beijing is just reaping what it has sown for all of these years. On the one hand, its tireless efforts to promote reform — including an embrace of market economics — have produced the likes of Huawei and ZTE, which can effectively go toe-to-toe with Western peers in terms of business scale and capabilities.

But at the same time, Huawei also represents a new class of ‘Made in China’ corporate mutants, which have reached their current status in no small part due to a relentless showering of state affection at all levels, starting at the top from Beijing. The cord between state and enterprise that produced such giants has been hard – if not impossible – to cut, which is what’s leading to this growing backlash by Western governments.

All that said, let’s review the latest developments, starting with the AFR report that traces the emergence of the latest wave of pushback against Huawei and ZTE. That report attempts to tie in the movement with the high-profile arrest of Huawei’s CFO in Canada on Dec. 1 for possible extradition to the U.S. to face fraud charges. 

In my view, that pair of actions don’t seem too related. That’s because the arrest stems from a one-time thing, namely the alleged violation of U.S. sanctions by Huawei over illegally selling American products to Iran. In comparison, the bans on buying Huawei and ZTE equipment are a long-term issue centered on national security.

This story behind the bans really began about six or seven years ago when Washington first started pressuring U.S. wireless carriers to keep Huawei and ZTE equipment from their networks. No evidence was ever given of secret backdoors or product tampering that could allow spying by Beijing, and Huawei has repeatedly denied any such interference. Instead, the real issue has been concerns over the potential for future spying, which is a direct result of Beijing’s previously mentioned inability to uncouple from the new generation of mutant corporates it has nurtured.

Five eyes

The AFR report neatly chronicles how Washington’s concerns over the matter became a central agenda item in July at an annual meeting in Canada between top intelligence officials from the so-called “Five Eyes” – the U.S., Canada, Australia, New Zealand and the U.K. Following that meeting the five have to varying degrees banned the use of Chinese equipment in their 5G networks.

The U.S., Australia and New Zealand have all banned Chinese equipment outright, while signals coming from Britain indicate a similar move may be afoot. Japan is reportedly now taking similar action, and Germany and France are considering their own measures, according to various media reports. 

If this list is beginning to look a bit like the G8, which represents eight of the world’s largest economies, that’s no illusion. Five of the seven countries I’ve mentioned are G8 members. The only three that are not said to be considering at least some kind of ban are Canada — which is reportedly being pressured to take such steps — as well as Italy and Russia, the latter of which is a top China ally these days.

Alliances aside, there’s another reason why Russia would probably never join the growing list of countries banning Huawei equipment: price. Huawei and ZTE have both reached their current positions in no small part due to the kinds of subsidies that Beijing tends to shower on sectors it wants to promote.

Those take the form of things like cheap financing for foreign carriers who buy equipment from Huawei and ZTE. The companies also receive a form of subsidy via strong demand for their products at home from China’s vast muddle of state-owned enterprises that monopolize the domestic telecom sector.

Both Huawei and ZTE use that cost advantage wherever they can, and it’s creating an interesting divide between the global haves and have-nots. While relatively wealthy countries like the ones that are banning Huawei can afford the luxury of buying costlier equipment from the likes of Ericsson and Nokia, that isn’t true for the majority of more price-sensitive nations like Russia.

That reality was on display two weeks ago when British giant BT confirmed its longstanding policy of excluding Huawei from its core networks, even as the less affluent Portugal said during a state visit by Chinese President Xi Jinping that it welcomed such products. https://www.caixinglobal.com/2018-12-06/bt-ripping-huawei-equipment-out-of-mobile-units-core-network-101356176.html

So where do things go from here? My guess is that all of the G8 except Russia will eventually sign on to the Huawei ban, alongside other smaller but equally developed markets like Australia and perhaps Singapore and South Korea. The have-nots will go ahead and continue to take their chances with Huawei and ZTE, essentially letting China’s low prices take precedence over national security threats that many may feel are nonexistent or at least manageable.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com


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