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USA builds up pressure on Huawei, but Spain and India bring comfort

If anyone hoped the holiday break would help passions to simmer down in the escalating disputes between the USA and China, those hopes were dashed with a new round of attacks on Huawei and ZTE. How far the threats to sanction the Chinese vendors are related to genuine national security fears, and how far they are part of the wider climate of trade wars, the uncertainty is damaging, especially when operators are trying to make critical decisions about 5G vendors and deployment plans.

As more countries join the USA in accusing Huawei (and sometimes ZTE) of using infrastructure roll-outs to conduct espionage (charges they vehemently deny), the operators are faced with the prospect of having only three major OEMs to choose from when buying their 5G networks – Ericsson, Nokia and Samsung, with some smaller players likely to benefit in specific areas like small cells and backhaul. But losing the Chinese suppliers would clearly reduce price competition significantly, and deprive operators of some of those vendors’ genuine areas of technology leadership, such as Huawei’s in flexible spectrum management.

And the ripples will be felt across the supplier ecosystem too. Some US Congress members are urging the Trump administration to impose a ban on sale of US components to Huawei or ZTE. A ban of that type was temporarily slapped on ZTE last spring and almost brought the company to its knees, since it procures more than two-thirds of its components from US suppliers. Huawei is less reliant on the USA, since it has its own silicon subsidiary and an extensive supply chain in China, but it would still struggle to get the best quality products in some important areas of its infrastructure and device businesses.

The proposed bill – the Telecommunications Denial Order Enforcement Act – was introduced by one Senator and one Representative from each party (Rep. Mike Gallagher (R-WI), Sen. Tom Cotton (R-AR), Sen. Chris Van Hollen (D-MD) and Rep. Ruben Gallego (D-AZ).) While it specifically cites Huawei and ZTE, it also covers any Chinese firm deemed to be breaking US trade laws – “any other telecommunications company domiciled in the People’s Republic of China (or any subsidiary or affiliate of such entities), excluding any subsidiary of a foreign company domiciled in the People’s Republic of China.”

The bill was drawn up in the wake of last month’s arrest of Huawei’s CFO, Meng Wanzhou, in Canada at the request of US prosecutors, on charges of violating US sanctions such as trading with Iran. That action escalated the tension beyond a war of words and seemed to strengthen the resolve of Congress members who take a hard line on China, and were critical of the government’s decision to reverse the previous ban on supplies to ZTE. Of course, the two Chinese OEMs have been barred for years from selling equipment for critical infrastructure projects in the USA, including national mobile networks, though Huawei does sell to some smaller rural and regional operators.

Gallaher said in a statement that the proposed legislation sets a “simple standard”: that any Chinese telecom company found to have violated US sanctions moving forward will be subject to the “same severe punishment originally imposed on ZTE”. In 2017, ZTE agreed a settlement, including a $1bn fine, over alleged violation of US sanctions against Iran and North Korea, and last year’s bar on component sales followed when the Chinese firm was accused of failing to keep all the terms of that settlement.

The feverish nature of this debate is reflected in some of the language used by supporters of the new bill. “Huawei is effectively an intelligence gathering arm of the Chinese Communist Party whose founder and CEO was an engineer for the People’s Liberation Army,” said Cotton in the statement. “If Chinese telecom companies like Huawei violate our sanctions or export control laws, they should receive nothing less than the death penalty – which this denial order would provide.”

According to reports in the Wall Street Journal, federal prosecutors have instigated a  criminal investigation of Huawei for alleged theft of trade secrets from US-based partners, including a quality control bot used by T-Mobile USA for smartphone testing., including a quality control ‘bot nicknamed “Tappy.” The WSJ said a Seattle jury had found Huawei liable for misappropriating robotics knowhow from T-Mobile’s lab in Bellevue, Washington.

This showed how various different issues are becoming conflated in this multilateral attack on Huawei – whether its equipment is used, wittingly or unwittingly, for espionage; whether it is violating others trade secrets and intellectual property; and whether it is breaking US trade sanctions against Iran and others. These are different areas of concern, but by lumping them altogether, a general atmosphere of mistrust and secrecy is being built up around the Chinese vendors.

In the face of these mounting allegations, Huawei has been fielding its most senior executives over the past few weeks to refute the claims. Even founder and CEO Ren Zhengfei held a rare press briefing, insisting that, if the Chinese government were to ask Huawei to spy on its customers, it would refuse. Of course, that does not address the point that, if the Chinese military were to use Huawei’s equipment to spy on western countries (and that remains a big if), it could do so without the vendor’s knowledge.

Despite the crisis, Ren insisted Huawei was expecting to increase revenues by about 20% in 2019m, which would take it to about $125bn. “We will not take advantage of the difficulties that our peers like Ericsson and Nokia are facing, in order to seize their market shares,” he said. “I also think that the macro environment is in their favor, because there are restrictions on Huawei in some countries.” However, he acknowledged that, in a worst case scenario, there might have to be cutbacks. “If we are not allowed to sell our products in certain markets, we would rather scale down a bit,” he said. “As long as we can feed our employees, I believe there will always be a future for Huawei.”

One country where Huawei’s prospects are looking brighter than before is India. Successive Indian governments have introduced added scrutiny of Chinese suppliers of telecoms networks over the years, but the government recently said it was not proposing to impose bans on Huawei. This is despite a recommendation from India’s Telecom Equipment and Export Promotion Council (TEPC), that the use of equipment from Huawei, ZTE and China’s Fiberhome should be barred in government networks.

Understandably, the operators in one of the world’s most cost-sensitive markets have resisted any restrictions on their freedom to choose Chinese kit – this is often cheaper than equipment from western vendors, and certainly, removing Huawei and ZTE from the options would reduce price competition. And the Chinese vendors offer high degrees of vendor financing, enabling operators to spread their payments and reduce capex spikes.

The Cellular Operators Association of India (COAI) wrote in a letter to the Department of Telecommunications (DoT) that Huawei was “suitably equipped to prepare operators and industry to build 5G capabilities in operations, in organization and most importantly in the ecosystem and to ensure they are fully compliant with all government requirements”.

Last month, the DoT was reported to be readying a ban on Huawei taking part in 5G trials and, indeed, it was not on the initial list of approved vendors, but it has now been invited to take part in tests which start this month. Huawei has told Indian authorities it will share source code to alleviate security concerns, if required.

Despite an up-and-down relationship with Indian trade authorities, the use of Chinese equipment and components has grown in India from $1.3bn in value in 2014 to $9.4bn in 2017, according to the Ministry of Commerce and Industry.

Spain is also, so far, refusing to follow the USA’s lead on Huawei until it produces some actual proof of its national security claims – and it is noticeable that, in the six years since the initial allegations were made by US security committees, no firm evidence has been produced. Violating sanctions by operating in Iran (and Syria), if that is proved in the Meng trial or elsewhere, is a serious breach, but not the same as espionage. Late last year, Germany took a similar stance, though national telco Deutsche Telekom then went on to say it would review Huawei’s role in its 5G plans – possibly to avoid jeopardising approval of the merger of its T-Mobile USA arm with Sprint.

In Spain, Huawei is to take part in a series of 5G test cases across the country. It will work with both Orange and Vodafone on separate 5G initiatives in Pamplona, Andalucía, Malaga and Seville.

The most recent instalments in the Huawei saga:

  • Huawei was accused, in a report by Reuters, of having ties to a networks company called Skycom, which did business in Iran. North American prosecutors claim Skycom is a front for Huawei (which the Chinese firm denies), and Reuters said a senior Huawei executive managed Skycom’s business in Iran. The Chinese company says Skycom was a business partner, but not under its control.
  • The case which has been brought against Meng Wanzhou (Ren Zhengfei’s daughter) alleges – among other things – that she lied to US financiers about the relationship with Skycom, which could have caused US banks to have breached sanctions unknowingly, by clearing Huawei transactions.
  • In Poland, a Huawei employee, and one from Orange, were arrested and accused of espionage. This led to much speculation that Poland would be the first eastern European country to impose a 5G ban, or restrictions, on Huawei, following in the footsteps of the USA, Australia, New Zealand and Japan.
  • The US Commerce Department has refused to renew an export licence at a Huawei R&D subsidy in Silicon Valley, Futurewei, which means it cannot export all the technology it develops back to China.
  • Norway became the latest country to express concern about Huawei, and to reportedly consider a ban on its participation in 5G deployments. The country’s justice minister, Tor Mikkel Wara, told Reuters that Norway shared “the same concerns as the US and Britain and that is espionage and state actors in Norway … This question is high priority… We want to have this in place before we build the next round of the telecom network.” Telenor and Telia both use Huawei gear in their 4G networks and have conducted 5G tests with the vendor. Tore Orderloekken, cybersecurity officer at Huawei Norway, responded: “Our customers in Norway have strong security requirements of us and they manage the risk in their operations in a good way.”

The key proposals in the US Telecommunications Denial Order Enforcement bill:

  • Establish that it is US policy to enforce denial orders, banning the export of US components to Chinese telecoms companies that have violated US export control laws or sanctions.
  • Direct the president to impose the same penalties originally faced by ZTE on any such firms.
  • Ensure that these penalties are only withdrawn once a pattern of compliance and cooperation has been established for at least a year, proving that behaviors have changed.
  • Bar any executive agency official from modifying any penalty imposed on Chinese telecoms companies, their agents or affiliates, until the president certifies that the company has not violated US laws for one year and is cooperating fully with US investigations.
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