Don’t Let Huawei Control 5G

President Trump has taken a firm stand against Huawei, the Chinese telecom behemoth – and for good reason.  Huawei is not your garden-variety Chinese company in the same vein as Tencent, Alibaba, or Baidu.  By many credible accounts, Huawei is a corporate extension of the Chinese government, replete with Beijing back channels and generous government support. 

In a report released by the U.S. Permanent Select Committee on Intelligence back in 2012, Huawei and ZTE Corp., another Chinese company, were described as potential threats to U.S. security interests precisely because of Chinese government involvement.  Last month, the U.S. Navy reported it was under intense “cyber-siege” by Chinese hackers.  These follow a litany of allegations that have Huawei engaged in spying, commercial espionage, and intellectual property theft over many years.

Despite Huawei’s denials, an independent research paper by Donald Clarke of George Washington University and Christopher Balding of Fulbright University Vietnam concluded Huawei’s controlling holding company is 99 percent held by an entity called a “trade union committee,” which typically means heavy government involvement.

Huawei was founded in 1980 by a former engineer for the Chinese military who garnered an initial investment from the Chinese government.  The company has grown from a small, dedicated defense supplier to a global giant whose products include smartphones, tablets, network components, and enterprise services for both Chinese and foreign customers.  It has become the largest cellular equipment supplier in the world – bigger than its next two competitors, Nokia and Ericsson, combined – and is an essential supplier for 4G and 5G networks worldwide.

The company finished 2018 with revenue of $107 billion, 20 percent higher than the previous year, along with a record 25-percent rise in profits.  “State-backed finance was crucial in Huawei’s growth,” said Matthew Schrader, a China analyst at the Alliance for Securing Democracy at the German Marshall Fund.  “It helped Huawei sew up the domestic market, which in turn enabled it to expand overseas by offering deep discounts.”

But it is not the company’s size that presents problems for American patriots.  It is the combination of the Chinese government’s deep roots into the company and Huawei’s strategic position as the dominant technology provider in the global race for 5G deployment.  This puts Huawei at the heart of next generation telecom and sets it up as the preeminent security risk for the United States.  While AT&T, Sprint, and Verizon are aggressively marketing 5G consumer services in the U.S., the equipment they rely upon comes primarily from foreign sources – Huawei and ZTE from China, Ericsson from Sweden, and Nokia from Finland.

As the global race for 5G dominance intensifies, Huawei leads the world in patents that are essential to 5G, according to IPlytics, a German company that tracks intellectual property development.  With 1,529 patents, Huawei has twice as many essential 5G patents as its nearest American competitor, Qualcomm, with 757.  As other global competitors receded from developing these technologies or resigned themselves to a licensing regime, Huawei doubled down, meaning they will get royalties and license fees for the use of their 5G technology.

As the Washington Post reported: “The rising global demand for 5G equipment highlights how the United States, a technology leader in other respects, is largely absent from the wireless networking industry.  It reflects the decline of a once-vibrant ecosystem of American companies that formerly went toe-to-toe with the likes of Nokia and Ericsson.  And it puts a focus on Chinese firms such as Huawei, whose rise to prominence has come at the expense of Western networking titans and sparked a global campaign by U.S. officials eager to persuade allies not to allow Chinese equipment into their networks.”

Despite warnings from the United States, the U.K. has agreed to allow Huawei to incorporate some of its equipment in their telecom infrastructure.  Their decision was not without controversy: As British Foreign Secretary Jeremy Hunt has expressed caution on allowing large Chinese companies to participate in the U.K.’s 5G buildout, another Member of Parliament is seeking to unwind Prime Minister May’s decision.  In the latest iteration, the U.S. Department of State has signaled that the U.S. may withhold intelligence from the U.K. if it moves forward with plans to include Huawei.  Undoubtedly, this would strain U.S.-U.K. relations and complicate other Trans-Atlantic cooperation among American allies.

Given Huawei’s record of theft, the concerns are well-founded.  It has been accused of stealing technology from Cisco, Nortel, and T-Mobile, including recent charges of violating U.S. sanctions on Iran.  Coupled with the fact that China is already America’s biggest banker and foreign debt-holder, Huawei’s opponents make a strong case.  China holds nearly 30 percent of all U.S. Treasury bills, bonds, and notes held by foreign countries, an estimated $1.13 trillion.  

Against this backdrop, Huawei is having a tough time with its American lobbying campaign.  Nobody on Capitol Hill is willing to argue for a change in policy or approach to the company.  Likewise, Huawei is expected to have little success with its lawsuit against the United States, challenging the National Defense Authorization Act (NDAA), which specifically prohibits the U.S. from procuring hardware made by Huawei and ZTE. 

The Huawei saga points out an enduring paradox in Washington.  How can a company whose products and services are admittedly superior be excluded from the market at a time of great need?  Huawei’s reliance on Chinese government support, while contributing to its growth, is also its undoing – at least vis-à-vis the West.  Its failure to operate as an independent private company and its resistance to sharing technology with American manufacturers, until late, were costly mistakes.   

In the race to dominate 5G, American companies certainly could benefit from Huawei’s technology.  But at what price?  While Huawei is big, it can never be best as long as it remains under Beijing’s tyrannical thumb.  For now, there is only one way for Huawei, and that is a lost opportunity for American commerce and consumers.

Adonis Hoffman (@AdonisHoffman) is chairman of Business in the Public Interest.  He held senior legal positions in the U.S. House of Representatives and the FCC, and is the author of Doing Good: The New Rules of Corporate Responsibility.  Mr. Hoffman is a member of The Media Institute’s Board of Trustees and First Amendment Advisory Council.  This article appeared in The Hill on April 30, 2019.