What did the US House of Representative Select Committee really say about Huawei?

Huawei is very much in the news today as the leading global ICT solutions provider is the subject of a damming investigative report published by the US House of Representative Select Committee, which investigated whether the Chinese telecommunications equipment vendors, Huawei and ZTE pose a national security threat. Although Huawei protest their innocence, the committee certainly had a right to investigate.  So what threat was perceived, and what did the US Committee really say?

Certainly Huawei’s growth and development has been extraordinary by any measure.  Its revenues and profit growth have been outstanding, overtaking and beating established competition such as Cisco, Alcatel Lucent, and Nokia Siemens Networks.   Although it has variously been accused of ripping off technology from others, it has a genuine track record of significant investment in innovation and has the patents to prove it.   Huawei was started in 1988 by the current President, Mr. Ren Zhengfe, an ex-military officer who has strong links to the Communist Party.  In the early days Huawei’s costs were thought to be 70 percent lower than its larger rival Cisco[i], thanks to lower wage costs (paying engineers $8,500 a year), reverse engineering, and multibillion dollar cheap credit lines from the Chinese government, and it grew somewhat unnoticed through to $6bn sales in 2005 and around $32bn in FY2011, 5.7% nett profit and nearly $10bn of cash[ii].   

Huawei and ZTE shared a similar attacking strategy in the early days: products with sufficient functionality at very low prices.  Huawei and ZTE used this aggressive low-priced strategy to advance into more sophisticated markets and products, and as they penetrated further this provoked major price degradation together with a deterioration of the incumbents’ ability to charge for software and service features, resulting in a spiral of profit death for established players such as AL and NSN. 

Up to now Huawei has had an impressive and meteoric although not trouble-free ride to stardom, but the U.S. House of Representatives’ report could be a game changer.  Whilst the chosen line of Huawei and China is that this is opportunist as the US presidential elections approach, and is protectionism by another name (“We have to suspect that the only purpose of such a report is to impede competition and obstruct Chinese ICT companies from entering the US market“), the fact is that there have been a string of concerns and dark stories about Huawei for a number of years[iii] and its history is hardly transparent or squeaky clean. 

Competitors have often complained about Huawei buying or bribing its way into large tender and contracts, particularly in 3rd world and emerging countries where the odd school or highway may get thrown into the offer, which western companies cannot ever get away with offering, and suspicion about where the money comes from.  Even if these are stories are unfounded, Huawei does not act like other commercial firms in the way that it claims; for example although its website claims that Huawei has introduced best practices of Western management” it then for example offered £50m of equipment free for equipment for London Tube for Olympics 2012, without any sense of understanding that just giving £50m of equipment – a huge sum for free - is not actually what best practice Western companies normally do when trying win business.  Curiously they then presented it as “extending... a gift from Olympic host nation to another...” without any sense of embarrassment at the separability between a company and its state, which of course is exactly one of the US’s fears. 

The US report[iv] makes very interesting reading and the context of concerns the House or Representatives have is very clear and genuine:  “Telecommunications networks are vulnerable to malicious and evolving intrusions or disruptive activities........ multiple critical infrastructure systems depend on information transmission through telecommunications systems.  These modern critical infrastructures include electric power grids; banking and finance systems; natural gas, oil, and water systems; and rail and shipping channels; each of which depend on computerized control systems.... Third, the U.S. government must pay particular attention to products produced by companies with ties to regimes that present the highest and most advanced espionage threats to the U.S., such as China.  Recent cyber-attacks often emanate from China, and even though precise attribution is a perennial challenge, the volume, scale, and sophistication often indicate state involvement”, and later “...Chinese actors are the world’s most active and persistent perpetrators of economic espionage.”

Interestingly, although Huawei’s statement of response regarding HSCI’s report[v] states that Huawei did fully cooperate and deliver the required information to questions, the Committee’s view is very very different, and says “The Committee finds that Huawei did not fully cooperate with the investigation and was unwilling to explain its relationship with the Chinese government or Chinese Communist Party, while credible evidence exists that it fails to comply with U.S. laws.  Throughout this investigation, Huawei officials sought to portray the company as transparent.  Huawei consistently refused, however, to provide detailed answers in written form or provide internal documentation to support their answers to questions at the heart of the investigation”

The report goes on to say that “...as Chinese analysts explain, state control or influence of purportedly private-sector entities in China is neither clear nor disclosed.... The Chinese government and the Chinese Communist Party, experts explain, can exert influence over the corporate boards and management of private sector companies, either formally through personnel choices, or in more subtle ways.  The investigation sought to answer several key questions about the companies including: What are the companies’ histories and management structures, including any initial ties to the Chinese government, military, or Communist party?  The Committee found the companies’ responses to these lines of inquiry inadequate and unclear.  Moreover, despite repeated requests, the companies’ consistently provided very little – if any – internal documentation substantiating their answers.  The few documents provided could rarely be authenticated or validated because of the companies’ failure to follow standard document-production standards as provided by the Committee and standard with such investigations.  Moreover, the apparent control of the Chinese government over this information remains a hindrance to a thorough investigation.  One of the companies asserted clearly both verbally and in writing that it could not provide internal documentation that was not first approved by the Chinese government” and goes on to say that “The fact that Chinese companies believe that their internal documentation or information remains a “state secret,” only heightens concerns about Chinese government control over these firms and their operations”. 

It is a genuine question of debate about the timing and the conclusions of the report, but the necessity of the committee to protect US security and investigate potential threats cannot be questioned – every state has a duty to protect their country, as China knows and does.   So the right of the committee to question if there is a risk is undoubted, and in Huawei’s case there was a ton of suspicion and arguably previous form to make it an entirely valid question (and the rumour is that Huawei were trying to get much, much closer to US’s security-critical networks, which was what triggered the investigation).  At that point, any innocent party would normally say, “Ok, our task now is to be completely open and convince the US beyond all doubt they have nothing to fear”, but instead Huawei failed to grasp the challenge to convince, and their subsequent reaction shows their essentially defensive stance, viz. their press release The report released by the Committee today employs many rumours and speculations to prove non-existent accusations”.  Instead of Huawei recognising that they had an opportunity to once and for scotch the concerns, they resort to ‘que, moi?” faux indignation.  This shows the very fault lines that are inherent in the Huawei paradox, and if Huawei continues to react like this, the concerns are only going to get worse. Up to now Huawei’s growth has been unstoppable.  But Huawai failing to address the US's Committee's concerns could have a very damaging effect on their business.  Huawei will take refuge in Europe which takes a less hawkish and paranoid stance towards Huawei (Huawei’s CEO was just recently welcomed to No 10 Downing St by David Cameron) and in 3rd world and emerging markets which are less coordinated and less fussy in their procurement (and ome of whom who appreciate the odd school or motorway being thrown in), but some European countries are thinking to reopen investigations and Huawei’s defiant and defensive stance will see them excluded more and more from the valuable US market  and possibly other markets unless they really knuckle down to addressing security, control and transparency concerns.      

[i] http://www.atkearney.com/paper/-/asset_publisher/dVxv4Hz2h8bS/content/are-you-more-capable-than-your-competitors-are-ruthless/10192
[ii] http://www.huawei.com/en/about-huawei/corporate-info/annual-report/annual-report-2011/Five-YearFinancialHighlights/index.htm
[iii] Who’s afraid of Huawei?  http://www.economist.com/node/21559922
[iv] http://intelligence.house.gov/sites/intelligence.house.gov/files/documents/Huawei-ZTE%20Investigative%20Report%20(FINAL).pdf
[v] http://www.huawei.com/en/about-huawei/newsroom/press-release/hw-194454-hpsci.htm

Posted on: Friday, October 19, 2012