The U.S. vs. Huawei

Article By : Junko Yoshida, EE Times

What's next now that Huawei's CFO is detained?

While in China last month, I heard both local and Western tech-industry executives speculating that “there will be a war” if the rising tension of the U.S.-China trade talks involved Huawei. They weren’t even talking about Meng Wanzhou’s detention then.

I’m not the only one shocked by the rapidly unfolding events since the arrest of Meng Wanzhou, Huawei’s CFO, in Canada.

Particularly worrisome are the unintended consequences of all the new developments associated with Huawei.

While in China last month, I heard both local CEOs and Western tech-industry executives speculating that “there will be a war” if the rising tension of the U.S.-China trade talks involved Huawei.

These guys weren’t talking about Meng’s detention. They were referring to sanctions against ZTE by the U.S. government earlier this year. (The U.S. lifted its ban later, allowing the Chinese telecom company to obtain critical parts and software from U.S companies.)

An almost unanimous consensus among global CEOs was, “Had the sanction been placed on Huawei instead of ZTE, it would have been an all-out war between China and the United States.”

A month later, here we are. Idle speculation among a few random head honchos is on the verge of turning into a real crisis.

Meng Wanzhou

But before speculating even more, how about a few facts?

First, what has happened in the last 24 hours? According to reports by Reuters and other news sources, the latest developments include:

• On Tuesday, in a court hearing in Vancouver, a Canadian judge granted a $7.5 million bail to Meng, who has been jailed since her arrest on Dec. 1.
• Meng, who was detained at the request of the U.S., must remain in Canada, wear an ankle monitor, and be accompanied by security guards when she leaves her residence.
• The judge set Meng’s next court appearance for Feb. 6.
• Ten days after Canadian authorities detained Meng, China reportedly detained a former Canadian diplomat, Michael Kovrig, once assigned to Beijing and Hong Kong as well as the United Nations.
• The U.S. State Department is said to be considering issuing a travel warning for its citizens.

Second, how did we get where we are? Why was Meng, the daughter of Huawei’s founder, detained in Canada?

Canada arrested her at the request of the United States, which claims that she misled multinational banks about Iran-linked transactions, putting the banks at risk of violating U.S. sanctions.

More specifically, this relates to a case reported by Reuters in 2013, which lays out Huawei’s close ties to Hong Kong-based Skycom Tech Co., which attempted to sell U.S. equipment to Iran despite U.S. and European Union bans.

Third, what’s next? What are we waiting for now?

The ball is in the Canadian court. If a judge rules that the case against Meng is strong enough, Canada’s justice minister must decide whether to extradite her to the United States. Reuters reported, “If so, Meng would face U.S. charges of conspiracy to defraud multiple financial institutions, with a maximum sentence of 30 years for each charge.”

Fourth, the Trump factor.

According to Reuters, U.S. president Donald Trump said on Tuesday that he would intervene in the Justice Department’s case against Huawei’s CFO Meng “if it would serve national security interests or help close a trade deal with China.”

Muddled message
This muddled message inadvertently typifies the West’s schizophrenia on China. The arrest of the Huawei executive is complicated and its mission is nebulous because it poses a lot of contradictory implications.

Certainly, the trigger for Meng’s detention was Huawei breaching U.S. sanctions against Iran-linked transactions. At a bail hearing at the Supreme Court of British Columbia, a Canadian government lawyer said, “Meng had used a Huawei subsidiary called Skycom to evade sanctions on Iran between 2009 and 2014.”

Separate from this specific arrest, there have been consistent “security questions” about Huawei’s telecom equipment. Critics contend that Huawei, founded by Ren Zhengfei, an ex-officer of China’s People’s Liberation Army, still curries favor with the government by developing equipment designed to spy on rival nations. Governments in the West that have taken actions or are contemplating actions against Huawei include New Zealand, the U.S., Australia, Canada, and the U.K.

New Zealand, the United States, and Australia have already barred Huawei from supplying 5G equipment. Canada is doing a security review of Huawei’s products. BT in the U.K is reportedly removing Huawei’s kit from the core of its 5G network.

Last week, the EU’s technology commissioner, Andrus Ansip, pointed out that countries “have to be worried” about Chinese manufacturers.

Let’s say that these security threats might be real. In parallel, let’s acknowledge that Western vendors in the telecom equipment market, most notably Nokia and Ericsson, are perfectly positioned to profit from Huawei’s fall.

The Dell’Oro group just issued a report, noting that “Huawei captured 28% share of the telecom equipment market, increasing its market share by 4 percentage points since 2015.”

As Dell’Oro group noted, Huawei’s telecom equipment revenue is now “nearly as large as Nokia and Ericsson combined.” Furthermore, “Huawei’s revenue share gains over the past four years have been most pronounced in the Core, Router, and Optical Transport Markets.”

Let’s not hide our own fear of China’s rise. Many Western companies are struggling against China on the global market. But the biggest fear is the possibility of one unforeseeable catastrophic political move — by the U.S. Justice Department, by China hawks in the Commerce Department, or, most ominously, by an impulsive U.S. president.

Meanwhile, as one Chinese executive told me last month, the Chinese business community worries most about the inconsistent trade policies imposed by the current U.S. administration. With the head of the nation prone to changing his mind on any given issue on the spur of the moment (whether defense, security, trade, or diplomacy), business leaders in both the United States and China have lost their bearings in trade relationships.

Tightly linked politics and engineering reality
Any “intervention” that the U.S. president might initiate on the Huawei executive’s arrest could have a devastating impact on the business world in both China and North America. Among unintended consequences could be business travel restrictions to visit China, or vice versa, or severely curtailed reciprocal opportunities for partnerships and investment.

Indeed, some opportunities may have already started to close before the Huawei incident.

On the investment front, the Trump administration has installed a new “rigorous review system” aimed primarily at preventing Chinese access to sensitive American technology. This is a measure that goes beyond the rules set by the Committee on Foreign Investment in the United States (CFIUS).

While CFIUS is concerned with M&A activities, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) is now being used as a new vehicle allowing the U.S. to block a much broader array of foreign transactions deemed threats to national security. These include “minority stakes” and “joint ventures” in technology, telecommunications, and other cutting-edge companies.

As one executive from the U.K. told me last month, “I was surprised how dramatic an effect that [the U.S.-China trade conflict] was having.” Of course, this was before the arrest of the Huawei CFO happened in December. When it comes to deciding on big projects involving China, he explained then, “I have never heard people so directly link politics and engineering reality. These were not long-term abstract issues but immediate tactical decisions now.”

— Junko Yoshida, Global Co-Editor-In-Chief, AspenCore Media, Chief International Correspondent, EE Times