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No corporation in the history of modern capitalism has faced the kind of coordinated attack that the global telecom equipment leader Huawei has in the last few months. The United States administration under President Donald Trump has not even pretended to abide by either diplomatic niceties or business courtesies. Instead, it has brazenly tried to obstruct the progress of a company that has had a meteoric rise in the global telecom business in the last decade (“Boycotting Chinese products: Bravado is no substitute for business” Frontline, July 31, 2020).
As the world stands at the cusp of the next wave of innovation in communications, heralded by the possibilities offered by 5G, the U.S. establishment’s unsubstantiated innuendo against the Chinese giant threatens to bend relations with its allies to breaking point. Meanwhile, the brash move threatens to disrupt or even wreck the 5G global technology ecosystem in which Huawei has played a key role.
Attack on Huawei
For several years now there have been allegations, mostly unsubstantiated, that networks using Huawei components may be prone to attacks because of “back doors” that enable surveillance. These vague threats sharply escalated in May 2019 when the Trump administration, citing allegations that Huawei had violated sanctions against Iran, barred U.S. companies from supplying “dual-use” military-grade technology to Huawei.
But this move was largely inconsequential for U.S. companies because the sales of overseas subsidiaries of U.S. companies remained unaffected by the ban. For instance, even a leading chipmaker such as Intel has about 40 per cent of its assets located overseas. Other U.S. semiconductor companies such as Analog Devices, and leading chipmakers such as Samsung (South Korea) and TSMC (Taiwan), also have most of their productive assets located outside the U.S. The sale of the basic building block in electronics thus escaped the ban on supplies to Huawei.
The “top dozen” global semiconductor majors have only one-fifth of their physical assets located within the U.S, according to a recent estimate by The Economist. Thus, U.S. companies, too, have been participants in the global supply chain, which required their own production bases to be closely aligned with other entities in the global market.
Realising the utter inconsequence of his actions, Trump significantly escalated the attack on Huawei a year later. On May 15, the U.S. administration announced that any entity, anywhere in the world, that supplied hardware or software that went into any components of Huawei-designed equipment would be barred from U.S. markets.
This marked a qualitative shift. The conflict now threatened to engulf entire supply chains not just in the telecom ecosystem but everything in the realm of electronics manufacturing. Not surprisingly, Huawei has been the cynosure of all eyes because it is widely acknowledged to be the leader in the development of the 5G family of technologies, which are still evolving. Huawei is way ahead and the leader of the pack. In fact, even before the COVID-19 pandemic, industry experts across the world reckoned that it had a 12-18-month lead over its nearest rivals.
Divided allies
These developments have created deep schisms not only within industry and business but also between governments. U.S. adventurism is increasingly seen as unviable, especially in a world that has been cajoled by sermons on globalisation that demand a seamless world. While countries such as the United Kingdom and Australia have succumbed to U.S. pressure, it is unlikely that other countries, such as Germany and the rest of the European Union, will fall in line soon. Germany is expected to decide on this issue only in September at the earliest; even then, it is not clear what the scope of its decision would be, or whether it is even considering a complete ban. Reacting to the shrill demands in the U.S. that Europe fall in line, and chastened by the U.S’ threat of sanctions against them for sourcing gas from Russia, Europeans are increasingly in a mood to resist U.S. pressure, even if only as a “nationalistic” response. Governments in East Asia, Africa and even Latin America are unlikely to fall in line with U.S. demands quickly. After all, it is evident that China is likely to be the first country to decisively emerge from the ongoing global recession caused by the COVID-19 pandemic.
U.K. Prime Minister Boris Johnson was the first to capitulate to the new wave of U.S. pressure. Ironically, he had sold himself as a self-certified “Sinophile” just five years ago when Chinese President Xi Jinping visited Britain. In January, the U.K. said it would limit the use of Huawei equipment in its networks; there was no talk of a ban then. However, Johnson did a U-turn on July 14, when he announced that imports of Huawei equipment would be stopped after the end of the year. More significantly, he said all Huawei equipment—not just 5G-related gear but even legacy equipment in existing networks—would have to be ripped out and replaced by 2027. Of course, the extended time frame was itself an admission of the significant problems and costs that would be caused to network operators working with wafer-thin margins.
In the U.S, successive waves of deregulation in the telecom industry since the Reagan years have resulted in the emasculation of equipment companies. Significantly, not a single U.S. equipment supplier has the production scales that a company like Huawei—or even Nokia and Ericsson, for that matter—has. Naturally, this makes them uncompetitive vis-a-vis the top-tier equipment manufacturers. This results in network operators pricing products, especially the new and high-end ones, out of reach of the mass market. In fact, smaller network operators in the U.S., such as those serving remote or rural areas, for instance, have complained that non-Huawei options are simply too expensive.
Splintered European market
Meanwhile, the fragmented nature of the European telecom market and its implications for communications in the E.U. is certain to be a major factor in deterring the nature of the German reaction. After all, Germany is Europe’s economic engine. But the European market is badly splintered. Vodafone has the highest market share, just 17 per cent; only three other network operators in Europe have market shares in double digits. Operators work with wafer-thin margins, which inhibits their ability to invest in technology. In such a situation, Johnson’s “rip-and-replace-Huawei” mantra may have few takers. Deutsche Telekom, German’s biggest telecom operator, in which the government owns a third of the stake, has lobbied against a ban on Huawei. It has argued that a ban on Huawei would delay 5G rollouts significantly. Given that 5G is not one piece but a family of technologies, this implies that companies across the world are working on different aspects of what will eventually evolve into a family of solutions. The ban on the leader of the pack would thus have a debilitating impact on developments everywhere.
Telecom equipment suppliers are also worried that a Chinese retaliation may hit them hard. For instance, companies like Ericsson, a leading telecom equipment company, have been allowed to operate in China, producing not just for local sale but also for export. However, recently there have been reports that China is considering banning exports by companies such as Ericsson and Nokia from production bases in China. These are sure to hit these companies hard, especially in an ongoing global recession. Both companies have major manufacturing facilities that employ thousands in China. The Chinese government is also reported to be compiling a “blacklist” of “foreign entities” that have failed to supply Chinese firms by citing “non-commercial” reasons.
Recent media speculation indicates that the Indian government is considering a ban on seven Chinese companies—including Huawei, Tencent and Alibaba—each considered among the world’s best in their respective domains. They have been targeted ostensibly for being close to the People’s Liberation Army.
The notion that Huawei equipment is particularly vulnerable to security risks is not ingenious to anyone with a basic understanding of electronic systems. Although it is perfectly understandable that networks ought to be as safe as possible from “leaks” that compromise security, the question of identifying deliberately designed “back doors” or “Trojans” that facilitate siphoning of information is extremely difficult to identify. “Software designed by humans is always time- and objective-specific, so when conditions change, they need to be upgraded,” a software engineer told Frontline. Most electronic equipment, including TVs, require periodic software upgrades, which reflect this reality.
Obviously, all equipment sourced from Huawei or other Chinese companies (ZTE is another major telecom gear supplier from China) that are already in use in India would require upgrades as long as they are in use. In fact, not upgrading them would put the networks to exactly the kind of risks that advocates of a ban now cite. The recent wholesale leak of data from Twitter, the ransomware attack on Cognizant in April, the periodic leaks of Facebook data, and the several instances of leaks of Aadhar data of citizens from servers hosted by the Indian government, point to the larger problem of vulnerabilities in systems and networks.
It is obvious that promoting national self-reliance is a pursuit that is worthy in its own right; it does not require justification through narrow-minded jingoism. The hypocrisy of nationalists who, until the other day, were singing paeans to globalisation and calling for unfettered access to markets would appear truly comical if not for the flames of the trade wars that have been fanned.
The Link Lonk
August 01, 2020 at 08:30AM
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Divided over Huawei - Frontline
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