Huawei caught in tug of war between the US and China

After years of mounting suspicions and leaked innuendo, the American government laid out its case against Huawei in black and white this week.

A 13-count indictment filed in New York accuses the Chinese company of bank and wire fraud over allegations it violated sanctions on Iran, and a separate 10-count charge in Seattle alleges it stole trade secrets from the US phone carrier T-mobile.

Taken together they represent a new phase in the bad-tempered dispute between the US and China over global technological dominance. It is a race to the golden pot promised by the new 5G wireless communications standard in a competition riddled with American concerns that China is using Huawei infrastructure to spy on the world.

Those fears were laid out by the director of the Office of the Director of National Intelligence on Tuesday as he listed the threats to America. He may have avoided referring to Huawei by name in his report to the Senate intelligence committee but there was no doubt what Daniel Coats meant when he said: “We are also concerned about the potential for Chinese intelligence and security services to use Chinese information technology firms as routine and systemic espionage platforms against the United States and allies.”

He delivered his remarks on the day Australia’s TPG Telecom announced it was abandoning plans to build the country’s fourth phone network because of a government ban on Huawei. A week earlier Vodafone, one of the world’s biggest carriers, said it would no longer use Huawei gear.

It comes after mounting US pressure which ratcheted up at the end of last year with the arrest of Meng Wanzhou, Huawei’s chief financial officer and daughter of its founder.

The company has denied all the allegations and said it was “not aware of any wrongdoing by Ms Meng and believes the US courts will ultimately reach the same conclusion”.

Huawei has built itself into a telecoms giant since it was founded in 1987 by a former engineer in the People's Liberation Army. Today Zen Zhengfei is a billionaire and his company is the second biggest manufacturer of smart phones and the world’s biggest supplier of network switching gear used by telephone and internet companies.

Now it finds itself caught in the middle of a trade war between two superpowers, accused of espionage and facing American moves that could threaten its dominance.

“It’s a very interesting time in the relationship between the two countries – the US and China – and I think Huawei is definitely getting caught in the middle of it,” said Harrison Van Riper, senior analyst at Digital Shadows. “There’s just very interesting geopolitical angles to everything.”

The stakes could not be higher as the world races towards overhauling communications infrastructure for the next generation of cellular services.

Each previous advance has brought its own explosion in applications and hardware. 2G networks heralded the age of the everyday mobile phone, when Nokia was the dominant force with its candy bar handsets, before 3G introduced the data speeds and internet access needed for apps to take off.

With 4G came yet more powerful phones with media streaming capabilities and the sort of oomph previously limited to desktops or notebooks.

The 5G revolution is expected to herald a true internet of things, connecting the sensors needed to harness medical devices, factory equipment, self-driving cars and other devices.

But no-one yet knows what secondary effects that will bring, said Bob O’Donnell, president at TECHnalysis Research.

“When we moved to 4G it was faster initially and that’s what everybody focused on. But 4G actually enabled new kinds of businesses and economic benefits that weren’t frankly thought about – things like Uber and Lyft and AirBnb,” he said.

Leading the way could mean a host of benefits, such as providing headquarters to the next generation of tech behemoths.

“Being first to 5G matters, especially when competing on a global scale,” concluded a recent Deloitte survey, which said nations that could move fast would reap disproportionate gains.

So even if no-one knows what will be spawned by 5G, it is worth a bet on something that could generate $12 trillion a year by 2035 and create 22 million jobs, according to IHSMarkits data.

Opting out of using Huawei could mean a competitive disadvantage, according to James Mulvenon, a cyber-security expert at the national security contractor SOS International.

“Huawei is currently the only global company that makes the entire end-to-end supply chain of 5G equipment,” he told Marketplace. “So one of the technology trade-offs is you’re not getting access to some of the most advanced 5G equipment in the world.”

That view is disputed. The company is already banned from bidding for federal contracts in the US – which means it is avoided by the big communications providers that want to do government work – without hindering the industry’s development, according to Mr O’Donnell

“With network infrastructure there are plenty of other options available, particularly Ericsson and Nokia which are pushing ahead very strongly with this technology and US carriers are deploying it already,” he said.

The US could get even tougher on Huawei. The New York Times says the White House has been drafting an executive order that would effectively ban Chinese-origin equipment in critical telecommunications networks altogether.

Although the big players such as Verizon or T-mobile would be unaffected, many local operators have opted for the more affordable Chinese equipment.

“When you are a smaller rural area and you don’t have as big of a budget as something like a big city or even a large company you are going for the more budget friendly option,” said Mr Van Riper. “Huawei, ZTE those are more budget friendly options.”

The Rural Wireless Association, which represents smaller operators such as Copper Valley Telecom and Sagebrush Cellular (as well as Huawei), has warned such a move would damage internet access for users in its areas.

At the same time Huawei is bracing itself for an American squeeze. An internal email obtained by The Financial Times recently warned employees that the overall situation will probably “not be as bright as imagined, we have to prepare for times of hardship...”

The new legal action also increases the prospect of Mr Trump banning American companies from supplying Huawei. Being unable to license Android from Google, or Qualcomm chip patents for radio access technology, could close down its ability to manufacture smartphones or build 5G stations.

A similar move last year all but put ZTE out of business until Mr Trump stepped in to ease sanctions imposed for selling products to Iran and North Korea.

But if Western US allies are keeping Huawei at a distance from new 5G networks, opportunities remain in the developing world for the Chinese giant. In December, India invited the company to take part in field trials alongside competitors Nokia, Samsung and Ericsson.

Manoj Joshi, distinguished fellow at Indian think tank Observer Research Foundation, said in a recent briefing note: “Indian companies have found that Chinese-made equipment is the key to their ability to provide the services they do at the prices that are, perhaps, the lowest in the world.”

The result could even be a bifurcation as the US and China and their respective allies push ahead with different components. Mr Van Riper said it might resemble the way networks have already split between CDMA wireless technology – used by Sprint and Verizon in the US - and GSM, which is more widely used in the rest of the world.

“I see the same kind of split between companies using specific 5G technologies,” he said, given the concerns about Huawei’s operations.

So with 5G capability embedded in autonomous vehicles and critical infrastructure why take the chance on even a tiny risk if alternative suppliers are available, said Mr O’Donnell.

“If you are in a disconnected world it doesn’t really matter but if your car is connected, planes… that’s the scary part of moving to this connected world.”