Friday, May 31, 2019

Fighting for future: US vs China

Huawei HQ in China
One thing which is very clear to those who follows US actions against Huawei is - it’s not about Huawei; it’s about future of supremacy in technology.

In past half century they faced this situation twice. First with USSR, which is now dubbed as space race era. With the end of towering USSR scientists Kirill Shchelkin, Yulii Khariton, Andrei Sakharov, Mstislav Keldysh, Boris Vannikov, Sergei Korolev etc USSR's technological challenge came to an end. After death of Sergei Korolev (which was accelerated by various Soviet programs), Soviets were not able to continue with their supremacy in space. Slowly but steadily leadership of USSR became more interested in political survival and maintaining military strength rather than funding huge S&T programs. With the disintegration of USSR that also came to an end.

Later it was Japan. Her supersonic cruise in all spheres of economy and technology seriously threatened US supremacy. However, Japan was US ally and their supersonic growth came to abrupt halt in early 90s. Though Japanese firms kept on investing in technology and maintained leading position they were never able to be the Japans of 80s.

Now decades after victory in space race, US is facing tough competition from anther rising Asian power - China. China became pragmatic and broke shackles of ideological dogma during Deng era and started sprinting. Unlike Soviets (who were able to remain as single country due to military might), Chinese are more coherent, focused, planned and certainly do not want to make repeat the mistakes of their erstwhile neighbor. It’s a different matter that in Xi era, China looks more like moving towards Soviet's way).

China is pushing hard in Space. In response, US recently created a new space command and pulled back NASA from its cash strapped, less ambitious vision. Focus also changed from Atlantic theatre to Indo-Pacific especially in South China sea. In both cases US has an upper hand. However, when it comes to technology (especially in Telecom, AI, Face recognition etc) it’s a different ball game. In fact, lot of patents in this area are with Chinese. In facial recognition and associated technologies, there are hardly anyone who can compete with Chinese.

US don't have any companies with the stature of Huawei in telecommunications sector. Sure, they have Cisco, but they are in a different field. Then Qualcomm, again in related but different area. ARM is British (or Japanese because of Softbank?). We hardly heard anything about AT&T Bell which pioneered a lot of earlier innovations for a while. Bell Labs are currently under Nokia which is a Finnish company. You may be remembering another company called Western Electric. They underwent many transformations (became Lucent in between) and now under Nokia's umbrella. Then there is Ericson. Hold on... Ericson is Swedish.

Looks like US also understand this. After all they blocked sale of Qualcomm to Singapore based Broadcom on national security grounds. Investments by any Chinese firms to US companies holding key technologies were also blocked citing national security reasons.

In fact, all major 5G, high end telecom gear manufactures are non-US companies - Huawei (with over 100bn USD in revenue), ZTE, Nokia, Samsung and Ericsson. Now, you may be thinking what so special about 5G. Why US is worried?

5G is a major variable in future technological landscape. It’s going to revolutionize Telecommunication networks, Internet, Industrial IoT, Control of remote and critical infrastructure, Entertainment and Multimedia, Smart Vehicles and driverless cars, Transportation, Low latency machine communications, Smart homes, Smart city development, Security and surveillance etc.

US may probably never been in this situation for at least two centuries. While US was pumping billions of dollars for non-winnable wars in Afghanistan, Iraq etc Chinese pumped many billions into research as well as for investing in key western companies. They made state champions and created alternatives for major western technology giants. It is another matter that, during this sprint they hardly cared about intellectual property rights and patents. What US saw when they took a break in fixing Afghanistan and trying to get out of Iraq was Chinese leading world's transition to 5G!!!

Panicked, they acted fast, targeting leading Chinese companies Huawei, ZTE. ZTE almost came to its knees before US relaxed sanctions. Huawei was added to sanctions list. Following that Google pulled Huawei’s Android license. This means, Huawei phones can't use Android OS (I think they can still use opensource part of Android) and google services including play store.
Was Chinse companies’ victims?

I don't think anyone describes Chinese companies as pure victims. Main accusation against Chinese giants are theft of trade secrets and surveillance for Chinese state. When US asked Canadians to arrest Huawei's CFO (Meng Wanzhou - daughter of founder Ren Zhengfei) charges were theft of trade secrets and violations of sanctions against Iran. As a matter of fact, company founder Ren’s resume includes working for 'Information Technology research unit' of PLA (Chinese Army).

A little History of Huawei

2003 - Networking firm Cisco accused Huawei of intellectual property theft. Cisco later dropped the suit.

2005 - RAND Corporation study, commissioned by US Airforce (USAF) - noted that, "Huawei maintains deep ties with the Chinese military, which serves a multi-faceted role as an important customer, as well as Huawei’s political patron and research and development partner."

2007- FBI interviewed Huawei’s founder, Ren in 2007 in relation to potential violations of US trade sanctions on Iran.

2008 - Companies efforts to buy 16% stake in 3Com (provider of anti-hacking software for US military) was blocked.

2010 Motorola filed a lawsuit accusing Huawei of corporate espionage, but later settles with the company

2014- T-Mobile sued Huawei. Later US telecom companies excluded Huawei from their contracts

Reuters reports that, "A major Iranian partner (Skycom, a private company registered in Hong Kong) of Huawei Technologies offered to sell at least 1.3 million euros worth of embargoed Hewlett-Packard computer equipment to Iran’s largest mobile-phone operator in late 2010". Problems is as per reports, Ren’s daughter, Meng Wanzhou, served on board of Hong Kong firm. This firm is also considered as front-end for Huawei.

As per the same report, “an Iranian job recruitment site ( describes Skycom as “a leading telecom solution provider” and goes on to list details that are identical to the way Huawei describes itself on its U.S. website: employee-owned, selling “solutions” used by “45 of the world’s top 50 telecom operators” and serving “one-third of the world’s population. On, several telecom workers list having worked at “Huawei-skycom” on their resumes. A former Skycom employee said the two companies shared the same headquarters in China. And an Iranian telecom manager who has visited Skycom’s office in Tehran said, “Everybody carries Huawei badges.”

Iranian project was to double prepaid customer capacity of Iranian telecom operator from 20m to 40m. As per this proposal (marked as Huawei confidential) requires HP hardware - one server, 20 disk arrays, 22 switches and software - in Tehran and Shiraz as part of hardware design. Total project cost was around 19.9mn euro. Same report states that, "...China’s ZTE Corp, a Huawei competitor, had sold or agreed to sell millions of dollars’ worth of U.S. computer gear, including HP equipment, to Telecommunication Co of Iran, the country’s largest telecommunications firm, and a unit of the consortium that controls TCI."

As per US authorities, Huawei "...retained control of Skycom, using it to sell telecom equipment to Iran and move money out via the international banking system… banks unwittingly cleared hundreds of millions of dollars of transactions that potentially violated economic sanctions Washington had in place at the time".

Another allegation is, Canicula (allegedly linked to Huawei) had business operations in Syria, another country that has been subject to U.S. and European Union sanctions.

Financial transactions via Skycom came to light during an HSBC internal investigation. HSBC was trying to dismiss criminal charges filed by US Department of Justice for violation of U.S. sanctions.

Security Risk

US intelligence agencies also fear that, Huawei equipment could contain 'backdoors' for Chinese state espionage. Huawei vehemently denied these claims. However, Australia and New Zealand went ahead and banned Huawei from building their mobile phone networks. Austria is trying to reduce overwhelming Chinese influence in their country. British are yet to ban the company but expressed reservations. It’ hard for British to say no to Chinese money during and after Brexit process.

In fact, Chinese law require companies to assist in national intelligence work. Well, you may be thinking isn’t US companies cooperate with US government in their intelligence gathering. Well, it’s a good questions and we know the answer from Snowden papers.

Ownership of Huawei

Ownership of Huawei is one of the most interesting puzzles in the game. You might be thinking founder Ren Zhengfei is the owner of the company. Interestingly no. He owns around 1%. Huawei is not a publicly traded company and never sold shares to public in last three decades. As per records, Huawei Technologies is wholly owned by a holding company called Huawei Investment & Holding. This holding company has two shareholders, Ren and Huawei’s labor union (Union of Huawei Investment & Holding).

Interestingly Huawei shares are different from normal shares. These shares can't be transferred to another or owned by nonemployee. If an employee exit Huawei, then company buys all shares back. If employee have certain seniority, then they many not buy it back. Labor Union, elect members to Huawei’s Representatives’ Commission, which in turn elects’ members of the board of directors. Union doesn't have any control over the operations of company.
Accusation (which Huawei trying to discredit but so far unsuccessful) is that Chinese party, military or government has significant control over Huawei.

Why American's Act Now?

China is very different from all other US enemies who are a threat to US interests. For e.g. whatever Russians do, they don’t pose a significate threat to US outside old USSR sphere of influence (except in Arctic). Moreover, Russians are neither investing in future nor cared about anything in economy other than Petro-gas and selling military weapons.

Iranians are a threat to US allies in Middle East including Israel. However, Iran won’t directly attack Israel.  In addition to that, Iran's strength is Oil and gas and its geographical position and influence over insurgencies in neighboring countries. Though Iran has a powerful army, its decades behind in military technologies and halfway across the world. Even minor disruptions, in global crude supply might not affect US market as they already became a net exporter of Oil due to significant shell oil extraction over past decades.

North Korea, despite all its grand standing; and Afghanistan don't pose any threat to US technological supremacy. As far as Europe is concerned, most economies (other than Germany) are cash strapped and they themselves looking for foreign investment (yes, including Chinese). Germany is a close US ally.

Made in China 2015 – 2025 - 2049

Huawei P30 phone with triple lens

With China its different. Chinese strength is not coming from any Oil and Gas deposits. China is the factory of world. After decades of building duplicates, they are moving towards original manufacturing. Getting contracts across the world from road construction to 5G rollout.

China aspires to be world's leading technological power. They came up with a plan – which released in 2015 - aims for developments in 10 key sectors by 2025. They also plan to achieve 70% self-sufficiency by 2049. Many of these plans violates many WTO provisions. Crashing of solar panel industry is a case in point. We will discuss this in another article.

Another issue is market access. While western markets are open for Chinese export, she put in place serious restrictions on opening her own market (which is very huge) to non-Chinese companies.

For investing or doing business in China foreign companies must enter into joint ventures with local firms. These agreements also required foreign firms to share key intellectual property and advanced technologies. Some rules were related later.

China also happens to be leading exporter of rare-earth metals. These metals are critical for electronics and battery manufacturing.

What will be Chinese reaction?

I don’t think Chinese will make any hard decisions. They think a lot before taking decisions. After all its the land of Sun Tzu. They will even wait till Trump’s term is over.

Some Chinese may be arguing for banning Apple. Will they do it? Very less chance. Apple phones are as Chinese as any other Chinese phones. Out of 800 suppliers for Apple approximately half comes from mainland China.  Why should they shoot on their own foot. However, Chinese users may choose not to buy Apple phones.

Many policy analysts argue that Chinese may ban export of rare earth metals. If US pushed had it is possible that, they might reduce export of rare earth metals. However, complete ban may not happen. After all, why to create significant disruptions in global chain when Chinese sits at a very important position in it.

How it is going to affect others?

Rough Waters for Huawei

Exclusion from using Android may not create significant impact in home market. However, in other markets - say, India - they won't be able to sell phones without Android OS and Google Services. They will face dip is revenue from overseas operations and without US chips (HiSilicon might not be able to provide a replacement for ARM or Qualcomm in immediate future) it’s going to be a hard struggle. Chinese government may compensate Huawei in one way or other. China may also try to get some reprieve for Huawei by making it as a bargaining chip in future US – China trade talks.
Costlier Telecom equipment’s

Equipment’s form Ericson and other companies will be costlier. This will delay 5G rollout and make it costlier.

Trade War

Tit for tat taxes exports between US an China will be a step back for freedom of trade, liberalization and globalization.

Alternate pressure point

For a set back here, China can create problems for US and allies elsewhere. May be boosting North Korea a bit. Building some more artificial islands in South China Sea etc.

Middle- East, Eastern Europe and Iran

A significant event in Middle East or Eastern Europe may take all the focus away from current problem and negotiations may go on slowly behind the scenes.

China will try to reduce import of US agricultural produce which will create problems for US president in key agrarian states.  After all US presidents must worry about elections unlike their Chinese counterparts. It is even possible that, China may simply wait till current US administration changes.

Whatever happens we are going to see a new technological race between US and China in coming days. Though it disrupts global supply chain and make a dent to global growth rates, we will eventually see more investments by US and China in science and technology. We will see more space explorations and even colonization’s of moon and mars. Who knows we may even bring fuel from moon to power machines in earth?




Photo Courtesy: Wikipedia

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