U.S. Government vs. Huawei, ZTE: This Was Doomed From the Start

October 9, 2012

I finished reading the U.S. House Intelligence Committee’s report on Chinese telecom firms Huawei and ZTE late last night, and I was stunned. My reaction had nothing to do with the content of the report, which was actually all too familiar, but rather that a public document with such a high profile so well highlighted the stark differences in perspective between the West and China when it comes to issues like transparency, the role of the government, and business relationships.

After I read the report, I realized that one could take use it as the core of an excellent book about U.S.-China business challenges and Chinese overseas direct investment to the West. The document is chock full of interesting passages that illustrate bilateral problems between the two governments and also cultural differences that I’ve seen over the years with Western and Chinese companies. Among other things, the report made me realize that Chinese companies still have a very long way to go before they will be truly successful in certain overseas markets.

In short, this report left quite an impression on me, and I’m not really sure where to start in responding to it.

There’s no doubt that between the report itself, statements made by some of the Committee members, pushback by Huawei and ZTE, and various Op/Ed articles written by commentators over the past day or so, I’m going to need more than one post on this issue. For those of you who are not really too keen on this topic, my apologies, but I’m going to be spilling serious ink on this one.

I think the place to start, and to limit myself in this first post, is to take a look at the “big picture” before delving into any details. And the most significant question that a lot of folks are asking these days is the following: whose narrative is correct?

The two sides here are the U.S. government, which says that for national security reasons, the two companies should not be trusted with access to American telecom infrastructure, and Huawei and ZTE, which say that they cooperated fully with the Committee and therefore find its conclusions unjustified.

Who is the bad guy here? Honestly, after thoroughly poring over the report, I empathize with both positions. In later posts, I will explain in detail how I arrived at that conclusion, but what it comes down to is this: the Congressional investigation was doomed from the start.

The problem here is that both positions have merit. The Committee, given the information it had, was justified in its general conclusion; at the same time, Huawei and ZTE probably did provide an unprecedented amount of information and were no doubt genuinely puzzled that this disclosure was deemed inadequate.

Why? Because it was never possible that either Huawei or ZTE would be able to give the Committee the information it required to complete its investigation. Sure, there were mistakes made by both sides, statements made that were incorrect or foolish, but in terms of the big picture, there was simply no way the two sides were ever going to come together.

There are many examples I could use to illustrate this point, but let me just give you one that relates to questions about PRC government influence with Huawei, a key issue that the Committee was trying to clear up. The following passage, from page 30 of the report, clearly shows not only the Committee’s frustration with what it sees as Huawei’s unwillingness to be transparent, but also the lack of understanding on the part of the Committee about how China works:

The Committee did not expect Huawei to prove that it has “no ties” to the government. Rather, in light of even experts’ lack of certainty about the state-run capitalist system in China, the Committee sought greater understanding of its actual relationship with the Chinese government. The Committee requested that Huawei support and prove its statements about its regulatory interaction by providing details and evidence explaining the nature of this formal interaction. Any company operating in the United States could very easily describe and produce evidence of the federal entities with which it must interact, including which government officials are their main points of contact at those regulatory agencies.

This is absolutely fascinating for several reasons. For one, asking a large company in a sensitive sector like Huawei to give detailed information about government interaction is a non-starter.  Complete transparency on this specific point is just impossible. Doing so would essentially rip the entire capitalist facade away from the Chinese economy — it’s unthinkable. Moreover, if the Committee was given that information, its suspicions about government interaction with Huawei would, if anything, been confirmed. (This posits a completely honest response of course. There were many ways, in my opinion, that Huawei could have formulated a limited, narrow response that might have satisfied the Committee, but apparently it did not even make the attempt.)

But the tragic part of that quote is the last sentence about how a U.S. company would respond to the Committee’s requests. This is the problem, isn’t it? Huawei and ZTE are not American companies, and they are bound by certain realities, some of which make it impossible for them to fully comply with the Committee’s demands for information.

At the same time, the Committee simply must require that these companies meet certain transparency standards. The U.S. government can not mandate one level of transparency for a U.S. company but allow a lower standard for a Chinese company simply because the system over here in China is different.

Even if we assume the best of intentions to the Committee, once the scope of its inquiry was determined, there was simply no chance that this exercise was going to end well for Huawei and ZTE.

[Some issues I hope to get to in later posts: evidence used in the report; poor use of consultants and lawyers; charges of protectionism and China bashing; accusations about IP, corruption, etc.; effect on other Chinese companies.]