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.]

13 thoughts on “U.S. Government vs. Huawei, ZTE: This Was Doomed From the Start

  1. bystander

    Exactly right that this was DOA before the hearings were ever convened. To my mind, there is a much more salient point however than even “transparency”. If the NSA tells Congress in classified briefings that there is a live security threat to the United States from placing telco gear in the US communication infrastructure, then for all practical purposes the story is over. Supposing Huawei and ZTE opened up a bunch of “board minutes” or whatever the US equivalent was, how would the Congress respond to the NSA? “We have seen the board minutes and they are transparent.” The obvious retort is that the problem is not a lack of board minutes but a real, living and visible security threat. The threat isn’t measured in “transparency” or “relationships” but in things like cyberattacks and other incidents that are carried out in the digital domain that the NSA is monitoring. There is no retort to these things in the form of corporate documentation that a Chinese company can produce, in my opinion. So long as China is seen to be hell-bent on penetrating the US with cyberattacks — not in documents but in facts on the ground — the whole exercise is largely empty and moot. Maybe something was learned by one side or the other or the public, but that’s about the best that could ever have been hoped for from these hearings.

    I find the whole argument to the effect of “we have provided an unprecedented level of cooperation” to be both hopelessly naive and strangely hypocritical coming from the Chinese side. Foreign companies in China are, so far as I have seen and have read on this blog and others concerned with the law in China, subject to much more stringent enforcement of laws and regulations than local companies are. Dan Richard’s blog for example, with his rule of thumb about everything costing a foreign company 3x as much as a local company. Estimate and multiply by 3, because a foreign company must actually comply with regulations concerning real estate usage, employment laws, regulations on business purpose, etc. etc. So now, whence this argument that “we have already provided much more information than Chinese companies usually provide” when it comes to a Chinese company operating in the United States? Reciprocation would have it that Chinese companies should provide much *more* documentation and compliance concerning corporate structure and control, etc. etc. than their American counterparts, not *less* because that is the norm at home. One more example of a weirdly lopsided trade relationship between the countries, in my opinion.

    1. Stan Post author

      Actually, knowing what I do about transparency in China, I have a feeling that the level of disclosure was unprecedented and that Huawei probably felt that it was quite open. The problem is that what they think is good enough is nowhere near what the standard is in the West. That’s the central problem.

      1. bystander

        yes, that’s a good and interesting point.

        It seems to me, though, that it really isn’t the central problem. The central problem is the security concerns and the ongoing cyberattacks originating from China. Abstracting this part of the problem away and discussing only the mechanics of the hearings and the notions of corporate governance in China and the US, in the abstract, will leave one with a very skewed impression of what’s actually happening in this case.

        Imagine that Huawei were manufacturing dishwashers instead of network switches. Now all the sudden the demand, on the part of the Congress, for details about their corporate structure and its connection to the Chinese government seem gratuitous and out of place. Transparency standards in the West notwithstanding. Everything about the story, including the reaction of the public in the United States, would be different. Security and defense matters trump ordinary trade and commerce considerations in a way that cuts through the usual rules and operating norms.

        I really think it’s not possible to discuss this story in a meaningful way without touching on the espionage/cybersecurity issues that are at the heart of it all.

        Interesting piece though, glad you are blogging about it!

        1. Andao

          That’s a great point and something I wish the investigators would have gone into more thoroughly. Quite simply, I would have asked about Huawei’s position on state-sponsored cyber espionage. This falls very squarely within the realm of “impossible to answer questions”, but let’s face it: Huawei and ZTE have done nothing publicly to lobby the Chinese government to change its cyber-warfare policies. Obviously this is going to have a very detrimental effect on private telecom businesses based in China, whether it’s fair or not.

          I hope at least through the private channels, Huawei has been telling the higher-ups in the Chinese military that the cyber espionage business is having hugely detrimental effects on private Chinese companies. It might be totally unfair to connect the two, but until Huawei makes a clean break with Chinese government policy on this issue, the apprehension will exist. And I think it’s totally fair that it exists. Looking forward to further posts in this series.

  2. Fons Tuinstra

    I would trust Huawei and ZTE as much as I trust Cisco, Ericsson and all the other producers of telecom equipment. Telecom providers need to have expertise at home to guard against any exposure to risks. Reinstalling national borders is obvious not going to help.

    1. Andao

      I think Google has been pretty vocal about resisting requests for information from the US and other governments. At the very least, there isn’t a political body sitting at Google HQ doing…heaven knows what. Even Huawei or ZTE making stuff up about what their CCP branches are responsible for would have been better than a non-answer. I was pretty surprised by their reluctance to even tell a lie to satisfy that question.

  3. Jack Fensterstock

    It has been reported that Huawei alone spent $850,000 on lobbyists and one needs to assume that or more on lawyers. So what did they get for all of this or is it that Huawei did not follow what was the best judgement from its army of advisors. Surely the lawyers who have dealt with issues such as export control and previous attempts by Huawei and other Chinese companies to do sensitive deals understand the nature/amount of detail required and necessary to satisfy government officials. So why would Huawei (and ZTE) risk such a public rejection without REALLY trying to satisfy the Committee’s questions? Isn’t it a bit arrogant of them to claim politicization before dispensing with what was required in terms of answers. Sure not all of the questions could have been answered to the satisfaction of the Committee but at least Huawei and ZTE would be on firmer ground.

    1. Stan Post author

      I have exactly the same questions and was planning a post on this issue. (I was talking about it a little on Twitter yesterday.) I have no doubt that lawyers could have drafted answers to some of those interrogatories that would have satisfied the Committee.

  4. Bob Kapp

    The “backdoor” issue (i.e., the danger that IT malefactors might placeundetectable espionage or cyberwarfare technology within others’ networks, e.g., those of customers buying HW/ZTE products, in this case) is really a Gift That Keeps On Giving, since there is never, by definition, any way of showing whether anything exists or not. Add to that “If you knew what we know but are not at liberty to disclose to you,” and you have a powerful combination. And raising any question about the issue raises the old “Selling the U.S. Down The River” (the Chinese term is 卖国) trope. Sorry to say it, but Resolved Problems = Unemployment. Conversely, Insoluble Problems can = Prosperity.

  5. Bob Walsh

    I think the underlying assumption has to be that the CPC’s influence over China telecoms has to be equal to or greater than NSA/USG’s influence over US telecoms, especially since the Patriot Act in all of its wonderful forms has been enacted and continued.