U.S. Government vs. Huawei, ZTE: Whither the Lawyers and Lobbyists?

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This is now my third post on the U.S. House Intelligence Committee report/smackdown of Chinese telecom firms Huawei and ZTE that was released Monday, and I have yet to seriously delve into the language of the report itself, which is fascinating in its own right. As I said yesterday, there are numerous issues to deal with here.

One question that has come up several times already relates to the assistance given to these two companies by lawyers, lobbyists and PR firms, presumably American ones. I have the same questions.

According to the Committee, this investigation lasted a whole year. These guys had plenty of time to lawyer up and assemble a team of top D.C. talent.

From what a lot of folks tell me, that’s exactly what they did, and paid dearly for the assistance. I know for example that DLA Piper was on board advising ZTE, although I have no idea what the scope of that representation was. DLA does have a hot shit U.S. government relations (i.e., lobbying) outfit that is run out of its D.C. office whose history goes back to the Piper Marbury days. These guys know what they’re doing. I assume that the other members of the team(s) had similar credentials.

So why did the investigation go off the rails, with the Committee complaining that the two companies did not respond to questions? Fair or not, the Committee ultimately decided that if Huawei and ZTE would not respond to, for example, speculation out there about ties to the PRC government, that it would not be able to recommend that the U.S. government approve inward investment from them.

As I wrote yesterday, I believe that the investigation was always going to end this way, that neither company was able to fully respond to the Committee’s queries, and that this whole thing was doomed from the start.

However, this doesn’t get all the lawyers, lobbyists and PR folks off the hook. If you go through the report, it is obvious that there were several opportunities for these companies to be more transparent with respect to connections to the Chinese government that were simply missed or ignored.

Some of these appear to be straightforward. For example, Huawei was asked about its shareholding structure, something that has been discussed for years now:

Available information does not align with Huawei’s description of this structure, and many analysts believe that Huawei is not actually controlled by its common shareholders, but actually controlled by an elite subset of its management. The Committee thus requested further information on the structure of the company’s ownership. For example, the Committee requested that Huawei list the ten largest shareholders of the company. Huawei refused to answer. (Report, p. 22)

Now, we can argue about whether this is an important topic or necessary information for the Committee to have. Regardless, it asked for it specifically and did not receive a satisfactory response. I’m no expert on the history of Huawei, and I’ve never seen evidence that the government owns shares, but either the shareholding structure is not a big deal and therefore should have been disclosed a long time ago, or there is something hinky going on that the owners don’t want to talk about. Any other possibilities?

The Committee was trying to find information about whether Huawei is partially owned by the government. Huawei apparently answered “We’re not going to tell you.” In some ways, this evasiveness is even worse than if it disclosed a minority position held by the Chinese government. Now the Committee not only believes that there is a government stake, but also that Huawei is actively trying to hide it. Fail!

To be fair, the report goes into quite a lot of detail about some of the document problems it had with verifying some of Huawei’s claims, and I think there were problems here that simply couldn’t be solved. In some instances, therefore, it was impossible for Huawei to back up its claims to the satisfaction of the Committee because its internal documents were not up to the standards required by the investigators.

While this may excuse many of the supposed “refusals” to comply with Committee interrogatories, however, it wouldn’t explain not providing a list of the top ten shareholders. Moreover, we cannot simply chalk this up to communication problems. That kind of interface function is exactly what the lawyers and lobbyists are hired to do.

One more example, again relating to government influence:

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. [my emphasis] (Report, p. 30)

This one is stunning/shocking. Let’s think about this for a second. If you ask a Chinese company to describe how it works with the government, it’s going to freak out and not want to say anything. Absent any outside counsel, I would be surprised as hell to receive any sort of response whatsoever.

But in this case, Huawei had U.S. lawyers on its side, right? These lawyers could read into those queries and VERY EASILY draft a response. I can imagine doing this for my own clients in China. Remember, all they’re looking for is formal interaction with the government that can be backed up with documentary evidence. (By the way, can you imagine how much more difficult this would be if they were asking for informal interaction? The limitation here makes this easy.)

What would that look like? Here’s a stripped-down version for Company X that makes widgets:

1. On an annual basis, Company X must submit the following documents for review with the Administration of Industry and Commerce to pass the annual review process. (See attached list, plus copies of business license and applicable legal citations.)

2. Every three years, Company X must renew its widget product license with the Ministry of Widgets. Documents submitted include testing certificate, blah blah blah. (See attached list, plus copy of current license.)

3. In order to export widgets, Company X must obtain approvals from the following government agencies: blah blah blah. (See attached list of documents submitted, plus copies of approval documents.)

I think you get the idea. Documents? No problem! Give ’em a few things from the Tax Bureau, Labor Bureau, SAFE, AIC. This is not difficult, and if there were some confidentiality issues, I’m sure that could be dealt with.

Yes, these are huge companies, and yes, this would be burdensome. So what? The stakes here are rather high. It might require a lot of lawyer time, but this sort of thing ain’t rocket science. Granted, some of the Committee’s questions might have simply been impossible for Huawei and ZTE to answer, but as I hope those two above examples show, there was some low-hanging fruit that went unpicked. How could this happen? And don’t tell me that D.C. lawyers don’t understand Chinese corporate law. I happen to have it on good authority that they know exactly how Chinese companies are run (Disclosure: I used to work at DLA Piper’s Beijing office).

So I’m left with my original question: where were the lawyers? Seems like only three possibilities:

1. The lawyers were marginalized or not really involved at the ground level.

2. The lawyers were ignored.

3. Huawei and ZTE actually did answer all those questions and the report is lying about it.

I’m open to other theories.

6 responses on “U.S. Government vs. Huawei, ZTE: Whither the Lawyers and Lobbyists?

  1. bystander

    I like 2: the lawyers were ignored. The stakes are high but not as high as revealing something that a high-ranking gov’t official in your home country told you not to reveal.

    I also wonder to what extent these companies were advised that these are mere hearings, that they don’t result in binding legislation or rulings. Maybe they underestimated the impact of not fully complying with the committee’s requests?

    1. Stan Post author

      I tend to agree that lawyers were ignored. Rather SOP for large PRC companies.

      As far as disclosure is concerned, I would suggest that there were things Huawei/ZTE could have revealed, and things that they couldn’t. I believe they could have done a lot more without pissing off Beijing and chose not to for some reason.

      If there was confusion about the nature of hearings, then again, I would blame the lawyers and consultants for not making that clear.

  2. KSChin

    Australia, on the advice of US, has disallowed Huawei to participate in their broadband project. Canada is now indicating the same. Papua New Guinea awarded the contract to Huawei for the IGIS Net despite warnings from Australia. I am dreading the consequences as China surely will not sit by without retaliation in a big way. I am struck by the language in the report with words of “might” rather than specific evidence. This is a hatchet job and frankly I am embarrassed at this rather “loose” comments coming out from the US no less. Will China do the same thing to CISCO?

    1. Andao

      If it’s such a hatchet job, then why didn’t Huawei properly defend itself? It hired very expensive lawyers that could have easily pulled something together. But why didn’t they respond at all?

  3. Jack Fensterstock

    Given that Huawei agreed to participate in the public Hearing and had gone through a series of private sessions with Committee members, they surely must have been aware of the level of detail that was being asked. So why is it that in the end it seems that they did not fully comply even if their responses would be found lacking in some aspects. Bottom line is that Huawei (and ZTE) agreed to enter the ‘game’ where surely their advisors informed them of the ground rules. Then once the game started, it seems as if the Chinese companies decided to pull back thus dealing their fate.

  4. Stuart

    Major knock-on effect for Huawei, this report could seriously damage their intentions to create a brand for themselves in the smartphone market, despite the fact that this report only focussed on the issue of telecommunication equipment. ZTE is happy to remain low profile in terms of brand image when it comes to their smartphone products, preferring instead to improve relationships with their previous carriers. Huawei, however, could be doubly hurt as a result of this report.