Huawei’s future at risk after CFO arrested in Vancouver

06 December 2018 | Alan Burkitt-Gray

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Huawei’s CFO, Meng Wanzhou, or Sabrina Meng, is under arrest in Canada and facing extradition to the US following an investigation into alleged breaking of Iran sanctions.

Her arrest, especially as she is the daughter of Huawei’s founder, Ren Zhengfei, is likely to escalate existing trade tensions between the US and China. But it is also likely to worsen the Chinese vendor’s position in the telecoms market, especially in the west.

Huawei was already facing pressure over alleged security inadequacies, culminating in BT’s admission only yesterday that it would not use Huawei gear in its 5G core.

Huawei immediately protested about Meng’s arrest, understood to be in Vancouver last Saturday, 1 December. In a statement issued on Thursday morning from its headquarters in Shenzhen it said: “The company has been provided very little information regarding the charges and is not aware of any wrongdoing by Ms Meng. The company believes the Canadian and US legal systems will ultimately reach a just conclusion.”

It added: “Huawei complies with all applicable laws and regulations where it operates, including applicable export control and sanction laws and regulations of the UN, US and EU.”

At the heart of Meng’s arrest is believed to be suspicions that Huawei preceded its Chinese rival, ZTE, by developing ways round US export controls to ship to Iran its gear, containing US-made hardware and software. Export licences specifically ban re-export to embargoed countries – not just Iran but also Cuba, Sudan and Syria.

 

Leaked documents

The clues came in the documents that the US leaked a couple of years ago after the Department of Commerce almost brought ZTE down for the same offence. ZTE eventually paid a $1.4 billion fine in order to stay in business.

These ZTE documents, originally in Chinese but helpfully translated into English by the US, were dated August 2011 and were signed by senior company executives, including then CEO Shi Lirong.

They set out ZTE’s detailed plan to smuggle goods to Iran – based on a company codenamed F7’s previous plan. “F7 found a big IT company serving as its agent to sign contracts for projects in embargoed countries,” it read. F7 was Huawei, a codename believed to be based on a Mandarin pun. ZTE did the same, got found out, and was punished.

Huawei was concerned that it would face similar punishment but – until last Saturday – the threat seemed to have gone away. Instead it was focused on security allegations.

Those came to a head yesterday, Wednesday, when the UK’s biggest operator, BT, told Huawei that it wouldn’t use the Chinese company’s network equipment in its 5G core.

Huawei shrugged that it was expected – but what it will also expect is that the news will ripple round the world at the end of what has been a more than usually difficult few weeks. Especially with the reinforcement of Meng’s arrest.

Last week the New Zealand government’s security specialists told Spark, the former Telecom NZ, that it should not use Huawei equipment in its planned 5G network core.

Two weeks ago, at the ExCeL conference centre in London, BT’s EE mobile unit was showing off 5G services at Huawei’s own mobile broadband exhibition that was also attended by CK Hutchison’s Three, Telefónica and Vodafone – all four of the UK’s mobile operators. And there were visitors from around the world. Huawei really is embedded in the Western world’s telecoms networks.

 

5G solution

Why? Because they are all, from my contacts with them, fans of Huawei – partly because they like its technological solution, especially its approach to 5G, and partly because Huawei’s lower price levels mean there is just about a business case for 5G. Some say that Ericsson and Nokia’s prices make it harder to justify 5G investments.

BT and Huawei argued that the restriction was on Huawei network equipment in the core. Others have pointed out that Huawei has taken an integrated approach to 5G, and it may not be possible to identify such a clear demarcation.

Telstra is also a fan of Huawei and even more of a fan of ZTE. The Australian government has accepted US demands that it ban Chinese network equipment from the country – and that means from Singtel Optus’s service as well as from Vodafone Hutchison's network.

Telstra was the first Western operator to use Chinese mobile equipment in a big way, when it went to ZTE for the CSL network it used to own in Hong Kong (it later sold CSL to PCCW's HKT, ).

ZTE is a rival of Huawei, though both are based in Shenzhen, Hong Kong’s neighbour city across the border in mainland China. Both have long been banned from major US networks after a report early this decade in which members of Congress wrote of their fears.

So impressed was Telstra that it built an experience centre in Hong Kong, so that potential clients of ZTE could see networks in action after visiting Shenzhen. “We had 200 telcos from around the world come to visit,” a Telstra executive told me this week.

 

Australian opposition

And the same executive added that he would really like to use ZTE equipment for Telstra’s 5G network in Australia. But the Australian government long ago said “No” to any idea of that. “We will use Ericsson instead but it’s too f****** expensive,” the executive added.

Meanwhile some years ago AT&T acquired a pair of Mexican mobile operators, at least one of which was a Huawei customer. It then upgraded the network to 4G and a senior AT&T executive, by then based at group headquarters in Dallas, told me how delighted the company was with Huawei kit – and how well it was integrated with the US network.

In Australia, Telstra has its own security team that tears apart any equipment and software that’s being considered for its network to hunt for vulnerabilities.

So does the UK. In the rural town of Banbury there is the Huawei Cyber Security Evaluation Centre (HCSEC), staffed by security-cleared British engineers who are paid for by Huawei. The trouble is that in July 2018 the HCSEC reported problems.

As I understand it, there were no deliberate vulnerabilities, but the security people were concerned that software is changing faster than hardware – too fast to thoroughly check for problems.

That is likely to be an increasing issue as we move to the era of software-defined networks (SDNs). If you’re wanting to turn up services fast, you need to write software fast – and that means the security specialists don’t have time to go over it with the detail that is needed.

 

Software tests

Attending Capacity Asia in Hong Kong this week, I had conversations that indicated that Huawei was planning to develop a solution. It’s still in draft and was not likely to be presented to UK authorities until early in 2019. But it seems Huawei was going to offer more resources – likely via the HCSEC – to test the software and test it again and again.

This is hugely important to Huawei and to its global reputation. The New Zealand government’s decision, I understand, was largely founded on the HCSEC’s concerns. If the solution had been accepted by the UK that would have helped overcome New Zealand reluctance.

But New Zealand is tiny. Deutsche Telekom and Orange are much bigger users of Huawei. Cyber security people in the German government tend to follow the UK’s lead on this, I was told on good authority; the French government, which owns a big stake in Orange, then follows the Germans.

Remember that BT’s biggest shareholder is Deutsche Telekom, and its CEO, Tim Höttges, is a non-executive director on BT’s board. So if BT has been told something that has led it to stop ordering Huawei for 5G, you can bet Höttges will have asked the appropriate questions.

Does this mean that, if the French follow the Germans, and the Germans follow the Brits, Huawei could end up losing business with Orange and Deutsche Telekom as well as that of BT and New Zealand’s Spark?

Huawei likes to say that it can survive the lack of access to markets in Australia and even the US. Last week Eric Xu, one of the three men who take it in turns to chair Huawei, told the US business TV channel CNBC that the company would achieve sales of $100 billion this year, compared to $92.5 billion in 2017. Some felt Xu was being reckless or maybe arrogant when Huawei was facing what could turn out to be existential challenges.

 

Bail hearing

However, the real decisions about Huawei’s future will be taken first in Vancouver on Friday when Meng faces a bail hearing after charges were filed by US federal prosecutors in the Eastern District of New York.

It is highly likely that the case will escalate to presidential level – Donald Trump and Xi Jinping will decide the future of Huawei and Meng. Concessions from the Chinese company will be expected – and, if ZTE paid $1.4 billion, Huawei may face a higher price.

Where does this leave the industry? In the 5G world, it leaves the northern European duopoly of Ericsson and Nokia – there is no credible US company in the race, though Samsung of South Korea has a good reputation, but a small market share.

And Nokia at least has a substantial operation in China: it used to be Alcatel Shanghai Bell and is owned 50% less one share by a state investment group, China Huaxin Post and Telecom Technologies. Has anyone set Nokia and its Chinese partner the tests that have been set for Huawei? Not that I can find.

ZTE is admired for its R&D and its work on 5G standards but came close to death after the Iran case.

ZTE is still there, but it is hanging on, just. It certainly doesn’t have the same level of access to developed Western markets it did before the Iran debacle.

But, then, it’s only a few years since it was widely reported that the US National Security Agency (NSA) had backdoors into communications that went through services such as Microsoft, Yahoo, Google, Facebook, AOL, Skype and Apple. The NSA, reports said, started on this project, called Prism, in 2007 and it was leaked to the world in 2013.

No one has denied the reports. We continue to use Microsoft, Google, Facebook, Skype and Apple, and some even use AOL and Yahoo, both now owned by Verizon. Difficult, isn’t it?

 

Survival challenge

Will Huawei survive? Almost certainly, as the industry could not really work with just two suppliers in the industry.

Huawei knew 2018 was going to be a tough year. But 2019 will be even tougher. The company has much to do to regain some of its reputation.

Meanwhile, next week Maltese tenor Joseph Calleja and the Royal Philharmonic Concert Orchestra will be entertaining Huawei’s guests in London at its annual winter concert for top UK customers at the Royal Festival Hall in London.

They will be welcomed – if the usual practice is followed (I’ve been a guest for several years) – by John Browne, Lord Browne, the chairman of Huawei UK. The concert has been held for years to support the Prince’s Trust, the charity founded by the heir to the British throne that helps thousands of disadvantaged young people get off drugs and into work. Huawei supports a number of good causes in the UK and has a deservedly high reputation for this.

But some of the conversations over the interval canapés may well move away from the quality of the music and the undoubtedly good works of the Prince’s Trust and stray on to other matters.