CFO in court again as Huawei waits on UK’s 5G decision

CFO in court again as Huawei waits on UK’s 5G decision this week

20 January 2020 | Alan Burkitt-Gray

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Huawei is hoping to hear this week whether it can supply the UK’s four mobile companies with the equipment they need for their planned 5G networks.

The 5G-powered rumour mill is in full production, stirred up by UK prime minister Boris Johnson, who said last week in his first media interview of 2020: “The British public deserve to have access to the best possible technology. We want to put in gigabit broadband for everybody. Now if people oppose one brand or another then they have to tell us what’s the alternative.”

The alternatives that the four – BT’s EE, CK Hutchison’s Three, Telefónica’s O2 and Vodafone – have to contemplate are network equipment from two Scandinavian companies, Ericsson and Nokia, with South Korea’s Samsung hovering in the background.

Whether or not the rumours are right, it’s going to be a busy week for Huawei. On Monday morning West Coast time the Chinese company’s CFO, Meng Wanzhou, appears in court in Vancouver for the latest in a series of extradition hearings.

The Canadians arrested Meng (pictured) at Vancouver airport on 1 December 2018 at the request of the FBI of the US, though the news did not come out until a few days later. She faces charges linked ultimately to the US embargo on trade with Iran, and the FBI wants Canada to extradite her to Canada to face trial.

That won’t be decided this week, in what’s expected to be a five-day hearing. Unless the unexpected happens, Meng will be in her home in Vancouver, with a tracker on her ankle constraining her movements, for the rest of this year and possibly into 2021.

Canadians launch 5G

The UK’s 5G decision will also be watched closely in Canada. Rogers launched its first 5G services in Canada last week, using software upgrades of existing Ericsson network equipment. Telus is expected to implement software upgrades of its existing Huawei 4G equipment for 5G by April, though might add Ericsson kit to the mix. The third facilities-based operator, Bell Canada, is “in the same boat as Telus, with loads of Huawei kit”, someone close to the market told Capacity.

But the Canadian government has actively decided not to get publicly involved, Capacity understands, “until the Meng case is sorted out”, though “the bureaucrats are all supportive” of Canadian operators’ use of Huawei if they wish. “But it’s a political decision. Our government wants to get a solution sooner or later.”

If the UK government says yes to Huawei, those in the know expect that the Canadian government in Ottawa will be more comfortable. And Capacity has been told by numerous people in Europe that France and Germany are likely to follow the UK’s lead. Maybe even New Zealand will join the throng.

Operators in other countries have already selected Huawei for their 5G: “We have 65 worldwide 5G contracts, half of them in Europe,” someone in a position to know told Capacity last week. This person named all four UK operators as in line to buy from Huawei, though not all have signed contracts.

Individual operators, however, are remaining tight-lipped, fully aware of the political scrutiny they are under. Operators contacted by Capacity did not return calls last week.

A pro-Huawei decision in London will be received badly in Washington DC, where President Donald Trump has led the campaign against the company while, at the same time, moving gradually towards a trade deal with China.

“I think the UK will support Huawei but will use the right words to placate Trump,” said a senior executive in China. “If the UK and Germany both approve Huawei, that will be seen in Washington as two steps against the US,” Capacity was told.

The US is supported by Australia, which has also banned its operators from using Chinese equipment – so much so that Australian operator TPG dropped plans to upgrade its existing Huawei-supplied 4G mobile network to 5G capability.

Former Australian prime minister Malcolm Turnbull warned in a radio interview last week that networks – particularly internet of things (IoT) services – would be “very vulnerable” to interference: not necessarily espionage but the threat of simply being switched off. “Do you want to give China the capability?” Turnbull asked BBC journalist Sarah Montague.

He spoke about the so-called “Five Eyes” intelligence alliance of Australia, Canada, New Zealand, the UK and the US. Australia and the US have blocked Huawei from 5G services, but the other three have still to make their decisions.

Huawei UK’s communications director Ed Brewster spoke on the same BBC radio programme as Australia’s Turnbull last week. “New Zealand and Canada and the UK have not made that decision [to block Huawei],” he said. “New Zealand is waiting to see what Canada and the UK do.” He claimed: “We are the world leader in mobile network technology. We are no more risky than other vendors in the market place.”

Johnson himself recognised the importance of the 75-year-old Five Eyes partnership when he said last week: “I don’t want, as the UK prime minister, to put in any infrastructure that is going to prejudice our national security or our ability to cooperate with Five Eyes intelligence partners.”

The Americans have hinted that a UK deal with Huawei would make them less inclined to share intelligence. However, last week Andrew Parker, the director of the UK’s internal security service MI5, told the Financial Times in a interview that he had “no reason to think” the UK’s intelligence relationships would be harmed if UK operators went to Huawei for 5G kit.

Asleep at the switch as industry consolidates

But the Five Eyes alliance has been “asleep at the switch”, said Turnbull, because only four companies, Ericsson, Huawei, Nokia and ZTE, now dominate the mobile supply chain. There are no North American vendors – Motorola having moved out of the business in the last decade while Nortel imploded and US-based Lucent merged with Alcatel of France, a firm that was then bought by Nokia. Other European companies, such as Marconi of the UK and Siemens of Germany, have sold their businesses to rivals. 

“No one is suggesting Huawei has malign intent,” Turnbull said, “but that can change in a heartbeat.”

In the interview Turnbull showed a greater comprehension of mobile network technology and the issues involved than most other politicians. “It isn’t possible to separate the core of the network from the edge,” he said. With a virtualised network “a lot of the processing is at the edge of the network”, and he said Australia had decided not to give “high risk vendors” access to any part of the country’s 5G networks.

Huawei is expected to report soon that revenue in 2019 was up 18% on 2018, though no figures have yet been published. That’s with virtually no business from the US: subject to a government embargo, Huawei has more or less ceased any sales, including of enterprise equipment, Capacity understands.

“Everyone in Huawei got two salaries in November,” Capacity was told, the extra being a bonus for good performance. “But nobody is complacent. The pressure is ramping up.”

Huawei has fought back. It challenged the whole US government in court on whether a decision to block it was constitutional. A result was due in November, but hasn’t arrived yet. Huawei is also waiting on a decision on another court case, against the Federal Communications Commission (FCC). “We expected a result by Christmas but it’s not yet been received,” Capacity was told last week.

Subsidies for US rural operators

Washington has banned US rural operators, for which margins are tight, from buying from Huawei or ZTE. Last week the US Senate introduced legislation that promises up to $1.25 billion in grants to subsidise the use of non-Chinese equipment.

That doesn’t mean subsidising Ericsson and Nokia network equipment, though this isn't clear. The name of the proposed legislation, the Utilizing Strategic Allied (USA) Telecommunications Act, implies US equipment will be preferred – if operators can find any. The proposed funds have backing from senators from both the Republican and the Democratic parties.

Since last year the Trump administration has blocked US hardware and software suppliers from selling to Huawei. This is a powerful move: a similar ban on selling to ZTE a few years ago almost destroyed ZTE as a company. ZTE emerged from its death march by paying a $1.4 billion fine and agreeing to US legal supervision for 10 years. It has revived, though it still can’t sell to US operators.

The US Department of Commerce (DoC) said it would license US companies to sell to Huawei in exceptional circumstances.

Capacity understands that 300 US companies have applied for DoC licence, of which half have been accepted. Capacity also understands, though hasn’t been able to verify, that Microsoft and Intel have both got DoC approval to sell to Huawei. But no one has made any announcements to shareholders.

And, crucially, it is not known whether Alphabet, the company that owns Google, has approval to provide Huawei with access to its features for new mobile phones – features such as the Android operating system, plus upgrades, as well as Gmail, YouTube and related marketing, billing and analytics.

Huawei is working on a new operating system, HarmonyOS, initially designed for IoT gear, but recognises the challenge to get app developers to match the offerings on Google’s Play Store. And these are all interlinked. “If you have an Uber app on a new Huawei phone, will it be able to use Google maps?” someone close to the action asked. However, since that conversation, Netherlands-based TomTom announced a deal to provide maps to HarmonyOS. 

Meanwhile Huawei has re-engineered its hardware to exclude US components, primarily chips, sources tell Capacity. “It performs better,” Capacity was told.

“Our production capacity of base stations is now 5,000 a month,” we were told, by someone citing 2019 figures. “We will make 1.5 million in 2020.” That, if accurate, will put the planned production rate at 125,000 units a month.

Court to decide dual criminality 

Meanwhile eyes from Shenzhen in southern China, where both Huawei and ZTE are headquartered, to Washington DC will turn to Vancouver later today as Meng – who is effectively under house arrest – appears in court again.

In October her lawyers tested the grounds on which she was arrested in December 2018. She was detained “on the pretence of an immigration issue”, a source in China explained to Capacity, without the formal procedure, involving the right to a lawyer, that would have been required if she’d explicitly been arrested on charges of financial fraud. But the judge decided it was of little consequence.

This week the court will test the law on dual criminality. Under Canadian law, someone can be extradited only if the alleged offence is also an offence in Canada, and Canada has not applied an embargo against Iran, say observers in China.

But others respond by pointing out that the Americans have not charged her with that. They are saying she was a director of Skycom, a Hong Kong company secretly owned by Huawei. Skycom, it is said, was an intermediary in 2010 in selling Hewlett-Packard gear to Mobile Telecommunication Co of Iran in contravention of US trade sanctions, thought to be in 2010.

But because, say the Americans, the Skycom/Huawei relationship was secret, CFO Meng lied to banks that were lending Huawei money. Meng is charged with bank fraud, wire fraud and conspiracy to commit both. Those are as much crimes in Canada as they are in the US. Meng denies all allegations. 

However, a report in yesterday’s South China Morning Post (SCMP), published in Hong Kong, said that HSBC was aware of the link between Huawei and Skycom in 2010, three years before Meng presented to HSBC, looking for funding. The SCMP said it had seen documents dated between 2010 and 2012 that show HSBC “knew the business relationship between Huawei and Skycom”.

“Don’t expect any new evidence,” sources told Capacity last week about the case starting today in Vancouver. The evidence will largely be a repeat of what was said in October’s hearing over the circumstances of the arrest. “And don’t expect quick decisions.” If last October is anything to go by, it will probably take weeks before a determination is made from this week’s hearing. And, whichever way it goes, there will undoubtedly be appeals. “Lawyers can string these things out for a long time.”

The whole legal process is slowly grinding towards an actual extradition hearing, which may not be until later this year – perhaps as much as two years after Meng’s arrest. That will, interestingly, coincide with the next US presidential election. Telecoms is political.