US cautious over China telecoms role
By Benjamin A Shobert
WASHINGTON - Last Tuesday, the United States-China Congressional Committee
(USCC) released a research report on "The National Security Implications of
Investments and Products from the People's Republic of China in the
Telecommunications Sector". Focused on how changes to the global supply chain
for telecom equipment (both hardware and software) have changed over the past
decade, the report highlights several concerns.
As the USCC stated on its release, "The report discussed how China's growing
involvement and investment in US telecommunications supply chains and
companies, including the penetration of the US marketplace by companies subject
to ownership, control, or influence by the People's Republic of China, could
eventually provide China with access to or control of vital US
and allied information, networks, or segments of critical supply chains."
While not necessarily a new concern, the report intensifies past questions
specific to the telecom industry, and also asks larger strategic questions
about how much further America is willing to integrate with China.
Of primary concern to the USCC is the role of the Chinese government - and the
Chinese People's Liberation Army (PLA) more specifically - with China's largest
telecom companies. Attempts to peer into China's business community and
understand where the business begins and the state ends have been historically
problematic, never more so than for those China considers "strategic
industries".
The Chinese government has seven strategic industries: armaments, power
generation and distribution, oil and petrochemicals, telecommunications, coal,
civil aviation, and shipping. As the report points out, being a strategic
industry means "the Chinese government seeks to maintain 'absolute control'
(meaning over 50 percent ownership)." Within these strategic industries,
Beijing will choose specific companies, commonly known as "national champions",
that receive lucrative government contracts, access to government-controlled
banks, and export incentives that most would not otherwise receive.
Those who receive these generous benefits are not expected only to grow their
respective part of the Chinese economy. These firms understand that they must
return to Beijing more than just a monetary reward; they need to pay attention
to the government's strategic and political objectives as well. For some firms,
in particular those responsible for raw materials necessary for the lubrication
of China's economic growth (coal, shipping, oil and petrochemicals), delivering
on these intangibles is easily done. But for others, like telecommunications,
Beijing's expectations are slightly more difficult to decipher, at least to
those outside the country's political leadership.
Expanding on this concern, the USCC report looks into Huawei Technologies as a
prime example of Chinese companies whose agendas appear to be mixed between
conventional market and industry motives, and very political pursuits. The USCC
makes this point when quoting a RAND Corporation analyst in the report who says
"'… one does not need to dig too deeply to discover that many Chinese
information technology and telecommunications firms' are the pubic face for,
sprang from, or are significantly engaged in joint research with state research
under the Ministry of Information Industry, defense-industrial corporations, or
the military.'"
This criticism has the potential to take on more heat in the midst of today's
debate over the role of China in the American economy than perhaps it should,
and the report does a good job acknowledging this problem.
Very early into the USCC's analysis, they write that their objective is
"Staking out a middle course between being unduly alarmist and unduly
complacent." The role of China's state in the Chinese economy is, as this
report highlights, one that has real influence and must be taken into account
when considering supply chains essential to maintaining the US' national
security. But the criticism also needs to acknowledge that much of the same
could have been - and in many cases still could be said - of telecommunication
companies in the US.
Many owe their foundations and large parts of their ongoing research and
development pipelines and revenue streams to sensitive US government programs,
technologies which have at their core an objective that is as equally - if not
more so - nationalistic than anything China has been accused of.
There are two important differences when contrasting the influence of US and
Chinese government involvement in the telecom sector. First, overall business
transparency in the United States is exponentially better than in China and
second, the US government does not have an explicit ownership claim on its
telecom companies where the same cannot be said of Chinese national champions
like Huawei.
These concerns have already negatively impacted Huawei. As the report notes,
Huawei's overly intimate connection to Beijing has raised warning flags in
Britain, Australia, India and Taiwan, in some cases resulting in lost deals or
complete exclusion from government bids in the host countries. But cases like
the July 2010 lawsuit by Motorola against Huawei have added additional fuel to
the fire, suggesting that the connection between Huawei and China's government,
and perhaps most troubling China's military, should not be overlooked.
Motorola's lawsuit centers on a charge of collusion between Huawei,
specifically the company's founder Ren Zhengfei who the USCC report points out
was "a former director of the PLA General Staff Department's Information
Engineering Academy, which is responsible for telecom research for the Chinese
military", and two Motorola employees at the time: Shaowei Pan and Hanjuan Jin.
Quoting a US government investigator in the USCC report who said, "' ... one
day after quitting Motorola, [Ms Hanjuan] Jin was stopped at O'Hare airport
with over 1,000 Motorola documents in her possession ... At the time she was
stopped, Jin was traveling on a one-way ticket to China ... [the charges
against her] are based on evidence that Jin intended that the trade secrets she
stole from Motorola would benefit the Chinese military.'"
These yet unresolved charges undoubtedly have played a role in pushback from
within the US Congress about Huawei, seen most recently in August 2010 when
eight senators wrote to Secretary of the Treasury Timothy Geithner to
communicate their concerns that US telecom company Sprint Nextel not purchase
equipment from Huawei.
The August letter directly stated the senators' concerns: "We are concerned
that Huawei's position as a supplier of Sprint Nextel could create substantial
risk for US companies and possibly undermine US national security." Making note
of Huawei founder Zhengfei's connections to the PLA, the letter noted that
other non-American "intelligence agencies have either investigated Huawei or
expressed concern that its products could facilitate remote hacking and thereby
compromise the integrity of the telecommunications networks in their
countries."
This is not the first time Huawei has run afoul of the American government. In
2007, Huawei's attempts to purchase 3Com created a political firestorm.
Financially underperforming 3Com announced in early 2008 that global investment
firm Bain Capital Partners was going to purchase it. As part of Bain's proposed
buyout, Huawei was slated to a minority interest of 16.5% in 3Com.
The proposed deal triggered a review by the Committee on Foreign Investment in
the US (CFIUS), which ultimately determined that Huawei's connections to the
PLA went too deep to allow the US government to approve the proposed
transaction. Consequently, on February 20, 2008, 3Com and Bain withdrew their
filing to CFIUS.
As Edward Graham and David Marchick pointed out in their 2006 book US National
Security and Foreign Direct Investment, the dangers of politicizing
proposed M&A activity with China are very real, and can be seen quite
clearly in the telecom industry.
Graham and Marchick write that, "In our view, CFIUS should ensure that the DOJ
and the FBI can pursue criminal investigations without the knowledge of foreign
nationals or governments. If the US telecommunications company being acquired
is sufficiently large or sensitive to be considered 'critical infrastructure',
appropriation safeguards can and should be put in place. But there should not
be a blanket ban on Chinese ownership of US telecommunications assets, nor
should NSAs [national security agreements] for Chinese companies be so onerous
as to effectively amount to the same thing."
CFIUS provides a certain amount of political cover for unresolved questions
over the differences between American and Chinese interests to be indirectly
addressed. But the attacks on Google in China in 2010 brought concerns over
China's use of its own telecom hardware and software for state purposes out of
the realm of specialists into the political limelight, from theoretical to
actualized concerns.
Consequently, questions like those raised by the USCC report have taken on some
urgency, threatening not only to bring a pause to further integration of
Chinese telecom suppliers into the American economy, but to highlight the means
by which Beijing could act to subvert American interests.
As the USCC report writes, "The loss of unfettered access to cyberspace would
not merely be 'game changing' in America, it would be profoundly catastrophic."
The American national security apparatus - from domestic policing to
counter-terrorism to international military engagements - rely on a telecom
system increasingly sourced from, and reliant upon, state-owned enterprises in
China. China enjoys an increasingly dominant position in the global supply
chain for telecom equipment, and the USCC report points out that "One of the
dilemmas facing the American defense establishment is how to maintain both
strategic and tactical superiority in an environment where the manufacture and
provisioning of critical technology infrastructure is being outsourced rapidly
to entities that may not have US national interest foremost in their minds."
In the August 2010 letter from eight US senators to Secretary Geithner, the
senators asked a very pointed question: "Have any goods provided to a US
government supplier by Huawei ever been found to contain suspect technology,
such as intentional defects or 'back doors' allowing remote entry?"
The answer, at least thus far, is that no, this has not yet been proven. And
this is, as the USCC report points out, an important note: while the concerns
over China's impressive consolidation of the telecom manufacturing space rise,
policymakers in Washington must keep in mind the chasm between what could
happen and what actually has.
Yes, provisions to protect key American national interests must be pursued but,
equally, must be kept in balance with the sort of openness and market-based
principles by the American government with which the US so desires China to
embrace.
Benjamin A Shobert is the managing director of Teleos Inc
(www.teleos-inc.com), a consulting firm dedicated to helping Asian businesses
bring innovative technologies into the North American market. (Copyright
2011 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us
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