Business Spectator: Huawei's legitimacy struggle

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(Original Post)

Alexander Liddington-Cox

Published 9:53 AM, 10 Oct 2012

It’s becoming increasingly clear that if China’s largest telco equipment company Huawei wants to do a meaningful amount of business in the western world, it’s going to have to list on the New York Stock Exchange.

The powerful US House Intelligence Committee slammed Huawei yesterday for what it claims are clear links to the People’s Liberation Army.

“As a majority of US networks are run by US companies, we recommend that private network providers find other venders,” said the committee’s chairman Mike Rogers, a Republican from Michigan.

“Government systems and contractors should also exclude these companies’ products as well.”

The committee’s report, which has been underway for a year and also included fellow Chinese operator ZTE, also recommended that the US government should view the growing presence of Chinese manufacturers in the American market “with suspicion”; the Congress should further investigate Chinese telcos, with a specific focus on subsidies from Beijing; the Congress should consider new legislation to “better address the risk posed by telecommunications companies with nation-state ties”; and Huawei and ZTE should become more transparent, with a listing on a “western stock exchange” offered as the main example.

The Australian telco and security industry would hardly be surprised at committee’s stance.

In March, the federal government officially banned Huawei from participating in the National Broadband Network on the back of advice that it had received from the Australian Security and Intelligence Organisation. Given that ASIO relies on the intelligence gathering capabilities of the big US agencies, it’s unsurprising that the two countries are whistling the same tune.

And back in the US, last year the Committee of Foreign Investment, chaired by Treasury Secretary Timothy Geithner, opposed Huawei’s push to buy assets from collapsed server-maker 3Leaf, on the back of security concerns that weren’t detailed. Huawei eventually backed off.

The Chinese company has a right to be upset with the committee, particularly the call for further investigation into China’s telco subsidies.

According to a joint report from the Citizens for Tax Justice & the Institute on Taxation and Economic Policy released late last year, US corporations received a quarter of a trillion dollars in tax breaks between 2008-10.

Three of the top four on that list would be familiar to the telco industry – AT&T, Verizon Communications and General Electric. They got $US40.8 billion ($40.0 billion)

Huawei may indeed benefit from some Beijing subsidies, but the reason for its global success is technological innovation and cheap labour. The company is headquartered in Shenzhen, coincidentally the home of Foxconn, which makes the very American Apple iPhone and iPad. Alcatel-Lucent, where NBN Co boss Mike Quigley was made famous, makes almost all its gear in the People’s Republic.

But Huawei faced an uphill battle because of the way the report was framed – the burden of proof was on the defendant.

The broadly accepted wisdom is the cyber-attacks on US intelligence assets emanating from China are too sophisticated to be conducted without some kind of cooperation between Chinese government proxies and high-tech telco equipment manufacturers.

This accepted wisdom ignores the reality that some of the most effective cyber attacks on US security assets have come from US citizens. Many of the more prominent agents now work in the cyber security industry, some of them after stints in the big house.

But international cyber security policy can’t be framed with these amusing ‘own goals’ in mind.

Business Spectator commentator John Lee, adjunct associate professor at the Centre for International Security Studies at University of Sydney, spoke to ABC TV’s Lateline programme last night, offering the timely reminder that China is also the world’s number one exporter of “industrial theft and espionage”. That’s an awkward position for Huawei that has filed around 47,000 patents.

Hence, the committee’s report was structured so that the burden rested on Huawei to disprove some of America’s worst suspicions about the company.

Huawei’s founder, Ren Zhengfei, is an elusive figure who once served for the PLA engineering corp. He left in 1983 amid a spate of budget cuts.

Four years later Ren formed Huawei, which got its big break by selling superior telco equipment to rural areas; it was effectively blocked in the early days from the highly profitable cities on the coast, which are ruled by the highly connected. It’s a mantle that Ren and Huawei now occupy themselves.

Huawei’s international strategy has to some extent mirrored it’s past. The company is the largest telco equipment provider by revenue across the Asia Pacific and is exploding in Africa. As a result of this success, in July it surpassed Ericsson in terms of revenue.

“The United States is a country ruled by law, where all charges and allegations should be based on solid evidence and facts,” said Huawei in its response. “The report…which took 11 months to complete, failed to provide clear information or evidence to substantiate the legitimacy of the Committee’s concerns.”

It’s an astute observation for a company that emanates from a one-party state. Huawei has also argued that the US report is nothing more than ‘China bashing’ during an election where that rhetoric is in vogue.

While it’s true some of the noises coming out of Democratic incumbent Barack Obama and Republican challenger Mitt Romney have been increasing anti-China, there’s no sign that the timing of the report has been engineered to coincide with it.

In truth, Huawei is less a victim of a protectionist report, but of its own fumbling attempts at transparency.

According to The Economist, last year Huawei acknowledged that some customers benefited from “export financing,” but did so in a way that shared nothing meaningful.

Huawei has hired lobbyists around the world to soften its image. It even became the main sponsor of the Canberra Raiders in March – of all the cities to pick.

It was also keen to point out that one of the more than 140 countries that it operates in is the UK, where it recently agreed to invest $US2 billion over five years. New Zealand has also come to its defence.

But the company really needs to think about genuine governance reform and transparency measures if it wants to participate meaningfully in the western world.

Huawei Australia director John Brumby, our very own former Victorian Premier, stated recently that the company would consider a listing on the ASX within the next decade.

When the US says a “western stock exchange,” it usually means its own. But a listing on the ASX would fit that definition.