Fran O'Sullivan on business

Business analysis and comment from Herald columnist Fran O'Sullivan

Fran O'Sullivan: Economic warfare over Huawei

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US telco investigation coup de grace after World Trade Organisation complaint about car industry subsidies.

Huawei, Chinese Telecommunications company, considered a potential threat to national security by US. Photo / Natalie Slade
Huawei, Chinese Telecommunications company, considered a potential threat to national security by US. Photo / Natalie Slade

The United States attack on Chinese telecommunications company Huawei shapes up like a declaration of economic warfare complete with buckets of political rhetoric and China bashing.

Cynics might think a presidential election is looming.

In just one month, the US has taken China to the World Trade Organisation claiming the Chinese subsidise their car industry and has blocked a Chinese firm from building wind turbines close to a US naval facility.

There may yet prove to be substance to these moves.

But with the US jobs recovery still faltering and a wakening belief Stateside that America slit its own economic throat by off-shoring too much of its manufacturing sector to China, there is considerable political utility in waving this particular red flag.

The United States Intelligence Committee's investigative report on the US National Security issues posed by the Chinese telecommunications companies Huawei and ZTE is the coup de grace.

Not only does the House of Representatives' committee conclude its nation could be vulnerable to future Chinese Government-influenced spying if Huawei and ZTE are able to cement their businesses as an integral part of America's telecommunications backbone, but the politicians also warned US companies to "use another vendor" and highlighted the potential for widespread harm given that critical infrastructure such as banking, water supplies and electricity were "incredibly connected".

Given that just last week the Wall St Journal was spruiking a potential IPO (public share float) of Huawei Technologies - which is the world's second-largest telecommunications company - this may appear fanciful.

But it is clear the Chinese firm's IPO will not be happening anytime soon. Its ability to gobble up US firms to increase its footprint will be thwarted.

US telcos and suppliers which have been out-gunned by the upstart Chinese competitor will be delighted that a very large spike has been inserted into its American expansion plans.

Huawei claims the US Intelligence Committee's report is lacking in substance.

The company has a point.

The 60-page report is light on public proof to substantiate the original claim that the two Chinese firms were deliberately installing backdoor methods to relay sensitive information back to China. But there have also been claims a former Huawei insider had evidence of connections to an elite Chinese cyber-spying group. What comes through very comprehensively is focus on the Chinese company's governance structure (it was founded by a former officer of the PLA, the Communist Party's military wing) and what makes it run so fast.

I doubt any company would want to disclose its business strategies to the extent the committee wanted.

But nevertheless, John Key's Government should resatisfy itself that Huawei does not pose any fundamental security threat here.

Ironically, the same opposition politicians who claimed that the Government was too craven to the United States' federal authorities in their quest to extradite Kim Dotcom to face alleged criminal charges in the IP space have no qualms about backing the US judgment when it comes to Huawei.

The problem is the Government Communications Security Bureau is publicly compromised.

The GCSB may well have run the ruler over Huawei before it successfully tendered for a role in New Zealand's super-fast broadband rollout. But its own-goals in the Kim Dotcom debacle means the results of any inquiry could be seen a political stitch-up.

The not-so-delicate fencing between the US and China in the telco space has already had an impact here. The US basically stymied Pacific Fibre from getting its undersea link to the States away when it ruled out attaching a Chinese manufactured cable to its own system.

Huawei's footprint in New Zealand has grown. Ultrafast Fibre is using its fibre and electronics in the broadband rollout in secondary NZ cities. Vodafone is using its gear not only on its own network but in a collaborative venture with Chorus to roll out the rural broadband initiative.

Then there is a tie-up with 2degrees which has driven cost-effective mobile phone ownership here.

Rakon also signed a letter of intent in August which it expects will result in a quadrupling of Rakon's sales to Huawei to US$56 million over the next five years.

Huawei travel company Smartcom will soon bring the first group of 33 Huawei staff and their families here for an eight-day visit.

Whether by bumbling - or more likely design in the Kim Dotcom case - it's pretty obvious that so-called secure networks are used for spying. But the fundamental issue is how Huawei's rapid expansion has challenged the management capabilities of American telecommunications giants and their European counterparts.

In discussions with one of Huawei's senior managers it is clear that two factors have driven its quick success.

•It has a strong corporate culture which enables the bosses to take the long view rather than focus on the typical short-term quarterly results approach beloved by Western listed companies where shareholders' desire for quick financial paybacks (through dividends) is put ahead of funding aggressive expansion.

•It has a strong focus on R&D and has had strong backing from the Chinese Government which has extended it huge lines of credit to fund growth. This has meant Huawei has been able to extend very cheap vendor finance to its partners and undercut competitors.

Another factor driving US suspicion is the Chinese Government's ties to Ren Zhengfei, who is Huawei's founder and chief executive. The committee believes the former Chinese army officer continues to maintain military links in China.

It's hard to see why this should surprise. Many of China's elite - including former Chinese Vice-Commerce Minister Ma Xuihong - have PLA backgrounds.

Australia has lined up with the US in seeing Huawei as a threat. New Zealand's stance is more aligned with the UK where the British Government is supporting Huawei's deal with BT saying it does not perceive the Chinese firm as a threat.

The NZ Government is caught between the two elephants of global trade - it should hold to an independent course.

- NZ Herald

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