Huawei and China: Not Just Business as Usual

Journal of Political Risk, Vol. 8, No. 1, January 2019 

By Douglas Black

A man looks at his phone near a giant image of the Chinese national flag on the side of a building in Beijing, during the 19th Communist Party Congress on October 23, 2017. GREG BAKER/AFP/Getty Images

To the average consumer around the world, Huawei is likely thought of as a Chinese company that makes nice phones — a “Chinese Apple” of sorts. The average American consumer might associate the firm as one that makes nice phones but, for some vague, political reasons, is not trustworthy. As of early December, the average Canadian consumer might recognize Huawei as the company at the focus of some political gamesmanship between the US, Canada, and China. All of these lay-interpretations are indeed valid, but there is a great deal more going on than revealed by a cursory glance. This article is intended as a brief explainer of Huawei’s history and current market position, the importance of the company to the ruling Communist Party and their strategic goals, and the far-reaching implications of the outcome of the arrest of Chief Financial Officer Meng Wanzhou.

According to the company’s corporate webpage, Huawei was founded in 1987 by Ren Zhengfei after his 1983 retirement from being a soldier-engineer in the People’s Liberation Army. Huawei asserts Ren established the telecommunications company with no outside help and only 21,000 RMB in capital, became CEO a year later, and the rest, as they say, is history: Today, Huawei leads Cisco by a wide margin as the most valuable telecommunications company worldwide (estimated value of US$38 billion); as of 2017, the company controls about 10% of the global smartphone market, raked in US$3.5 billion in profits, and has a staggering compound annual growth rate (CAGR) of 26% for revenue.

As the title of this article suggests, despite comparisons to Apple and other tech companies, Huawei is not “business as usual” as many westerners understand it. Huawei has always insisted it is privately owned without official ties with the Chinese government. Despite this insistence, Australia, New Zealand, the US, Taiwan, and Japan have deemed Huawei’s technology off-limits for government usage. The problem is that in China, not being “state-owned” doesn’t mean much in terms of being void of Party influence — especially for a company as important to the ruling party’s aspirations as Huawei is. It is difficult (if not impossible) to prove unequivocally that Huawei is acting as a state-owned enterprise, but by understanding the general workings of the Chinese political system, it can be deduced (as the House Intelligence Committee did in 2012) that this is likely the case on two grounds: Firstly, the Chinese government has the motive to both support and steer Huawei, and secondly, in an authoritarian state such as the PRC, the Party certainly has the means to do so.

Let us examine the Party’s alleged motive for their support and implicit involvement with Huawei’s operations. Huawei is the champion brand of China, and Beijing wields the company as a symbol of technological prowess and development. The implication is that the Chinese Communist Party is the steward of this sort of success, and such successes are necessary to bolster their credibility. Huawei has China’s biggest non-governmental R&D budget (13 billion USD last year, likely more this year). As a point of comparison, this is 10% higher than Apple’s R&D budget.

There is little question that China’s Party-governmental apparatus has the means to influence and direct a company as instrumental to the health of the system as Huawei is. The government and its dozens of organs are nearly impossible to separate from the Chinese Communist Party, which is deeply entrenched in schools, government, and society. As a result, the Party influences nearly every facet of life, from planning the economy, setting educational curriculum, screening what is on TV or which movies are in theatres, determining which books can be published or sold, and deciding what information is available online. I don’t believe it unfair to say that the only encouraged freedoms are the freedom to cheer for the Party and the freedom to consume.

The Chinese economy (and Huawei by extension) is a chief domestic concern of the Party, but that is only part of the story. China’s international aspirations need to be accounted for. Luckily, most of this information is no particular secret, and it is all laid out as public record for anyone who cares to read it: The “China Dream” is part of China’s multi-faceted initiative to reshape the world into a sino-centric one, where countries and people are beholden to China. They want geopolitical influence, respect, and to be depended upon economically, which are not unprecedented goals for a country that seeks superpower status. This policy directive has been driven by Xi Jinping since he began openly consolidating power around 2012. Now known as “The Core of the Party”, Xi has successfully enshrined himself as the steward of the Party and state with “Xi Jinping Thought”, accumulating power arguably unrivaled since Mao’s reign.

The primary purpose of this article is not to establish that what China wants is entirely evil and what the US wants is entirely good, but the objective differences between the foundations of each country need to be acknowledged. It is all too common for casual Western observers to hand-wave and make excuses, as if it might be more acceptable if an Asian superpower is the one doing it. Though it is tempting to say that China is just doing what the United States or another country did in the past and thus there is no difference, there is little equivalency between the Party’s callous, Kafkaesque, authoritarian operation (the Uyghur “re-education” camps in Xinjiang are just one example captured by external media) and a pluralistic democratic country founded on principles of free speech and thought.

In short, in order for the Chinese Communist Party to justify their heavy-handed tactics, the economy must continue to grow. Economic success of Chinese companies is not the final goal, but it is an important tactic through which Xi Jinping and the Party seek to assert China globally. They are playing a zero-sum game, and they are also winning thanks in large part to ignorance and greed by politicians, lobbyists, companies, and consumers around the world.

All of this information is an important backdrop to understand the context and importance of the arrest of Huawei’s Chief Financial Officer (CFO) on December 1 of this year. CEO Ren Zhengfei is known to have two children from his first marriage: son Meng Ping and daughter Meng Wanzhou, both of whom work for Huawei. Meng Wanzhou is the Chief Financial Officer (CFO), and has been the target of a US investigation into charges of bank fraud. A warrant for Meng Wanzhou’s arrest was issued in late August, and being aware of this, Meng avoided landing in the United States since then, despite her son attending school in Boston. She was arrested upon landing in Canada for a transfer flight bound for Mexico as a result of Canada and the United States having an extradition treaty.

Despite predictable reprimands by the Chinese foreign ministry and some (frankly, humorous) indignation about Meng’s human rights, there is a strong legal basis for Meng’s arrest and extradition. Huawei’s CFO is not being arrested on charges of skirting the United States’ sanctions against Iran. Instead, Meng is being charged for allegedly defrauding banks in presentations where she claimed that her represented company, Huawei, was separate from Skycom and not responsible for skirting sanctions. Citing digital evidence, prosecutor John Gibb-Carsley asserts that Skycom and Huawei were actually the same company.

It is fair enough that China would be upset by the US seeking extradition for one of their citizens — especially a high-ranking executive from one of the most important companies in their country; it is a loud and clear challenge to the China Dream. What China did next, however, could certainly be defined as “brash”. In apparent retaliation for Meng’s arrest and extradition proceedings, three Canadian citizens have now been reported as detained on vague charges of subversion. The Chinese Foreign Ministry denied any connection to Meng’s case in Canada, but the point couldn’t be more clear: Don’t allow Meng to be extradited to the US, or else.

Given this context, the arrest and extradition attempt against Meng Wanzhou has far-reaching implications beyond issues of trade, the fate of a Chinese company’s CFO, or the Canadian citizens currently being held by Beijing. My chief assertion is that the arrest and full legal processing of Meng is likely the best method currently available to send China the important message that they will no longer be allowed to continue flouting international norms and accumulating power, resources, and influence to achieve Xi’s China Dream and become the new global superpower — not without a fight, at least.

It’s difficult to say to what degree China has been intentionally (rather than accidentally) cultivating an air of international impunity, but the detention and arrest of the head of France-based international police organization Interpol upon his arrival in China is just one worrying recent development. Like most aspiring superpowers, China is involved in territorial disputes with its neighboring countries for decades. Following the Hague’s ruling in favor of the Philippines in one such dispute, however, China responded with aggressive militarization of the South China Sea, placing armed forces on artificial islands and regularly patrolling and harassing non-Chinese vessels in their own Exclusive Economic Zones (EEZ). For its smaller, fractured, neighboring countries, China’s economic and military power are difficult to resist politically, despite popular outcry.

The South China Sea is considered a potential flashpoint area, and it is a thorny issue for any country to get involved with militarily — even the United States. As a result, China has been handily winning control over more and more of the South China Sea (a strategically critical area) via shrewd loans, investments, and opaque business deals. The Maldives, for example, recently found itself overburdened with debt to China as a result of Chinese companies overbilling for their infrastructure work after being awarded the contracts. Meanwhile, last December, Sri Lanka handed over a major port to China with a 99-year lease as a result of similar economic pressure resulting from Xi’s “Belt and Road” initiative, and recent reports suggest Kenya is facing a similar fate.

The implications of Meng Wanzhou’s prosecution can be separated into legality, security, and politics. Legally, her prosecution sends the message that China cannot continue to flout the laws of other countries and get away with it, even if those responsible are particularly powerful and important people. With military action being a clear last-resort due to the global consequences, the best option is for the West to leverage rule of law in a situation where China will be forced to abide: in public view. In terms of security, Australia, Canada, New Zealand, the UK, and the US have misgivings about Chinese technology being used in government infrastructure due to escalating issues of cybersecurity brought on by mobile consumer technology and wireless broadband. Since Huawei is a leading manufacturer of consumer and business telecommunications devices, it should be as much of a security concern for the Five Eyes to allow Huawei equipment to be used in infrastructure just as much as it should be for China to use SingTel to build their own network infrastructure. Thus, Meng’s arrest and legal processing would send the message that the West isn’t ignorant of the exploitable security risks posed by Huawei and any other expanding Chinese companies in the upcoming era of the Internet-of-Things and 5G connectivity. Politically, Meng’s prosecution also happens to be an expedient method of putting egg on the face of the ruling Party, who have knowingly misrepresented the story for their domestic audience.

The ramifications of failing to legally process Meng are severe. Should she slip off the hook as a result of president Trump’s interference or because of Canadian citizens being held as collateral, the PRC will be emboldened to continue such behavior in the future both domestically and internationally. Despite the Party’s current enjoyment of a fair amount of domestic support, this is good for no one in the long run — not the Chinese people shaped by an authoritarian, dogmatic system, and not the rest of the world.

Douglas Black is a technology journalist based in Hong Kong. JPR Status: Opinion.