Joseph V. Micallef is a best-selling military history and world affairs author, and keynote speaker. Follow him on Twitter @JosephVMicallef.
Huawei Technologies (pronounced hwa-way) is China’s largest multinational technology company and its leading telecommunications firm. From humble beginnings in 1987, the company has grown rapidly, achieving revenues of $108.5 billion in 2018.
Huawei is the second largest manufacturer of smartphones, ahead of Apple, and second only to Samsung Electronics. It is also the leading manufacturer of telecommunications equipment in the world and dominates the technology needed for installing the latest generation of 5G cellular networks.
The company has approximately 190,000 employees and claims that around 76,000 of them are involved in research and development-related activities across 21 of its research centers around the world. Its R&D budget exceeded $14 billion in 2018. Huawei deals with 45 of the 50 largest telecom operators around the world. Its equipment is found in 1,500 different cellular networks and covers one-third of the world’s population.
The Trump administration, based on its claim that the company’s effective control by the Chinese government poses national security risks, has moved aggressively to contain Huawei’s global reach. It has banned the company from doing business in the U.S. and restricted its access to U.S.-made equipment and components, as well as related U.S. technology companies. It has also brought pressure on other countries around the world to ban the use of Huawei equipment in the installation of 5G networks.
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Leading telecommunications companies, including U.S.-based companies, have contended that banning Huawei’s 5G technology would slow down the implementation of 5G networks and significantly increase the cost.
Is Huawei actually controlled by the Chinese government? Would the use of Huawei’s technology allow Beijing to snoop on American telecommunications traffic? Is the company’s technology as indispensable as many telecommunications companies claim?
Who Owns Huawei?
Huawei was founded by Ren Zhengfei in 1987, in Shenzhen, with an initial capital of 21,000 RMB, approximately $4,000. Ren is a former deputy director of China’s People’s Liberation Army who still owns approximately one percent of the shares in Huawei’s holding company, Huawei Investment and Holding. The rest of the company's shares are technically owned by employees. In reality, the shares are held in trust by a trade union committee that represents Huawei’s employees.
About half of Huawei’s employees are shareholders. Ownership is limited to Chinese citizens. Shares are allocated to employees as a performance bonus. The company describes the shares as “virtual restricted shares.” They are non-tradeable and can be held only by employees. When employees leave, shares revert back to the company, and the employee is compensated for the increase in value of those shares in accordance with an undisclosed formula.
Shareholders receive dividends, but they do not have any say in the election of the company’s board of directors or company policy. They are allowed to vote for members of the trade union’s 115-member Representative Commission from a preselected list of candidates. The Huawei Trade Union is part of the All-China Federation of Trade Unions (ACFTU). The ACFTU’s leadership is appointed by the Chinese Communist Party (CCP).
Ownership of Huawei’s shares is different than ownership in the shares of American companies. Huawei’s employees don’t really own their shares; they simply benefit from whatever dividends the company distributes and any appreciation in the value of the company’s stock during the term of their employment.
The Chinese government doesn’t directly control Huawei. It doesn't own a majority of the company’s stock or appoint a majority of its directors. Technically, the Huawei Employees’ Trade Union controls the company via a self-perpetuating representative board. Ultimately, however, that trade union is part of a trade union organization that is controlled by the Chinese Communist Party, so it is hard to imagine the board ignoring the wishes of the CCP.
Does Huawei Pose a Threat to U.S. National Security?
Any telecommunications network can be hacked, allowing the hacker to see the data flowing through the network. The Trump administration has argued that the use of Huawei’s 5G network equipment could allow Chinese government agencies to utilize “back doors” to conduct wide-ranging cyberespionage and network sabotage. To be fair, the same argument could also be made for any other telecommunications company.
The issue of “back doors” or so-called “Trojan horses” is far larger than Huawei. Global supply chains in the electronics industry are exceedingly broad and complex. Electronic components are sourced from a multitude of countries, including, increasingly, China.
Moreover, the source of components isn’t always obvious. Apple’s iPhones are typically described as being made in China. In reality, most of the components, and the underlying value of the product, are supplied by electronic companies in Taiwan and the U.S. What mostly happens in China is the actual assembly of the phone.
The idea of “Trojan horses” embedded in electronic components or equipment is a popular theme with fiction writers. There is no shortage of thrillers that postulate U.S. military forces suddenly finding critical equipment ineffective because of a back door that allowed a hostile power to render it inoperative. To date, however, no such “Trojan Horses” have been found, although many telecommunications networks have been hacked.
Critical electronic systems and components, including those that go into telecommunications networks, are not accepted carte blanche by their manufacturers or their end users. They are tested and examined to ensure that they will perform according to specifications and that they do not have any security flaws, either inadvertently or intentionally.
Such testing can be extremely time consuming, however, and there is no guarantee that all flaws could be identified. Moreover, it’s not always clear whether a security vulnerability is the result of a coding error or a deliberate “back door.”
And the breadth and complexity of the electronic industry’s global supply chains mean that it is difficult to exclude equipment that contains electronic components that were either manufactured or passed through the hands of a Chinese company.
This is an important reason why China is a far more formidable near-peer competitor than the Soviet Union ever was. The USSR was never fully integrated into the global economy. The Soviets were significant exporters of commodities but, outside the military sphere, the USSR was never a significant competitor with Western technology.
The Soviet Union had a vast nuclear arsenal, a considerable army perched on the edge of Western Europe, and the ability to project military power virtually anywhere in the globe. The Chinese nuclear arsenal is far more modest. The Chinese military is a formidable local force, but its ability to project military power globally is still limited, albeit increasing rapidly.
Chinese technology, however, is a significant challenge. By any metric -- graduates in STEM (science, technology, engineering and math) programs, R&D spending or new patent applications -- China is demonstrating that it will be a significant competitor in the technological space. In the long run, China’s technological power will prove to be a more significant challenge to the U.S. and its allies than the Soviet military ever was.
So far, the U.S. has moved to ban the use of Huawei equipment in critical U.S. communications networks and has urged its allies to do the same. It has restricted U.S. companies from supplying components, although it has modified those restrictions -- so it is not entirely clear to what extent U.S. companies can collaborate with Huawei.
On Dec. 1, 2018, Huawei’s Deputy Chairwoman and CFO, Meng Wanzhou, the daughter of Huawei’s founder, was arrested in Vancouver by Canadian police at the request of the U.S. Department of Justice on charges of fraud and violations of the Iran Sanctions Act. She is currently under house arrest in Vancouver, pending an extradition hearing to transfer her to the United States.
The arrest of Meng is not directly related to the use of Huawei’s telecommunications gear, but it appears to be part of a broader pattern of bringing pressure on Huawei by the Trump administration.
Notwithstanding its claims that the use of Huawei’s telecommunications equipment poses a national security threat to the U.S., the White House has undermined its own case by hinting that the withdrawal of the extradition case against Meng and Huawei’s access to the U.S. market and U.S. companies could be part of a larger Sino-U.S. trade deal. There are also signs that the U.S. is considering a smaller, preliminary U.S.-China trade deal that would lift some restrictions on Huawei in return for stepped-up Chinese purchases of American agricultural commodities.
Huawei is simply too big now and too well entrenched in the global telecommunications industry to be marginalized by U.S. government pressure or sanctions. The time to sideline Huawei was 20 years ago, when it was emerging on the world stage.
Nokia, Ericsson and Samsung are currently capable of offering a comprehensive solution for 5G networks, albeit at costs that are about 30% higher. There are no U.S. companies that can offer a comparable suite of network equipment.
However, the role of Huawei in the rollout of fifth-generation cellular networks does not need to be an all-or-nothing proposition. 5G networks will operate on a high-frequency spectrum. This will allow exponentially faster data processing speeds and capacity. It will also require a far denser network of base stations and antennas, as well as millions of miles of new fiber-optic cable capacity.
A cellular network consists of two main components. The core represents the servers and the accompanying software that execute the network’s critical functions. The periphery consists of the network of towers and related equipment that connects users to the core.
A tower can be hacked just as a central server can, but the consequences of hacking an individual tower are less serious than hacking a central server. In theory, restricting Huawei’s role to the periphery components would still allow the company to participate in the rollout of 5G networks while minimizing the national security risks posed by the use of its equipment.
The larger issue, however, is, can the U.S. trust Chinese technology? Huawei is simply the apex of a vast and rapidly growing Chinese technology sector. Revising global supply chains to exclude electronic goods or components from Chinese companies would prove to be extremely complicated and expensive. It would also likely trigger reciprocal actions by the Chinese government.
To be fair, the Trump administration has not demonstrated that Huawei’s equipment has any “back doors” or that the company has facilitated cyberespionage by the Chinese government. Given the apparent, indirect influence that Beijing has on Huawei, however, the concern -- however theoretical -- is a valid one.
Whether it is the result of “back doors,” “Trojan horses” or simply coding errors, an increasingly networked world is vulnerable to hacks, especially those carried out by governmental actors as part of a broader campaign of intelligence gathering or to damage critical infrastructure in the event of a military conflict. This is a reality of 21st century life that will continue for the foreseeable future.
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