Forbes/Calhoun: Five Points to Save Huawei? Forgot Localization

On July 23, 2020, George Calhoun, who I do not know but who seems to have a remarkable pedigree, had a thoughtful contribution published by Forbes titled “How Huawei Could Save Itself: A Five-Point Plan” (linked).  Good ideas.  But not enough.

(Full disclosure: I worked for Huawei from 2010-2018. I owe them nothing and, frankly, in light of how I was mistreated in my final years, I have zero reason to stump for them.  However, I remain engaged in terms of the broader geo-economic and geopolitical policy issues that the Huawei conundrum presents).

George opened with an apt disclaimer: “I have no inside information related to Huawei. I have never done personal business with them, and I have not spent much time in China. I do have a background in the wireless industry, but my proposals here are generic to modern business practice, and/or a sort of common sense, I think. Which is not to say that any of them have a practical chance of being adopted.”

Well said.  And his thoughts are valuable.  Huawei, however, is unique.

The first of the five points suggests that Huawei should follow and be assessed to its performance according to globally-accepted financial/accounting standards.  Now, as I used to parrot when I was with Huawei, George notes that “Huawei currently provides financial statements that comply with international accounting standards (IFRS), audited by KPMG…” He goes on to point out, however, that Chinese companies listed on American exchanges don’t follow the requirement to be reviewed by the Sarbanes-Oxley spawned Public Company Accounting Oversight Board (PCAOB) since the Chinese government has blocked the PCAOB from exercising its function for Chinese companies.  Now, Huawei is not listed in the U.S., but George suggests “Huawei should request the Chinese government for a waiver to allow PCAOB to review KPMG’s audit, and, they should also invite an additional audit review by a different firm – not KPMG, and not based in China, and, they should also publicize the waiver request, even in the face of Beijing’s likely disapproval, and actively lobby the government to permit it." Strong idea.  Not enough though.  And, the current Huawei wouldn’t touch it – they are beyond adamant about not going sideways of the Chinese Government or the CPC.

For his second point, George suggests that Huawei should ask to have its credit rated by the three leading global rating agencies, according to global standards, and not as is the current practice or relying on credit ratings from suspect Chinese credit rating agencies, which operate by credit ratings standards that are not equivalent to global standards.  George notes that credit ratings performed by global firms like S&P and Moody’s would amount to “another form of “audit…which is in some ways more demanding and more substantive than an accounting audit, because it also considers the nature and viability of the company’s strategy and the competitive market environment.”   He’s correct.  This would be an easy thing for Huawei to do and would certainly help their global reputation.  It’s been recommended before.  It’s unclear why Huawei has balked.

George’s third recommendation, in my opinion, falls quite flat.  He points out that “The number one stated concern of most Western governments is the possibility that information passing through Huawei’s networks could be accessed by the Chinese government.”  He then cites unspecified Chinese law that says the company like all Chinese companies are subject to “forced cooperation with the Chinese military intelligence service.”  This is a constant canard of the U.S. Government, despite the fact that Chinese, international and American lawyers have all pointed out that no such law exists in terms of outside-China data and information.  In any event, why would they publish a law in a country lacking a history of the rule of law?  That question is what undermines George’s third recommendation, e.g. that “Huawei should construct its own firewall…to interpose between its equipment and the Chinese security apparatus and block the transfer of user information. This firewall should be open to inspection and validation by outside authorities.”  This is a pipe dream, absent fundamental overhaul (foreshadowing).

Point number four has George proposing that Huawei jettison it’s historical, militaristic “Wolf Culture.” George mistakenly opens suggesting that “Huawei sprang from a military origin.”  This is simply untrue, but he has a point that the culture encouraged by Huawei Founder and still CEO Ren Zhengfei – a former PLA civil, not telecommunications, engineer - is indeed militaristic, rhetorically.  Ren still speaks in riddles and analogies that sometimes rely on his military past (and just as often on his love for nature), but, having spent enough time in the organization, albeit as a Westerner, I can say that the “Wolf Culture” has really just become proud company lore at this point.  All of that said, should Huawei want a cheap and easy PR campaign, they could do as he suggests and “euthanize the wolf culture,” but died-in-the-wool Huawei adversaries in the West wouldn’t buy it.

George’s point number five is one focused on something that has always been a source of consternation in the West: “Who Owns Huawei?” George says “The company says that Huawei is employee-owned. 100,000 happy capitalists. Probably a lot of millionaires. Just like Microsoft, more or less…”  I must admit, that sums up what we were saying when I was with Huawei. And, he points out that in the West the prevailing thought is “that Huawei is either owned or controlled by the CCP.”  Of course, there’s no proof offered for this assumption on the part of Western authorities other than “they’re Chinese so they must be.”  George offers an “interim” recommendation: “Huawei should invite an international team of business, legal and corporate governance experts to review the current structure in detail, with full access to all the appropriate information, charged with producing a thorough and honest report of the current state of affairs.”  Great idea.  Huawei has invited same on multiple occasions, but never followed through.  And, the U.S., for instance, has offered the same as well, and, yet, in 2012 instead sent a gaggle of ham-handed Congressfolk and staff which ultimately released a pre-cooked report that confirmed their largely groundless preconceptions.

George includes a sixth bonus point, what he calls “Laissez-Faire.”  He says that “Huawei’s relationship with the Chinese government has to change. The company needs to stand up to the Chinese authorities and assert its commercial independence from the state’s geopolitical agenda.”  He concludes: “It is time for Huawei to become what they say they are. Stand up now. If we take the company’s self-characterization at face value, as they want us to, true to its outward clothing as a private company with a no controlling government ties – then show us! Take the heat. The world will rally to you.”

Now, while I greatly appreciate those heartfelt sentiments, and I truly believe that George’s entire article is reasonable, rational and hopeful, as I said before, Huawei is simply not going to go sideways of the Chinese Government, at least not in China.

Which leads me back to George’s point number five where he also said: “Huawei should consider how to restructure itself so as to bring its ownership arrangements into line with a more comprehensible and transparent structure. Whether this involves creating a public company, or a hybrid with multiple share classes, or a partnership, or a state-owned enterprise...”

Yes.

Over my eight years at Huawei, I spent better than half of them advocating for the company to address its Western nation challenges through organizational change.  Specifically, I repeatedly recommended that the company should localize.  And I mean truly localize.  The company has a mantra that talks about 75% localization.  It’s a crock. A) A lot of those folks are Green Card holders from China, and B) Local executives are almost universally not empowered to make decisions or otherwise run the business.  And, it’s not hard for local stakeholders – including Government – to recognize this, which makes Huawei more suspect, which reinforces pretty much all of the negative assumptions about the company.

Further, I recommended that the company should make a harmless investment in the U.S. that would require it to go before the Committee of Foreign Investment in the United States (CFIUS) – A who’s who of sixteen U.S. Federal Government agencies charged with assessing foreign acquisitions for potential national security threats.  Further, I suggested the company acquiesce to whatever the Committee might demand to approve a transaction.  Yet further, I suggested Huawei and the U.S. Government could use the process to birth a truly independent, transparent American subsidiary of the company, including with select Government-appointed Board Members, and other Americans empowered to make real decisions, and appropriate security assurance mechanisms established and monitored to ensure the integrity of American networks and data.

So, in sum, I think George's recommendations were great, with a couple of exceptions in terms of Huawei going domestically (China) sideways of the PRC or CPC, and with the addition of perhaps the most critical requirement – empowering non-Chinese in non-Chinese markets to manage the business and oversee the security of non-Chinese critical infrastructure.

State Paper Promoting Perilous China Decoupling Rehashes Huawei

China-based Huawei, the world’s leading telecommunications equipment vender, has long suffered strident U.S. Government opposition, both within the U.S. and, increasingly, over the last decade, extraterritorially. The U.S. Government believes that Huawei is effectively or actually an arm of the PRC/CCP and thus presents a national security threat, both in terms of facilitating espionage and in the context of China’s potential dominance of the global information and communications technology industry. 

No credible public proof of the U.S. allegations exists.  Huawei denies them.

On May 22, 2020, the State Department’s Office of the Undersecretary for Arms Control and International Security released Volume 1, Number 8 in its series of Arms Control and International Security Papers, titled U.S. National Security Export Controls and Huawei: The Strategic Context in Three Framings, authored by Assistant Secretary Christopher Ford, a Trump political appointee.  Link to the paper: https://www.state.gov/wp-content/uploads/2020/05/T-Paper-Series-U.S.-National-Security-Export-Controls-and-Huawei.pdf.

The paper purports to discuss “recent U.S. moves to restrict transfers of cutting-edge U.S. technology to Chinese technology company Huawei, explaining these steps and placing them in the strategic context of a great power competition with the People's Republic of China (PRC) brought on by Beijing's geopolitical revisionism, exploitation of such firms to steal and divert foreign technology to support the Chinese military, abuses of human rights in China itself, and employment of companies such as Huawei as tools of strategic influence.”

The “recent U.S. moves” referenced in the paper are changes to the U.S. export control regime – and specifically the so-called “Entity List” - which allow for more broad reaching restrictions and license requirements for U.S. firms that might do or contemplate doing business with foreign firms, with Huawei as an example.   At this point, not only can U.S. firms not export (without license) components to Huawei, they are restricted from selling Huawei the gear currently required by the Chinese company to produce, for instance, higher-end semiconductors.

That said, in reality, the paper’s references to Huawei are largely limited to repetition of never-proven accusations, and reiteration of Huawei’s Iran sanctions busting-related sins (the latter which is legitimate in terms of charges that the company engaged in sales of controlled technology).  Oddly, inexplicably, Huawei’s Iran debacle is conflated with utterly unrelated allegations of intellectual property theft, spotlighting “source code and user manuals for Internet routers,” a clear reference to an over twenty-year old incident involving Cisco.  There is also reference to charges filed this February related to undetailed but alleged intellectual property “misappropriation” from six U.S. technology firms.

The paper’s true focus is on China, not Huawei. 

China’s history of intellectual property theft is broadly discussed, with commentary also looking forward in the context of the “Made in China 2025” initiative, characterized as epitomizing “the PRC’s drive to seize a dominant share of global high technology markets as soon as possible;” the paper expresses great competitive concern for China’s strategy of “military-civil fusion” (these are legitimate concerns).  There is also a good deal of detail and condemnation of  China’s pattern of human rights violations featured in the treatise – “Huawei and it’s siblings” are described as “handmaidens…of oppression” via provision of surveillance technology, notably similar to elements of the “smart cities” technologies and capabilities being developed and marketed by U.S. and other Western firms.

Somewhat diluting its impact, there is an odd pretentiousness to the paper, in terms of its broad and perhaps not-always-necessary use of ill-fit or over-thought or just gratuitous analogies and metaphors.  The slightly tortured paragraph on the second page attempting to analogize Chinese landscape painting to the so-called Huawei Policy Landscape is a reach, at best.  The reference to Voltaire and 18th century Prussia and its army on page three is gratuitous.  And, given China’s rich and long history, page four’s cherry-picking of the fourth century BCE legal framework that allowed for the establishment of the Qin Dynasty as some sort of scene-setter for today’s environment in China seems just filler.

Finally, in terms of over-the-top analogies, the Conclusion section’s references to “Thucydides’ rendering of Pericles famous funeral oration for Athens’ early casualties in the Peloponnesian War” and “Venetian officials who in 1745 actually dispatched an assassination team to pursue two local glass-blowers who had taken the lucrative secrets of their trade abroad” approach the definition of pretentious.

Yet, notwithstanding the misleading title, the parroting of tired or undetailed allegations about Huawei, the all-over-the-place analogies and metaphors, there is value to the paper.  On the one hand, it sets the stage for the more recent June 15 Commerce Department announcement and clarification that Huawei’s inclusion on the Entity List does not preclude American companies from engaging with Huawei in 5G standards development.  It is the normal course of business in the telecommunications industry for standards to be developed globally and given Huawei’s 5G leadership, not allowing American firms to collaborate in 5G and related standards bodies including Huawei would severely disadvantage those companies.  The Commerce ruling is welcome.

But, the announcement should not be interpreted as a loosening of the U.S. stranglehold on Huawei.  It is not.  It is 100% self-serving on the part of the U.S., and very necessary for U.S. industry to remain viable in the 5G space.

On the other hand, and perhaps the most important takeaway from a macro perspective, the paper highlights that the U.S. seems determined to decouple from China, in the technology arena, and, it would also seem, more broadly.  However one might feel about China, from an economic, political, ideological, trade, rule-of-law, human rights or other perspective, decoupling is a dangerous prospect.  America has retreated from our global leadership position in recent years, which is worrisome.  Meanwhile, China’s profile and influence has grown, which is yet more worrisome.  Whether we like it or not, we must accept that China has emerged as a peer of sorts on the global stage, clearly not in terms of democratic values, but certainly from a political and economic perspective. 

On the technology front, we should – we must – recognize that the information and communications technology industry has become global, interdependent, borderless.  Supply chains and networks coexist and overlap.  There is no putting this genie back in its bottle.  While we have bits and pieces, and primarily at the high end, the U.S. cannot hope to midwife a full-blown telecommunications industry.  China, however, has the financial, human and technological resources to verticalize their own.  This is not in our economic or national security interest.  Indeed, our goal should be to remain integrated so that technology solutions and products remain intrinsically global.  It is arrogance to believe that we can go it without China.  Strategic re-coupling should be the path we follow, and urgently.