Behind Huawei’s court battle: open markets vs. national security

When it comes to the next generation of telecommunications – which could make cars truly self-driving, boost mobile phone downloads a hundredfold, and bring real-time “touch” to virtual reality – who are you going to trust to build it?

Companies in the West or in China?

That’s the high-stakes battle now emerging from dueling legal actions involving Huawei, one of China’s leading tech companies. On Thursday, Huawei formally accused the U.S. government of unfairly shutting it out of American markets based on unproven fears. The company’s lawsuit follows a U.S. effort to prosecute one of Huawei’s top executives on charges including evading sanctions on Iran.

The emerging fight over Huawei’s role reflects a clash of values that, on the surface, may seem ironic. The company from Communist-led China is appealing for its right to compete in global markets, while the world’s leading free-market economy is putting up barriers.

Underneath the surface, analysts say the story is more complicated.

Nations around the world are eyeing the arrival of so-called fifth-generation or “5G” networks as a new epoch for mobile networks. It promises the integration of wireless devices with advancing online services including the “internet of things,” where all manner of personal, corporate, and government equipment is web-connected.

“[It] makes sense for any country to always be ... making sure that if something is a critical piece of your infrastructure, that it be secure,” says Scott Harold, an expert on Asia and defense policies at the Rand Corp., a think tank near Washington.  

And for his part, he sees limits on Chinese companies, including Huawei, as a valid step that goes hand in hand with America’s free-market principles.

No westward drift for Beijing 

For years in the 1990s and early 2000s, U.S. policymakers held to the hope that over time China’s government would draw closer to global norms on things like human rights and property rights. Signs in recent years have led many to conclude that, for now, those hopes are unfounded.

“The passage of time is actually going to make things worse, in this view, because China is perfecting its technology-enabled authoritarianism, it’s getting more repressive at home and more aggressive internationally,” Mr. Harold says.

Even though Chinese companies are viewed by many Western companies as reliable suppliers, they are caught up in such doubts. Huawei has won rising market share worldwide for its networking equipment, but along the way it has also stirred doubts for alleged connections with theft of intellectual property, and concerns that its own products fall short on security.

The Iran-related allegations against the company have landed the firm’s chief financial officer, Meng Wanzhou, in house arrest in Canada as the U.S. seeks her extradition for trial.

Hauwei says it is being pilloried without evidence.

In filing its new lawsuit Wednesday, the company argued that the U.S. Congress served unconstitutionally as “judge, jury, and executioner” by approving a defense bill that bans federal agencies and their contractors from buying its equipment.

Hauwei said its equipment contains no hidden “backdoors” to be exploited, and has denied that it is beholden to China’s government. Ren Zhengfei, the founder of Huawei and a former engineer in the Chinese People’s Liberation Army, told the BBC last month that “We would rather shut Huawei down than do anything that would damage the interests of our customers.”

Outside analysts doubt it has that autonomy. William Carter, a security expert at the Center for Strategic and International Studies, says “China has made it clear in their national security law that basically any Chinese company can be drafted into the broader state power apparatus.”

He says that argues for heightened wariness when it comes to procurement of core infrastructure.

The more things change...

The problem is not new – and not confined to China.

Reports of tracking by the U.S. National Security Agency caused an international uproar in 2013 when it was revealed the NSA had tapped phones of world leaders, including of allies, like German Chancellor Angela Merkel and Brazilian President Dilma Rousseff.

The revelations by former NSA contractor Edward Snowden also showed the NSA was collecting internet data with the help of U.S. companies, including AT&T, Verizon, Microsoft, Facebook, Apple, and Yahoo.  Seth Schoen, senior staff technologist at the Electronic Frontier Foundation, writes in an email, “Many governments have sabotaged and tampered with technology products as a way of spying on foreigners.”

Such revelations hurt technology businesses. In 2014, Cisco had to cut staff because of customers’ fears that the NSA was using back doors in its networking equipment to scoop up online data. That reportedly spurred some businesses to look at alternative equipment suppliers outside the U.S., including Huawei.

Now, “there’s a weird sort of parallel where some people in China may assume that Cisco gear is compromised (or potentially compromised) by the U.S. government, while some people here assume the reverse about Huawei gear,” says Mr. Schoen. “This also gives customers in the great majority of countries no good option if they don’t want to be vulnerable to either risk.”

However the lawsuits shake out, the trust issue with Huawei – and Chinese tech companies – is unlikely to go away. Huawei has established itself as a juggernaut in the industry by owning more “standard-essential” 5G patents than any other company as of early February. Chinese companies in total own 36 percent of those patents, according to IPlytics. In contrast, U.S. companies hold just 14 percent.

A lasting architecture

“You’re talking about the lines and the servers and the various capabilities that will support [data traffic], and that infrastructure is going to be around for a long time,” says Mr. Harold at Rand.  “And the United States government ... has deemed that to be critical backbone infrastructure for the economy of the 21st century.”

For now, major U.S. cellphone companies like Verizon have been avoiding Huawei equipment in their networks, as have those in some other nations. But Nick Read, head of British-based Vodafone, has questioned the idea of a ban on Huawei, saying such a limitation – in a market dominated by just a few large providers – could stall the rollout of 5G by more than a year. Other key equipment providers include the Finnish company Nokia and Sweden’s Ericsson.

U.S. companies have been able to dominate in the apps and services that ride atop current 4G networks, and “that’s the bigger market,” says Brent Skorup, a telecom expert at George Mason University’s Mercatus Center. But without Chinese suppliers, U.S. carriers “are essentially left with two or three equipment manufacturers instead of four or five.” That would likely mean higher costs for the networks, he says, although, “it might be worth it for the security.”

Staff writer Laurent Belsie contributed to this story from Boston.