Huawei’s Grand Game: Can It Be Won?

Narration: Over 68 countries went with Huawei for 5G development, despite U.S. warnings of national security risks. What does that mean?

Declan Ganley: If Beijing succeeds in the strategy that it is implementing now everywhere else, 10 years from now, there won’t be anywhere else to go.

Narration: The security authorities of U.S. allies largely side with America in resisting Huawei. Why did they fail to stop China’s momentum?

Declan Ganley: It’s not the governments that that message is being delivered to are not receiving that message but the repellent to that message are the retail carrier lobbies in each of these countries.

Narration: China’s state subsidies gave Huawei an unfair competitive advantage in pricing that gives Western mobile carriers access to cheap equipment.

Declan Ganley: Very few large vested interests want to disrupt their own business model. And because they don’t want to disrupt their own business models they ride those horses until they’re dead.

Narration: China is playing a grand game to dominate the world’s fifth strategic domain.
If security risks alone are not enough to turn the tables on China, what else can?

Simone Gao: Welcome to Zooming In, I’m Simone Gao. Two months ago, when Zooming In did a story on Huawei and global 5G deployment, Huawei was poised to take control of much of the world’s cyber domain. We talked about the national security implications of that prospect. And we observed the U.S. effort to raise the awareness of that risk. Two months later, when we are doing another story on this, we realized the world knows Huawei a lot better through these efforts, but Huawei’s momentum has not stopped. In fact, Huawei and China are playing a grander game. They have a brilliant strategy that is working well with the very nature of a crony capitalism. Can this battle still be won by the free world? And what does it take to win? Let’s find out in this edition of Zooming In.

Narration: For many stakeholders, the Barcelona World Mobile Congress held at the end of February this year was what they feared: a victory party for Huawei, China’s primary telecommunications equipment provider who will be deploying 5G networks worldwide.

According to Zooming In sources, Huawei has signed official 5G deployment contracts with 68 countries. That number jumps to 80 if memorandum of understandings, where countries are testing and planning on using Huawei equipment, are included. When Zooming In reported this story in early February, the number of countries who had decided to go with Huawei was 61.

Interestingly, In public, Huawei has underreported the victory number by asking some of its new clients not to announce the deal. Some of its clients have also asked Huawei to do the same out of fear of political pressure.

Huawei’s success is significant against the backdrop of a few important events. First, on December 1st, 2018, Huawei’s CFO, Meng Wanzhou, was arrested in Canada at the request of the United States for allegedly breaching U.S.-imposed bans on dealing with Iran. Two months later, Huawei was indicted for theft of trade secrets, wire fraud, and obstruction of justice in the U.S. Following that, America warned allies that whoever uses Huawei equipment for 5G development will be cutting itself from information exchange with the U.S.

Responding to the U.S. warning, The European Commission decided not to call for a European ban on Huawei, leaving it to EU countries to decide on national security. But it urged EU countries to share more data to tackle cybersecurity risks related to 5G networks.

On March 19, Danish telecom provider TDC announced it will go with Sweden-based Ericsson to build the company’s 5G network. But Germany recently refused to ban Huawei from its 5G development. The UK has indicated a similar stance.

Simone Gao: For the Barcelona Congress, the United States sent representatives to renew the warnings about Huawei’s security risks while Huawei was at the same place celebrating its success. The conventional wisdom is that Huawei overshadowed U.S. representatives. It is not entirely surprising, though, because this is a battle China has engaged in for a long time, but the U.S. only realized it recently. Yes, Huawei is better prepared because they know they are executing a grand plan to dominate the world’s next generation of cyber domain and beyond.

Narration: Over the past ten years, the Chinese foreign direct investment footprint enlarged significantly while America’s shrank. According to a 2018 report by the Economic Commission for Latin America and the Caribbean, China dropped close to $90 billion in the region between 2005 and 2016, with a growing emphasis on telecommunications.

Since 2011, Huawei had been advocating the idea of national broadband networks as the centerpiece of a country’s new economic “ecosystem” around the world.

In 2015, this idea was successfully implemented in Mexico. Huawei and Nokia were hired to build the brand new $7 billion broadband network in the country. The first elements of the network went live in March 2018.

When it comes to 5G, Huawei’s narrative is simple: by using Huawei technology and equipment, these countries will be able to go straight to 5G at a much lower cost because Huawei is both the cheapest and the most technologically advanced provider.

They are not technically wrong. But the other side of the coin is this: by doing so these countries will be dependent on China’s equipment, technology, capital and market. They will be hard-wired into the Chinese economy and the backbone of their cyber infrastructure will be designed, built, and maintained by the surrogate of a totalitarian regime famous for technology theft and suppressing its people.

Obviously, this message hasn’t penetrated. Many of the 68 countries that have signed 5G contracts with Huawei didn’t seem to mind the prospect.

In the more developed world, Huawei deployed a strategy Declan Ganley calls a Trojan horse. Declan Ganley is the president of Rivada Networks, a U.S.-based telecommunications company.

Declan Ganley: I talked about the fact that Beijing uses these retail mobile carriers as their Trojan horse. I think in China, in Chinese it’s, I’ll mispronounce this now, ShashouJian is the term that is used for this. “The assassin’s mace” is the rough translation in English. It’s using an asymmetric advantage against your opponent and using your opponent’s own strength really against your opponents. And the carrier lobbies in each of these countries have done all of the lobbying with not an awful lot of need for help from Beijing. And the reason that they’re doing that lobbying is, Beijing has offered them extremely attractive terms, is really offering a massive subsidization of their 5G rollouts and these carriers who are trying to maintain the market, the margin, between what they retail a gigabyte of information of data for and the cost that it costs to produce it. While they want to maintain this retail business model, they need these Chinese subsidies and so they’re addicted. There is an addiction problem in the retail mobile carrier oligopoly in the West and the addiction problem is to Chinese subsidization so that they can do 5G.

Narration: Coming up, a showdown between Mobile carriers and security authorities.

The cyber domain is of great importance not only for the economy but also for security. In terms of warfare, there are five strategic domains today: land, sea, air, space, and cyber. According to Ganley, the first ten minutes of the next great war will be fought in the cyber domain. And that’s where the Pearl Harbors of the future will take place. Whoever dominates the architecture of 5G has got an enormous strategic and security advantage.

After Australia and New Zealand banned Huawei technology in their 5G deployment, Australian ships carrying coal and iron ore to China experienced significant delays in custom clearance. A Canadian businessman’s drug smuggling charges were quickly escalated, and he was sentenced to death soon after Huawei’s CFO was arrested in Canada.

Declan Ganley: There’s very strong, the squeeze is, there’s a whole of government approach to Australia and New Zealand where I think Beijing thinks it can squeeze Australia and New Zealand. They’re in the Pacific domain. It’s very important to Beijing that it gets their equipment in there. Britain is throwing its old, historic brethren in Australia and New Zealand under the bus as it were, if it allows. Because it will be the Five Eyes partner that breaks the alliance on this issue. And which is interesting when you consider that a post-Brexit Britain is supposed to want to, will want to, or should want to improve and deepen its relationship with Australia and New Zealand in the Anglosphere that it would put the whole security of the Anglosphere at risk over this issue is, it’s bizarre to me. It’s so short-termist it’s it’s a little bit crazy.

Simone Gao: Let’s go back to the Barcelona Congress. You said the American representatives delivered some very strong messages, using Huawei will pose a national security threat to those countries. How come these messages didn’t penetrate?

Declan Ganley: I think they are penetrating. I think this is a slow soak in some regards. But remember the repellent to that message. It’s not that the governments that that message is being delivered to are not receiving that message. But the repellent to that message are the retail carrier lobbies in each of these countries. So you watch the debate, watch the debate in Germany or in the U.K. Germany is a really good case in point the Financial Times and the Wall Street Journal’s been talking about this the last few days. You got the security establishment in Germany, the security services, the diplomatic services who recognize the threat and the risks and are saying so. And the counter lobby is coming from the carriers and what the carriers have done is they’ve gone to their friends. Germany is a mercantilist structure so business and government have this sort of established way of relating to each other in Germany and the modern German system. So the carriers have got the business lobby, lobbying for them and saying allow Beijing’s equipment in. And so you have the security establishment whose job it is to protect the country and national security saying we can’t do this. This is crazy. And the carriers having, using his, you know ShashouJian in action. The carriers in turn harnessing the lobbying power of the industrial, the big industrial lobby in Germany to lobby against the security establishment to roll them over and to be allowed to bring in the Chinese 5G equipment and that is playing out in some version or other, in many, many countries. Whether it’s Germany the Czech Republic, Spain, the U.K., France, and so on and so forth.

Narration: Coming up, what will it take to roll back Huawei’s map?

The retail model that Declan refers to is that the major commercial networks pay a large amount of money upfront to purchase spectrum from the government, leaving no one else in the field, because smaller players can’t afford the price. Then they charge consumers as much as they possibly can for data. Meanwhile, they naturally look for the cheapest equipment and rollout costs. This equipment comes from China. And these big commercial carriers end up serving as lobbyists for Chinese companies to gain regulatory favors from their governments. According to Ganley, in order to change this, the retail model needs to be flipped to a wholesale model where everyone—Apple, Amazon, Walmart, Uber, or small operators serving rural areas—could all buy spectrum at a reasonable price. By doing so, the desperate need for the cheapest equipment and rollout cost will disappear, competition will increase, and Huawei’s ShashouJian of state subsidization will melt away.

Declan Ganley: I think that we will have a number of countries adopt and announce that they will allow, allocate spectrum, radio spectrum for 5G networks to be built and operated by the private sector using Ministry of Defense blocks of spectrum on a sub priority access basis so the ministries of defense in whatever countries have roofless pre-emption to that spectrum. But they will share it with the economy on a sub priority access basis. That, countries that put RFP’s out for those, for wholesale carrier neutral 5G networks that are secure. I think any country that puts out an RFP asking for that and identifies a suitable block of spectrum to allow that to take place in, they will get proposals from the private sector. Those proposals will be backed by serious dollars from the financial sector. And those awards will be made and those networks will be deployed with no Beijing 5G technology. And if enough countries do that, there will be large, wholesale 5G networks in a significant number of countries that are going to do a few things for those economy. They’re going to introduce serious competition. They’re going to drop the average price of capacity so that we will have a real internet of things. You’re going to see a huge spike in innovation. We estimate that any country that does this will add at least 0.75 percent per year to their GDP. So this will have a measurable impact on people. It will create millions of jobs in the U.S. You’re looking at about three million jobs, is what the estimates are. In other countries the U.K., Germany, et cetera, very very significant job numbers and it will reassert the West’s dominance in this absolutely vital domain of security and technology.

It will end up being great for those carriers because those carriers are not extracting serious value out of their spectrum holdings. They’re very inefficient uses of their own radio spectrum. If they did this with their own radio spectrum themselves they’d end up making more money for their shareholders. It’s really, it’s a crazy dynamic that’s going on right now. If governments are strong enough to stand up to that cartel, then we will have success, which will end up being better for the shareholders of that cartel than what they’re doing right now. And we’ll have a secure cyber environment for the next many years to come.

Simone Gao: If they would actually benefit from it, why don’t they do it in the first place?

Declan Ganley: Because they are measured, they are almost all public companies, they are measured quarter by quarter. So the market looks at what their earnings are, you know for the next quarter. All of their senior executives are compensated in stock, in performance, and options, and everything else, bonuses that are tied to that quarter or that year’s performance. So the gearing of those companies in terms of goals is all orientated towards very short-term goals, a quarter or a year. And they’re not rewarded for thinking 10 years out, because none of them are going to be there in 10 years’ time. There are very, very few, I’m a founder entrepreneur, I own a lot of my company. There are very few carriers that could say the same thing.

So you have a professional managerial class and that’s not a criticism of them. But whose incentivization is more short-term? And therefore, so for example, to shift a big carrier’s model and separate retail from infrastructure and radio spectrum so you turn your infrastructure radio into a wholesale platform, and you separate your retail platform and you have that be sort of independent of it, you’re talking about a two year transition there to extract value. And you’re probably looking at a dip in earnings over two years, which will end up going back up and going beyond, where the earnings are. But that two years, that could be the end of, the CEO could get fired, the CFO could get fired. That could be a career ending dip for a lot of people. They’re not willing to go out and engage the market and explain to the market, “Look we’re going to disrupt our own business model.”

How many large corporations have had the courage to disrupt their own business model? Remember where Steve Jobs got his ideas from, Xerox. They could have done it, but they didn’t, because very few large vested interests want to disrupt their own business model. And because they don’t want to disrupt their own business models they ride those horses until they’re dead. And they don’t disrupt their business models, and therefore they end up at the at the end of the lifespan of a business model that might have been successful for a few decades. They end up relying on regulatory capture and on blocking out competition rather than their own innovation to succeed.

Simone Gao: If Ganley is right, it’s astonishing to see it comes down to this in terms of why and how this problem came about in the first place. The profit-driven large corporations have dominated U.S.-China policies for decades and the results have been disastrous for the average American people. I asked many pundits how this country can prevent this mistake from repeating itself. I haven’t got a very clear answer. Stay with Zooming In, which delivers the most comprehensive report on this critical matter to all of you. Let me know what you think on Twitter @ZoomingInSimone. You can also join the conversation on our Facebook page and subscribe to our YouTube channel: Zooming In with Simone Gao. Goodbye until next time.