CANADA’S DECISION TO ban Huawei and ZTE from providing equipment for the country’s 5G network suggests that flesh is, at last, being put on the bones of the comprehensive new approach to China that Prime Minister Justin Trudeau has been promising since last year.
Nor can it be a coincidence, this Bystander suspects, that the announcement comes in the wake of the United States preparing sanctions against Hikvision and ahead of US President Joe Biden’s trip to US allies in Asia, where he will unveil the United States’ long-awaited Indo Pacific Economic Framework.
Canada’s decision brings Ottowa in line with the other members of the ‘Five Eyes’ intelligence-sharing community (the United States, United Kingdom, Australia and New Zealand).
The decision to ban Huawei and ZTE had been expected once China freed two Canadian citizens last September who had been ensnared in the diplomatic row caused by Ottawa acceding to a request from Washington to detain Huawei’s CFO, Meng Wanzhou, on suspicion of sanctions evasion.
Concerns among Canadia’s telecom operators about the extent of re-equipping that the bans will make necessary may have caused the subsequent delay. They will now have two years to remove any 5G equipment from the two Chinese companies already installed and five years to replace any used for current 4G service. However, there will be no government money to do so.
Beijing’s response has been boilerplate, accusing Ottowa of political manipulation and colluding with Washington. The Chinese embassy in Ottowa said in a statement:
China will comprehensively and seriously evaluate this incident and take all necessary measures to safeguard the legitimate rights and interests of Chinese companies.
That suggests some foot-stamping but likely little if any material retaliation.
CHINESE FIRMS ARE increasingly involved in owning, operating, laying and equipping undersea communications cables — creating another front in the technology and telecommunications contest between Washington and Beijing.
Undersea fibre-optic cable is the backbone of global data transmission and communications. More than 400 cables beneath the oceans carry upwards of 95% of international internet data — everything from streaming videos to billions of dollars of sensitive financial transactions and encrypted government communications.
Thus, China’s growing presence and designation of undersea cables as a ‘marine strategic emerging industry’ — part of a broader goal of capturing 60% of the global market for fibre-optic communication equipment by 2025 — is seen in Washington as both a commercial rivalry and a geo-strategic threat.
The three big state-owned telecos, China Mobile, China Unicom and China Telecom, are the principal Chinese owners and operators of commercial cables, often as consortium members. The leading Chinese turnkey supplier and installer of undersea cables and the systems running them is HMN Technologies, formerly Huawei Marine Networks. It is now rebranded and 81%-owned by Shanghai-listed Hengtong Optic-Electric, the country’s largest producer of advanced submarine-grade fibre, after a restructuring to get around US sanctions on the Huawei group.
HMN Tech says it has completed or is working on 108 projects worldwide involving 64,000 km of submarine cable. It is now the number four in the global industry, behind US-based SubCom, Nokia-owned Alcatel Submarine Networks (ASN) and Japan’s NEC Corp. The private sector dominates the installation side of the industry, as opposed to the owner-operator side, which has traditionally been dominated by a mix of private and state-owned telcos.
HMN Tech is estimated to have a 10% share of a worldwide installation market worth $5 billion last year and forecast to grow at 10% a year for the next seven years as the bandwidth-devouring giant cloud and social media platforms drive an investment boom in new capacity, including their own cables, and route prioritisation.
Earlier this month, the World Bank pulled the plug on a cable project it was funding on which HMN Tech had reportedly outbid ASN and NEC for the installation contract. The East Micronesia Cable System (EMCS) would have connected three Pacific island nations, Nauru, Kiribati and the Federated States of Micronesia.
However, it would have an onward link to the cable connecting Guam with the United States. Guam is a US territory, 29% of whose land area is occupied by US military bases. Washington let it be known that it objected to Chinese involvement in the EMCS because of a possible threat to US national security from potential Chinese espionage or disruption. The World Bank diplomatically decided that all three bids were ‘non-compliant, leaving the project in limbo.
Huawei’s first involvement in the industry dates back to 2009, a joint venture with the UK’s Global Marine, to lay a Hong Kong to United States cable. However, the People’s Liberation Army and the Ministry of Information Industry have played a strong role in developing the country’s submarine cable technology and capabilities since the 1990s. The PLA Naval University of Engineering and Hengtong Optic-Electric, along with others, established a joint submarine cable R&D laboratory in 2016 and the PLA-N has at least eight cable-laying and repair ships. As that might suggest, undersea cable technologies have dual-use.
The so-called ‘underwater great wall’ — a network of subsurface sensors connected by cable networks — is central to the PLA-N’s monitoring of in-shore waters (and beyond) for submarine activity, similar to the US SOSUS system that monitored Soviet-era submarines. During the Trump administration, one of the concerns of US security planners was how this could erode American naval superiority in the South China Sea.
These concerns aligned with the Trump administration’s twin objectives of stymieing both China’s indigenous technology development and the modernisation of the PLA. This was a broad front. The administration barred the use of Huawei equipment in government procurement contracts in 2018; the following year, it put Huawei and 68 affiliates on its Entity List, which stopped the use of any of its gear in US networks. However, a couple of measures had specific relevance for China’s undersea cable capacity.
One was the formalisation of an ad hoc US interagency group known as Team Telecom that advised the US Federal Communications Commission on national security issues. The Commission routinely referred applications for licences for operating landing points for undersea cables to the ad hoc group. Referring them to the new committee did not provide a substantive change in that regard. However, like the updating of the Committee on Foreign Investment in the United States (CFIUS), the more formal structure and stringent deadlines for reviews will likely have a chilling effect on new applications from consortia with Chinese members.
The Trump administration also called for closer scrutiny of submarine cables connecting the United States to ‘adversary countries’. Of the three cables directly connecting the US and China, two are partially owned by Chinese state-owned companies.
A year ago, with its attention focused on Beijing’s imposition of a national security law on Hong Kong, the Trump administration blocked approval for the city to be a landing point for a fourth direct link, the Pacific Light Cable Network (PLCN). This connects Los Angeles and Hong Kong with branches to Taiwan and the Philippines and was backed by Google, Facebook and Dr Peng Telecom & Media Group. The latter is a former speciality steel smelter turned Beijing-based internet services provider listed on the Shanghai exchange. The Trump administration argued national security grounds, albeit with its customary lack of public evidence.
Google and Facebook subsequently were permitted to light the Los Angeles-Taiwan and Los Angeles-Philippines links only. As a result, the leg to Hong Kong has stayed dark.
PLCN’s fate has had a chilling knock-on. Three consortia of other planned trans-Pacific cables to Hong Kong withdrew landing license applications, including Amazon, Facebook and China Mobile’s proposed Bay to Bay Express linking San Francisco to Hong Kong cable, the China Telecom, China Unicom, Facebook, Tata Communications and Telstra Hong Kong-America cable between Hong Kong and Hermosa Beach in California; and Google’s Hong-Guam cable. In addition, two other proposed trans-Pacific cables, Facebook’s Bifrost and Facebook and Google’s Echo, announced earlier this year that they would avoid Hong Kong landing points.
This suggests that Hong Kong will not be a growing gateway for trans-Pacific cables as long as US-China tensions persist. However, that will not necessarily stop it from remaining an intra-Asian regional cable landing hub.
The East Micronesia cable example suggests that the Biden administration is carrying through with the thrust of its predecessor’s policy. That includes extending its discouragement of other countries from using Huawei and other Chinese telecoms equipment manufacturers’ kit in their 5G networks and other critical infrastructure to undersea cable systems.
The Biden administration is starting to rally its allies around the idea of creating a more cohesive and updated legal framework to protect undersea cables. These are covered by Articles 113-115 of the UN Convention on the Law of the Sea (UNCLOS) and the International Convention on the Protection of Undersea Cables. The latter dates to the 1880s and has 36 signatory nations. China is not among the three dozen.
As most cables are privately owned and operated, the US wants to establish stricter global standards and norms for private companies to make their cables and network management systems secure from cyberattacks and physical disruption.
This would go beyond the code of conduct of The International Cable Protection Committee (ICPC), a forum for submarine communications and power cables companies. It would also include greater sharing of intelligence between governments and companies on cyber threats to the cables. This Bystander understands that the United States raised both these notions at the recent G7 and NATO summits.
Submarine cables are surprisingly vulnerable for such critical infrastructure. There are an estimated 150-200 accidental fractures a year. Undersea earthquakes can break them, but ships’ anchors and fishing nets snagging them are the most frequent cause. In the Soviet era, there was a suspicion that Soviet trawlers deliberately fished for cables.
US security planners fear that Chinese trawlers could employ the same tactic, particularly against Taiwan in the event of conflict or the threat of it, or even just as a muscles-flexing exercise. Taiwan is a telecoms hub for the region, so the damage to regional economies and financial markets could be severe.
A different set of concerns surrounds espionage risks and an adversary’s ability to divert or monitor data traffic. This is an additional concern for governments. They use the global network of commercial undersea cables for their communications, albeit encrypted. Government-owned classified or military cables are surprisingly uncommon.
There are three ways to hack into undersea cables’ data:
remotely via backdoors in the kit inserted during manufacturing or in the network management software systems;
infiltrating facilities at the landing points or where the cables connect to domestic networks; and
tapping the cable directly on the seafloor.
The last is technically the most challenging and beyond most countries’ capabilities. Unverified reports say that the United States, the United Kingdom and Russia have managed it by using specialist submersible craft to place physical listening devices on cables. Earlier this month, a Foreign Ministry spokesman accused the United States of ‘unacceptable’ espionage of undersea cables.
Believing that Chinese espionage efforts concentrate on targeting landing points, the Biden administration is addressing the first two attack points by pushing ahead with Trump’s strategy of banning approvals for equipment in US telecommunications networks from foreign companies deemed national security threats, i.e., Huawei and ZTE, and getting their kit removed from US networks.
The US Congress passed the Secure and Trusted Communications Networks Act in 2019, authorising the FCC to do that through its rule-making. Earlier this month, the FCC said it was moving onto the next stage of that process — public comments on the proposed rule that would revoke the certification of any equipment listed by the 2019 Act, signalling it had had a green light from the Biden administration.
Digital Silk Road
China sees undersea cable networks as a component of its Digital Silk Road under the One Belt, One Road initiative. For example, HMN Tech has laid or is laying cable under the Java, Andaman and South China Seas, the Gulf of Thailand and the Indian Ocean.
It is also laying a 15,000km submarine cable connecting Pakistan to East Africa and Central Europe (PEACE) via the Red Sea, another project on which the United States has been expressing disquiet. The Peace cable will have a landing point at Gwadar in Pakistan, whose port is owned by state-owned China Overseas Port Holdings and where China will likely have a military base. The Peace cable would connect to China from there by an overland route through Pakistan.
HMN Tech has also laid a barely shorter cable of 14,530km connecting South Africa and the United Kingdom, with a dozen landing points along the west coast of Africa.
Authorities regard the company as a national champion, although the company, like its forebear parent, asserts its independence at every turn.
To this Bystander, this is shaping up to mirror the contest over 5G networks, with HMN Tech and the Chinese telcos squeezed out of undersea communications cables with landing points in the advanced economies where the United States and its allies hold sway, but growing their market share in the Global South where their lower prices and political and financing support from Beijing will prove attractive.
If there is a difference, it is that Washington and its allies can offer a realistic alternative to China in both the installation and operation of cables in a way it cannot with 5G networks.
XIAOMI, THE SMARTPHONE-MAKER blacklisted by the Trump administration in its waning days in office as a Chinese military-owned company, has got itself off the list after suing the US federal government.
The two sides have now agreed to an out of court settlement under which the US Department of Defence will ‘vacate’ the designation. Xiaomi had secured a US District court-ordered stay on implementing the blacklisting in March, with the US side offering only circumstantial evidence in support of the blacklisting.
The effect of being put on the list is to prevent US investment in the company and to remove its stock from US stock exchanges and global benchmark stock indexes.
At this point, it is unknown if there are any conditions attached to the settlement. That may become clearer in court filings necessary before May 20.
Xiaomi’s share price fell 15% after its blacklisting was announced. The company has insisted all along that it is neither owned nor controlled by the People’s Liberation Army. However, this a rare victory for China’s technology giants caught up in the technology and investment contestation between Washington and Beijing.
That shows few signs of easing up under the Biden administration. It has just extended its predecessor’s 2019 executive order intended to exclude telecommunications equipment from US networks made by firms assessed to pose a national security risk to the United States — for which read Huawei and other Chinese firms.
THE TRUMP ADMINISTRATION has granted telecoms giant Huawei Technologies a third 90-day waiver from being banned from doing business with US companies. In May, Huawei was added by the US Commerce Department to the Entity List, an economic blacklist that is the backbone of the US regulatory regime intended to stop foreign companies from buying US-made products where Washington has national security concerns. (Huawei denies the US national security concern that the software in its kit might facilitate state spying.) It is from that blacklisting that the waivers apply.
As before the rationale given for the extension is to maintain telecoms service in parts of the rural United States that are dependent on Huawei kit. True, rural America voted overwhelmingly for Trump in the US presidential election in 2016, and he will want every one of those votes and more for his re-election campaign in 2020. However, more than 200 US companies have asked the US government for the licenses that would allow them to sell components to Huawei regardless of the Entity List listing, suggesting the impact on the US tech sector may also have weighed in the latest waiver decision.
In May, US President Donald Trump directed the Commerce Department to establish a regime to enforce a ban on US companies from using telecoms equipment made by companies that pose a national security threat to the United States (for which read Chinese companies like Huawei and ZTE). This is now a month overdue.
Huawei also remains banned from pre-loading its phones with Google apps. It can use only open-source components of Google’s operating system, Android. Huawei unveiled its operating system, HarmonyOS, in August, which it has reportedly been working on since 2012. This, however, was a developer version and while useable in Internet of Things devices does not seem ready to be used in mobile phones.
Earlier this month, Huawei’s first batch of phones without Google apps or US-made processor chips, the high-end and limited-run Mate X, went on sale in China. The foldable Mate X uses the Emui operating system, which is based on Android 9, not the HarmonyOS.
More significantly, Huawei’s chairman, Liang Hua, told a tech conference earlier this week, the company’s 5G base stations can be built without US parts. In October, Huawei claimed to have signed more than 60 commercial 5G contracts with carriers around the world, despite a US campaign to have carriers disengage from the company both to crimp its lead in the global race for 5G leadership and as part of the Trump administration’s general confrontation with China.
Where all this fits into the current US-China trade negotiations is anyone’s guess. What is certain is that China will continue its drive to be self-reliant for the core technologies its companies need such as advanced semiconductors.
HUAWEI’S FIRST-QUARTER results suggest that the United States’s campaign against the world’s biggest telecoms equipment maker is having limited effect, especially outside the advanced economies.
The company has long denied Washington’s allegation that Beijing ultimately controls it and that its equipment could be used for espionage in the service of Chinese state security, the basis of the Trump administration’s campaign to prevent other governments from using Huawei’s 5G equipment.
Huawei says its income was 179.7 billion yuan ($26.8 billion) in January to March, a 39% increase on the same period a year earlier. It did not disclose its net profit but said it operated at an 8% net profit margin, slightly higher than in the first quarter of 2018.
It reported sales increases in all its three customer groups — carriers, enterprise and consumer customers. On the contentious 5G technology, it said it had signed 40 contracts with leading global carriers, and shipped more than 70,000 5G base stations, a number it expects to reach 100,000 by May. It says 2019 will be ‘a year of large-scale deployment of 5G around the world’.
In practice, only a handful of countries have heeded Washington’s exhortation to follow it in banning Huawei from their 5G telecoms network: Australia, New Zealand and Japan, all close US allies in Asia.
Europe, which will likely lead 5G rollouts — eleven EU countries have 5G auctions scheduled for this year and six for 2020, with 30% of its internet users expected to be on 5G by 2025 — has been more ambiguous in its response.
Denmark, Germany, Italy, Norway, Poland and the United Kingdom all have expressed concerns about the cybersecurity risks of contracting a firm with opaque links to Beijing. However, Belgium has declined to ban Huawei, saying it has found no deliberate technological compromises in its equipment that could be misused by China’s state, but it will keep the equipment under review. Germany has taken a similar line but is drafting quality and cybersafety standards for 5G suppliers and talking about a ‘no-spying agreement with China.
France is debating 5G legislation that would impose extensive security tests. The report of a Dutch government investigation into Huawei is due in May when the United Kingdom is also expected to make a final decision. London has repeatedly raised concerns about Huawei equipment and the firm’s ability to fix cybersecurity problems but also has one eye on a post-Brexit trade deal with China.
For all of Europe, keeping China, a critical trade and investment ally, on side while securing the Internet of Things devices and automated vehicles that 5G will enable, from malicious state and non-state cyber attacks will be a delicate balancing act, made harder still by the current unease of the transAtlantic relationship. Washington may ban US firms from working with any others, including European firms, who use Huawei technologies and equipment.
Brussels and EU member governments will try to keep the decision-making process on the technical level and not get sucked into the political dimensions that saw Meng Wanzhou, Huawei’s chief financial officer and daughter of its founder, Ren Zhengfei, arrested in Canada in December at Washington’s request on charges of bank and wire fraud in violation of US sanctions against Iran. (She denies wrongdoing.)
The European Commission’s recently published recommendations on 5G network cybersecurity rejected bans on specific suppliers (unnamed, but for which read Huawei) and told member states to come up with joint EU-wide security checks for firms building 5G networks in Europe by the end of this year.
While Europe will be an important beachhead for Huawei’s 5G equipment and offers a near-term market, the company is looking beyond Europe. Many parts of Asia, Africa, Latin America and the Middle East will transition from 2G/3G/4G to 5G over the next ten years. That is where Huawei’s future sales lie.
Word from our man in Delhi that Indians are getting in a tizzy about their country being ringed by Chinese-built IT infrastructure and communications networks, already being likened to an electronic string of pearls. India’s intelligence agencies have raised concerns that contracts awarded to Huawei and ZTE to build telecoms networks and data centres in India’s neighbours such as Nepal, Sri Lanka and the Maldives pose a threat to national security because they could compromise the integrity of India’s telecom and internet networks. Intelligence officials suspect Huawei and ZTE of maintaining close links with the PLA. A similar concern has been expressed in the U.S. and Europe.
Indian intelligence services want Delhi to offer technical expertise and assistance to countries like the Maldives to forestall the advances of China, which many Indians also suspect of being behind the islands’ recent decision to terminate the contract of an Indian company developing an airport there. India’s communications ministry also is pushing Indian companies to bid for telecoms and IT infrastructure contracts, and presumably is lobbying for financing and diplomacy to support them.
Our man tells us that last year the ministry quietly told Indian companies not to buy Chinese made telecoms equipment, regardless of how cheap it is, for fear it had spying capabilities built in to it. With China friendly not only to Nepal, Sri Lanka and the Maldives but also Bangladesh, Bhutan, Myanmar and Pakistan, it doesn’t take much for Indians to feel encircled.
Hats are being shuffled in China’s fast-growing but corruption-tainted mobile telecoms industry. Xi Guohua is reportedly moving from the Ministry of Industry and Information Technology (MIIT), where he was a vice-minister, to take up the chairmanship of China Mobile. The country’s largest mobile phone operator has lost seven senior executives to corruption charges in the past couple of years and is currently the focus of an industry-wide corruption investigation being conducted by the Party’s discipline enforcers.
Xi will replace Wang Jianzhou, the 62-year old who had given up his chief executive role at China Mobile last August in what was presented as a corporate governance reorganization. A vice chairman of China Telecom, the no 3 in the industry, is moving to the ministry to be vice minister, while the company’s general manager Wang Xiaochu, is to become governor of Yunnan. No 2 China Unicom’s general manager, Chang Xiaobing, will replace him at China Telecom, with Lu Yimin, China Unicom’s president moving up to chairman.
The corruption probe into the telecoms industry is still unfolding, though the inquiries seem to revolve around embezzlement and bribe-taking. State media say the sums involved could exceed 350 million yuan. More than 60 senior and mid-level executives at the big three state controlled operators and government officials have been implicated so far. All three of the largest telecoms companies are under investigation as are some of their data service providers, which is the fastest growing part of the business. Though the network operators’ large size and state control protects them against the impact of corruption scandals to a certain extent, the probe is clearly expanding and it is uncertain where it will end.
China may skirt round a WTO challenge on its rare-earth exports, but a decision to protect its state-owned telecom companies from competition from VoiP providers such as Skype and UUCall seems to be on thiner ice.
The Ministry of Industry and Information Technology says that only the leading telecom companies — that would be state-owned China Telecom and China Unicom — have the right to offer services that link computers and telephones (via People’s Daily). There are no details of when the prohibition would come into effect or what punishments illegal VoiP providers face.
Inevitably, China is the world’s largest market for VoiP services, which are far cheaper than landline calls and are cutting into the state carriers’ duopoly profits. Shutting down the services won’t be easy. So MIIT’s announcement may be a warning to the VoiP providers not to grow too quickly, to give China Telecom and China Unicom time to find a way to live with them or smother them. Market force if not market forces.