No limits, p.7
No Limits, page 7
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From privacy to competition, industrial policy to investment screening, a range of areas that had never been touched by the China question were now being transformed. But most of the decisions in these areas would play out over many years. In one area, it had become very urgent indeed. As Heilmann put it: “Made in China 2025 was closely connected to the Huawei debate. Many people would treat that as the attack they had seen coming. It was a debate that then sunk down even to many smartphone users, a unifying and focusing event.” 5G, he argued, “was the manifestation of bigger things; the bifurcation of the technological ecosystems for the next generation; the new means that China has to reshape societies; and how their ideas of social order and surveillance are translating to us.” The question was whether policymakers in London and Berlin could be persuaded of this in time.
2
NOBODY DOES IT BETTER
BRITISH SPIES AND THE 5G QUESTION
Washington, DC, March 2019
THE QUESTION TO ME WAS FRAMED by a pair of raised eyebrows and a vexed look: “Have the Brits gone wobbly?”
I was sitting with my colleague, Jamie Fly, in one of the grander suites of meeting rooms at the Pentagon with a couple of concerned Trump administration officials who oversaw much of the US intelligence apparatus. The allusion to Margaret Thatcher’s fortifying injunction to George H. W. Bush on the eve of the first Iraq war—“Remember George, this is no time to go wobbly”—was knowing and pointed. A disturbingly long list of European allies was ready to buck Washington’s warnings and allow Huawei to take a sizable role in their 5G networks. But none of them prompted as much incredulity and exasperation as the country that had long framed its relationship with Washington as uniquely “special.” I would hear much blunter language in the year that followed, especially in January 2020 when Boris Johnson’s Conservative government announced that Huawei would not be excluded from swathes of the UK’s 5G infrastructure.
By then, however, the Trump administration had a better handle on how to fix the problem and was approaching the home stretch of what would prove to be a successful political offensive to turn the tide. That previous spring, as I bounced between meetings to see an array of similarly disturbed US Defense, State and White House officials, it was floundering. The 5G issue lay somewhere between China policy, Europe policy and cyber-policy, with a host of questions around telecoms regulation, export controls, industrial policy, intelligence-sharing, military mobilization and much else thrown in besides. The result, as one of the other officials in our Pentagon meeting lamented, was that “it’s not just that there is no strategy. No-one is even in charge of this.”
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The issue was ostensibly simple. Huawei had already made vast inroads into the world’s 4G architecture, but its presence there was seen by US officials as something they could just about live with in other countries, even if it was not a risk they accepted themselves. Any use of the Chinese company’s kit in 5G networks, however, posed security risks of a different magnitude. Washington just had to convince its allies of this before the new grid was built. Two cases loomed over all the others.
The first was Germany. As the largest European telecoms market, the lynchpin of the European economy and the most politically influential actor in the European Union, decisions in Berlin were expected to set the tone for much of the rest of the continent. The second was the UK. London’s verdict would be closely watched by every country that was still deliberating over its 5G equipment suppliers.
The UK had been the first major Western state to become deeply enmeshed with Huawei. It had the most advanced risk mitigation processes to deal with what were euphemistically called “high-risk vendors,” with British spies crawling all over the company’s equipment and code. But it was the hand-in-glove relationship between the US National Security Agency (NSA) and the UK’s GCHQ, the Western world’s two most capable signals intelligence agencies, that gave the decision so much symbolic resonance.
Many countries had followed the UK’s path of integrating the Chinese company into their telecoms networks and were reluctant to exclude it altogether. Now they were trying to figure out what the Trump administration could live with. It was hard for Washington to argue that any country should be applying more stringent standards than those of its very closest defense and intelligence partner. As one US official put it: “The way we saw it, if London goes, we can roll everybody else. It had to do with the position of GCHQ, the perception of their technical powers. It was the crutch that others used to justify their inaction.”
For US officials who were used to thinking about China through the prism of strategic competition in the Indo-Pacific, it became clear in the early months of 2019 that Europe had become the most critical battleground. As one of the US officials leading the diplomatic efforts on 5G remarked in a meeting at the time: “If we can’t even get our NATO allies on board, we’re not going to make much progress anywhere else. We have to prioritize, and Europe is the priority.”
For Huawei, the stakes were high. Its very nature as a company hung in the balance. The Chinese firm was already largely excluded from the United States and, more recently, Japan. The verdicts in Europe would decide whether it was going to be confined to China and the developing world or if it still had the chance to consolidate its position at the heart of the industrialized democracies. But the issue went well beyond one Chinese firm. It was clear to both Beijing and Washington that this was a test case in China’s wider push for global technology leadership. The scope for Beijing to set standards, access data and acquire specialized components would be far more limited if its leading companies were restricted by virtually every advanced economy.
As a result, the Chinese government decided to swing in firmly—if often ham-handedly—behind the company’s fierce lobbying efforts to persuade European governments to find in its favor. And to prevent that from happening, the United States was preparing to run a campaign of unprecedented scope, the most significant mobilization of political resources on a China-related issue in Europe that it had ever undertaken.
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Washington’s realization did not come quickly. It had concluded during the Obama administration that the use of Huawei equipment was not an acceptable risk for its own national networks. Aside from a few rural operators, the major US telecoms operators understood to steer well clear of Chinese suppliers. Even this was starting to come under creeping pressure. Privately, as the planning for the 5G transition got underway, US telecoms firms started raising questions about whether the “gentlemen’s agreements,” whereby Huawei had been excluded without the need for a full panoply of legislation, needed to be firmed up. As one US official put it:
They were starting to say to us “Okay, we haven’t been using their equipment, you’ve sent your teams in to show us the intelligence and persuaded us not to do this. But it’s becoming harder for us to justify to our boards and our shareholders to keep doing it with a wink and a nod when Huawei is 30 percent cheaper.”
As they started to move towards tightening the legislation in 2018, it started to become clear that the allies were going to be a far bigger problem.
Canberra raised the warning flag first. In August 2018, the head of the Australian Signals Directorate, Mike Burgess, announced that, despite its best efforts at trying to figure out a British-style risk-management approach, “At the end of this process, my advice was to exclude high-risk vendors from the entirety of evolving 5G networks.”[1] Australian officials had war-gamed scenarios that replicated Huawei’s presence in the existing networks for the new ones and determined that they could no longer credibly secure them from Chinese intrusion. Their US counterparts began waking up to the consequences if its other partners did not reach the same conclusions.
At first, the Trump administration hoped the whole thing could be dealt with quickly and discreetly. That had been their experience handling the first country at which they directed their energies in late 2018: Japan. It was a remarkably uncomplicated case. Shinzo Abe’s government needed little persuasion from Washington that Chinese technology firms might represent a threat, nor the importance of aligning Japan’s security position with that of its military guarantor.
Only one Japanese company, SoftBank, had any Huawei equipment in its 4G networks anyway, and Japanese officials were already looking to deal with the problem even before the US weighed in. Corporate Japan was not as hawkish on China as Abe and his cabinet advisors, and indeed SoftBank’s prodigious success owed much to its early investments in Alibaba, the Chinese commercial giant. Without any need to name Huawei in Japanese government guidelines, it was made clear to SoftBank’s billionaire CEO, Masayoshi Son, that making the move away from Chinese suppliers was a precondition for any allocation of 5G frequency. There was no public agonizing about the lack of alternative suppliers and no blood-curdling threats from Beijing over the firm’s decisions. Huawei was out. Nokia, Ericsson and the more experimental cluster of 5G efforts from Fujitsu, NEC, Rakuten and Samsung were in. When Washington trained its sights on Europe, it expected a repeat.
Instead it would face an almighty political battle. European and Japanese security anxieties about China were not of a remotely similar scale. European governments did not have to spend their time planning to face Beijing in an outright war or deal with an ongoing barrage of air and naval intrusions by China’s People’s Liberation Army (PLA). Their view of the relationship with China was nonetheless growing increasingly jaundiced. The cyber-domain was the one security arena where Europe was in the same boat as other Chinese targets, not least when it came to the forms of economic espionage at which Beijing was so skilled. This was estimated to cost the US economy alone $320 billion each year, but also encompassed over 80 percent of the theft of trade secrets, market data, software, source code and manufacturing techniques in Europe too.[2]
There was a major problem, however, even for governments on the continent that might have been minded to follow Tokyo’s example. European telecoms operators were simply far more beholden to Huawei and ZTE, Huawei’s Chinese state-owned sibling, than their Japanese, American or Australian counterparts.
One of the main reasons that European mobile operators had ended up in this invidious position was the cumulative effect of a seemingly innocuous public policy choice: the model used by European governments to issue rights to telecoms frequencies. Japan assigns them for free and then imposes various obligations on the firms that are the beneficiaries. Most of the European markets use spectrum auctions, an ingenious process that helped win the economists who designed it, Paul Milgrom and Robert Wilson, the 2020 Nobel Prize for economics. Spectrum auctions have been a lucrative cash cow for governments who require the telecoms operators to make a large up-front payment for the privilege of operating within the frequency they are allocated. The scale of that payment depends on what the operators expect to recoup, but it can run stratospherically high, the German government alone recouping over €50 billion from a single 3G license auction at the turn of the millennium.[3] And while there are many uncertainties about how lucrative these contracts will prove to be, it is absolutely clear that driving down operating costs will make them more so. Chinese firms offered a way to do this at the cheapest imaginable rate.
Huawei’s rise was fueled by a mix of theft, genuine technical ability, vast research and development spending, and prodigious subsidies. The company was founded in 1987 by Ren Zhengfei, a former member of the PLA engineering corps, and spent its early years selling telecom switches to connect phone calls in rural China before it reverse-engineered them and produced the switches itself. One of its breakthrough deals was a contract to build the first national telecom network for the PLA, but it was when Huawei was accorded “national champion” status in the 1990s, with all the government backing this afforded, that its take-off really began. The volume of special lending arrangements, tax breaks, deals on cheap land and outright grants was estimated in one study at $75 billion.[4] Its international competitors complained particularly forcefully about the vast credit lines offered to Huawei’s customers, the major telecoms operators, by China Development Bank and the Export–Import (EXIM) Bank of China. Not only were Western firms’ equipment prices often undercut by 30 percent or more, the generous financing terms that Huawei offered made it almost impossible for the likes of BT and Deutsche Telekom to resist.
As one expert on the European telecoms industry put it, though:
The story about Huawei wasn’t a story just about the price, it also integrated well with how Europeans did business. They were extraordinarily forthcoming, diligent, and professional in their service. It was a good story of how a Chinese company became an exceptional business partner for European companies in a crucial industry. They trusted them.
The consequence was that many of the other telecoms equipment suppliers were driven into the ground. Back in the 2000s, the telecoms market was a competitive space in which an assortment of mostly European and North American firms vied for the market. The arrival of Chinese competitors on the scene was one of the main factors behind a brutal consolidation that is still underway. Lucent, Alcatel, and Siemens’ communications arm were swallowed up by Nokia. A struggling Marconi was bought by Ericsson, which also took over most of Nortel’s assets after it filed for protection from creditors, the former Canadian giant’s situation hit not only by cost issues but Huawei’s large-scale industrial espionage, which saw Chinese hackers stealing hundreds of Nortel’s sensitive internal documents over the course of a decade.[5] For the leading US firms, such as Cisco, it was ever-more evident that equipment provision was turning into a low-value business that they wanted to transcend. They got out of the market altogether to focus on higher-margin products—the routers and the software—rather than the heavy-lifting of radio infrastructure building.
By the time it came to the 5G bids then, in 2018, there were only two major competitors left standing who could match Huawei toe-to-toe, both beaten and bruised by the whole experience: Finland’s Nokia and Sweden’s Ericsson. In 2019, there was even the risk that they would be driven out of the business too, as they struggled to compete on pricing with the state-backed behemoth from Shenzhen. As one US official put it:
What dawned on us, when we talked to the telcos, was that 360 million people in the US and Australia is not enough to support the companies who are providing an alternative. It used to be that we could agree—okay, you made a different decision. Increasingly it was becoming: your decision to “mitigate risk” with Huawei is undermining our ability and your ability to maintain an alternative.
The European Commission had attempted to step in to deal with the damage years earlier, but the case brought against Huawei by the European Commission in 2013 was knee-capped by member states whose telecoms operators were already hooked on the very Chinese subsidies that it sought to address. Not only was the course adopted by European governments over the preceding decade leading to a deepening dependence on Chinese suppliers but it had also brought about the near-destruction of one of the largest-scale advanced technology sectors where Europe retained a genuine global edge: constructing the spine of the world’s telecommunications networks. When governments defended their Huawei decisions on the grounds of a “lack of alternatives,” they rarely acknowledged that it was their own choices that had led them there.
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The country that made the biggest early Huawei gamble was the UK. In 2005, the Chinese firm was at best a regional actor, its only serious international contract being with Hutchison Whampoa, a short hop over the border in Hong Kong from its South China headquarters. Huawei’s international reputation was transformed by a breakout deal pioneered by BT, the UK’s former state provider and the largest telecoms firm in the country, which handed it a £10 billion contract to supply routers, transmission and access equipment for an upgrade of the UK’s networks. BT did so with remarkably little scrutiny. Ministers were not even informed until a year after the contract was signed, foreshadowing the curious process that would keep the most important decisions away from politicians until they could be presented with faits accomplis.
From that point on, the UK would act as Huawei’s most important reputation-launderer. Prior to the BT contract, the firm had been dogged by concerns not just over its technical competence but its proximity to the Chinese state, not to mention Ren Zhengfei’s military background. Most governments steered well clear. The cost proposition, the firm’s improving technology and the stamp of validity from a charter member of the Five Eyes, the Anglosphere intelligence club that comprised the United States’ closest allies, opened many more doors. In the decade that followed, Huawei would become the world’s largest telecoms equipment supplier, winning a string of contracts across advanced economies as well as the developing world.
This didn’t mean that Huawei had carte blanche in the UK. An arrangement had to be found to address the unique lack of trust in the firm. Several years after its groundbreaking deal was completed, BT had detected suspicious behavior in Huawei’s core switches, necessitating a bending-over-backwards level of reassurance from the Chinese firm about the security of its equipment and its code. This took the form of a two-story building on the outskirts of Banbury, about an hour’s drive across the Cotswolds from GCHQ in Cheltenham. The Huawei Cyber Security Evaluation Centre, more commonly known simply as “the Cell,” was described by the Economist with uncharacteristic hyperbole as the “fulcrum for the balance of power in the world of telecoms.”[6]
