SHENZHEN, China — Huawei Technologies Co. Ltd. rotating chairman Eric Xu seems frustrated when asked why the telecom equipment maker, the world’s largest, should be trusted amid accusations of espionage, intellectual property theft, conspiracy and fraud, charges that could damage its global expansion plans just as telecoms are poised to spend billions on 5G equipment.
In a mahogany panelled boardroom at Huawei’s lavish headquarters in Shenzhen, Xu turns the company’s public relations crisis into a philosophical discussion on the impossibility of proving something will never happen in the future. In Huawei’s case, that something is spying for the Chinese government. In Xu’s example, that something is a reporter committing murder.
“For example, I will say you probably will kill someone. Do you believe? I will say I have suspicion that you might commit a crime or kill someone before you go to see God someday,” Xu said through an interpreter in a wide-ranging interview with four Canadian media outlets in late March. “That is a suspicion you can never prove negative.”
It’s dark humour, but Xu has a point. “Absence of evidence is not evidence of absence,” as goes the saying attributed to British astrophysicist Martin Rees.
Even so, it’s odd framing for a company embarking on a charm offensive to convince the public it’s not a national security threat. Self-promotion doesn’t come naturally for Huawei, which traditionally eschews media attention and vies to win customers on merit. But it feels forced to defend itself against suspicions it believes are based on its identity as a Chinese company, not evidence. The 5G stakes are high, and Huawei is straining to stay on top of its game.
The diplomatic drama leaves Huawei feeling misunderstood
Huawei’s detractors aren’t exactly conjuring concerns out of thin air. The U.S. effectively banned Huawei and its Chinese competitor ZTE Corp. from its market in 2012 after an 11-month investigation failed to refute ties to the Chinese government or military (the report found Huawei particularly evasive about its ownership). Australia followed suit last August.
Western security officials also tensed after the Chinese Communist Party introduced the National Intelligence Law in 2017, which requires all organizations and citizens in the country to support, assist and co-operate with intelligence officials — in other words, spy.
Tensions rose even further last December when Canada arrested Huawei chief financial officer Meng Wanzhou, the founder’s daughter, on an extradition request from the U.S. to face charges of conspiracy to commit bank fraud and bank fraud related to lying about Huawei’s business dealings in Iran.
In apparent retaliation, China arrested two Canadians and upgraded a third man’s drug-related prison sentence to a death sentence. Its foreign minister warned of “serious consequences” if Canada didn’t release Meng, who remains under house arrest in her Vancouver mansion fighting extradition. The ongoing trade wars between China and the U.S. and Canada aren’t helping either.
The diplomatic drama leaves Huawei feeling misunderstood. It believes it meets all security protocols, but, despite its efforts, is being targeted by those with anti-China biases who resent its disruptive ascent to the top.
It admits, however, that it’s never been good at storytelling, so the 32-year-old company is for the first time sharing its rags-to-riches history with the media as it struggles to change the narrative that it just can’t be trusted. It’s also calling for industry-wide cybersecurity standards, arguing it doesn’t make sense to single out one player in a global supply chain.
Formerly unwilling to make executives available for interviews, members of Huawei’s senior leadership team including Xu and founder Ren Zhengfei are now making the rounds and inviting reporters from around the world to tour its campus, enticed with “rare” access and “exclusive” interviews that are increasingly hard to describe as either rare or exclusive.
Huawei is also beefing up its public relations team in places such as Canada, where telecom operators poised to choose 5G suppliers are waiting for a government review that will decide whether Huawei is in or out.
Given its footprint in the U.S. is next to zero, Xu said Huawei isn’t wasting its time trying to convince the Americans to adopt its gear. But it has a lot to lose elsewhere.
Nearly half its US$107 billion in global revenue came from outside China in 2018, the year its revenue topped US$100 billion for the first time, according to its annual report released in late March. More than a quarter (28.4 per cent) of its revenue came from Europe, the Middle East and Africa.
Canada is a relatively small market, but Huawei still earned US$7 billion, or about 6.6 per cent of its global revenue, in North America. Yet Canada is the third-largest destination for Huawei’s R&D spending, Xu said, with its centre in Ottawa known for 5G innovations.
Huawei invests about US$30 million annually (10 per cent of its global research budget) in basic research at Canadian universities. It also does business with Telus Corp. and BCE Inc., both of which have used its radio access network equipment in their 3G and 4G networks.
Huawei’s charm offensive
Huawei’s media tour begins at the campus hotel reserved exclusively for its guests in Shenzhen, the South China city of about 12.5 million people neighbouring Hong Kong.
The next stop is the digital transformation centre, an opulent building with marble floors inlaid with a floral pattern and a “million-dollar” chandelier hanging from the soaring ceiling. Between this and the perfectly manicured grounds, where workers in straw hats sweep the grass for stray leaves, it’s easy to believe the revenue figures in Huawei’s annual report. (It releases one even though it is a private company that it said is owned by employees.)
The building’s entryway is followed by a showroom heavy on the technical merits of products used for smart cities, oil and gas, transportation and data centres. One screen shows a map of every surveillance camera in Shenzhen — which is experimenting with smart-city technology— that Huawei said has lowered the unsolved murder rate to zero and helped prevent a child from being kidnapped.
Yet for a company touting the benefits of its surveillance gear, it appeared less comfortable with cameras pointing its way. A representative pressed a switch to hide the camera map when reporters started photographing the screen.
That’s more than just Huawei. This is just a western bias against China
a Huawei spokesman
Minutes into the tour, a Huawei spokesman who said he wasn’t allowed to be named for the article, stated that most media outlets have a bias against the company. This is challenging for Huawei, he said, because it was never structured to respond to media requests coherently across the organization for cultural reasons.
He explained that DengXiaoping, who brought free market reforms to China 40 years ago, encouraged companies to be internally focused to avoid attracting hostility after hundreds of years of isolation.
“That’s more than just Huawei. This is just a western bias against China. That goes back culturally,” he said. “The country and the company all need to learn how to tell a better story. This is why I’m now able to talk to you.”
As an example of the bias Huawei wants to counter, the spokesman pointed to a U.K. National Cyber Security Report that came out last summer. The report recommended improvements to Huawei’s practices, but he said the media used loaded words in headlines that stated the U.K. “slammed” the company.
The tour took place days before the U.K. released a new report on its Huawei Cyber Security Evaluation Centre, the oversight facility set up to test the company’s gear for vulnerabilities. It revealed “serious and systemic defects in Huawei’s software engineering and cybersecurity competence.” The report said the U.K. security system could only provide limited technical assurance for the equipment, but it “does not believe that the defects identified are a result of Chinese state interference.”
In a statement, Huawei said it takes the U.K. concerns seriously and plans to spend an initial US$2 billion to transform its software engineering capabilities. (The U.K. also chastised the company for failing to reveal details about said plan.)
But Huawei realizes it needs to raise its voice if it wants to convince European players to buy its gear, especially if it wants to counter the security concerns raised by the U.S. and a variety of security officials in other countries, including Canada.
The company is also not afraid to flex its muscles. For example, the spokesman cast doubt on experts who pop up to criticize Huawei’s security, and also pointed out there are commercial interests at play, citing Canada as a “prime example.”
Two of the big three operators (Bell and Telus) use Huawei gear while Rogers Communications Inc. uses Sweden’s Ericsson. (Rogers has used Huawei gear in the past, but is replacing it.)
If the Canadian government bans Huawei, Rogers is the only operator that won’t face substantial costs. Telus chief executive Darren Entwistle told investors the cost would be material, whereas BCE’s George Cope said costs could be addressed within its capital spending outlook.
“If you’re operator one, and I can put either a huge or an astronomical cost on my competition, why not?” the spokesman said.
A giant awakes
Ren Zhengfei, a former military engineer, started Huawei in 1987 with 21,000 renminbi (about $4,200) shortly after DengXiaopingdeclared Shenzhen, then a fishing village of about 30,000 people, a special economic zone with more market freedoms.
Huawei’s growth mirrors Shenzhen’s. In the 1980s, only a tiny fraction of government officials had phone lines and state-owned phone companies were only expanding in the biggest cities. Ren took on the rural markets. In 1991, he decided to focus on research and development, producing the company’s first switch in 1994.
The technology wasn’t the best, but Huawei became known for its customer service and willingness to tailor products to customer needs. For example, when rats kept destroying cables, other equipment vendors told their customers to get rid of the rats. Huawei made rat-proof cables.
Huawei landed its first major European client (Dutch mobile telecom Telfort KPN) in 2004. It then signed British Telecom and Vodafone in the U.K. in 2005 and now has built more than 1,500 networks around the world.
It also built a base station on Mount Everest in 2007 and its equipment was used in 2009 in the one of the first LTE networks with Telia Sonera in Norway.
Europe clearly made an impression on the founder. Huawei recently completed a new campus with 12 sections modelled after European cities, including Paris and Burgundy, copied down to the statues. A bright orange, electric train connects the sections at the campus designed for 24,000 workers, with company-chartered buses lining up to take them home around quitting time at 6 p.m.
Today, after three decades of explosive growth, the one-time startup is the world’s largest telecommunications equipment manufacturer, employing nearly 188,000 people and operating in more than 170 countries and regions.
4G was the first time Huawei showed it could compete with the best
It also sold more than 200 million smartphones in 2018, making it the third-largest smartphone provider less than a decade after entering the device market in 2011. Its consumer business grew 45.1 per cent in 2018 to account for nearly half of Huawei’s revenue (US$51.9 billion). Its carrier business, however, fell 1.3 per cent to about US$43.8 billion.
Huawei has undergone a series of major growth spurts as mobile services ramped from 2G to 3G to 4G, said Leroy Blimmeger, global president of assurance and managed services, in a presentation on the company’s trajectory and culture.
There’s a perception that Huawei’s gear is the cheapest and least effective, but that hasn’t necessarily been true since the shift to 4G.
Historically, Huawei’s lower price point gave it a foothold in emerging markets. But by 2009, carriers in developed countries realized Huawei provided good service at a competitive price, said Dexter Thillien, a London-based telecom analyst at Fitch Solutions.
“4G was the first time Huawei showed it could compete with the best,” he said.
The higher quality also enabled the company to compete in Chinese cities where western companies previously dominated. Now the country’s three largest mobile players (China Mobile, China Unicom and China Telecom) use multiple vendors including Huawei.
Thillien and other analysts place Huawei in the lead when it comes to 5G, citing its massive investment in research and its large patent portfolio. Every year, Huawei invests 10 to 15 per cent of its budget in R&D whether or not it was a good year financially. Forty per cent of its employees — about 75,000 people — work in R&D.
In Huawei’s material lab in Shenzhen, one scientist explained how they experimented to find the least corrosive, lightest material to enable radio access equipment to operate in unforgiving climates. The goal is to expand the life cycle of 5G equipment to 10 years, the average span before a telecom replaces its gear.
Huawei’s new systems are light enough that one person can position the antennae and equipment that may have previously required a crane, said Peter Richardson, research director at Counterpoint Research and former head of competitive intelligence at Nokia.
The company also tweaked its radio access gear to allow for 5G downloads and 4G uploads, Richardson said, another adjustment that will enable carriers to roll out networks faster. He, too, credits the developments to Huawei’s bigger engineering work force and R&D budget.
Still, Huawei operates under the premise that it does not have a sustainable technical or resource advantage — if the bar is raised, its peers catch up, and no one has a monopoly on hiring talent — but Blimmeger, who has worked with Cisco Systems Ltd., Motorola Inc., Nortel Networks Corp. and Ericsson, said “there’s nobody that does customer centric the way Huawei does customer centric.”
The American, who started consulting for Huawei in 2005 and became the first non-Chinese professor at Huawei University, said it’s also part of Huawei’s DNA to remain humble and fear becoming arrogant. In the late 1990s, management felt it didn’t have the global expertise needed to expand, so it hired western consultants from International Business Machines Corp. and Accenture.
The willingness to invest in improvement resulted in opening a university in 2005 where, for $50 million annually, 75,000 employees rotate through to update their skills. There’s even a “strategic elite team” for 5G.
Both Thillien and Richardson said a Huawei ban would be disruptive, potentially causing delays as carriers move forward with other suppliers. But Thillien said the biggest loss would be a drop in competition to two major suppliers from three, giving operators less choice and stunting the race for quality.
Analysts believe security concerns are valid, but note a lack of foolproof evidence to back a ban.
To indicate how seriously Huawei takes breaches, it set up an internal ethics website where it names any employees that break a rule, along with their ID numbers, what they did, and what the consequences were. There are currently 189 people on the list, which covers a period of years. Every month to six weeks, the ethics board email blasts the entire company with an updated list.
“People who have broken the rules become famous because everybody in the company, in their inbox, is made aware of this. That provides a very powerful deterrent,” a spokesperson said.
Blimmeger said there is a very high bar for conduct when it comes to cybersecurity and privacy protection.
“Anybody that breaks those rules is automatically terminated,” he said, claiming Huawei’s standards are industry leading. “We’ve always had to pay more attention than our peers in the industry just to keep the playing field level.”
Previous rule breakers who lost their jobs include an employee in Poland who Huawei fired in January after he was arrested on spying charges (Huawei in a statement at the time said the allegations had no relation to the company and the worker has denied the charges), and two employees in the U.S. accused of stealing trade secrets from T-Mobile US Inc. in 2012.
Huawei’s cybersecurity lab employs 137 people, many of whom have foldable mattresses under their desks should they need a nap. Their motto, as shown in a presentation: “Assume nothing, believe no one, check everything.” Indeed, reporters on a tour weren’t allowed to bring their laptops inside for security purposes.
The lab workers sift through Huawei’s products to ensure coding meets standards. If it doesn’t, the director can veto the product. In 2013, 58 products were vetoed. That dropped to zero in 2017 and 2018, which Huawei credits to improved security practices across the organization.
Huawei also shares its source code with governments that want to take a deeper look before allowing its gear in their networks. In Canada, Huawei tests its equipment in partnership with Bell, Telus and Saskatchewan Telecommunications Holding Corp., alongside the Communications Security Establishment, the national cryptologic agency.
Huawei said adopting industry-wide security standards would ease concerns and level the playing field in the evolution to 5G, given these networks will touch life-critical functions such as health care and self-driving cars.
“It’s time that we come together as an industry to get working with regulators, to get working with governments to build a common standard to say if you want to play in this space, this is what you have to do,” Blimmeger said.
The pitch for 5G
Telus, for one, is considering Huawei equipment in its 5G networks. Huawei is the most customizable vendor, according to a senior Telus executive who spoke on condition of anonymity. He likened buying from Huawei to going to a hamburger restaurant where you can pick the toppings versus going to McDonald’s, where Big Macs are made the same way every time.
Besides, switching from Huawei — its competitors are Ericsson and Nokia, with Samsung a distant fourth — would require an expensive rip and replace because 5G gear from other vendors isn’t compatible with Huawei’s existing 3G and 4G equipment.
But that doesn’t mean Telus trusts Huawei.
“I don’t think we trust anybody,” the executive said. “We’ve operated for a long time on the basis you can’t trust vendors to have secure equipment.”
Telus adopted that mentality about a decade ago when globalization permanently altered supply chains. Previously, western giants such as Canada’s Nortel and France’s Alcatel provided telecom gear, especially in their own backyards. But a wave of bankruptcies and industry consolidation made room for Huawei to expand its global footprint.
It was during this industry-wide shakeup that Huawei entered Canada in 2008, though its entry came with conditions. For example, its equipment was not to be used in core networks, only on the less sensitive radio access portions. The federal government and the telecoms also set up a system to test its gear for vulnerabilities, a system that operated largely in secret until last year when the government disclosed its existence in response to questions about Huawei’s presence in Canadian networks.
Canada was one of the few countries that acknowledged the risks and did something about it, the Telus executive said.
“We believe we have had the right formula from the beginning,” he said. “I think that those that believe their networks can be secure by choosing a European vendor over a Chinese vendor are ignoring the problem.”
Telus obviously has a financial interest in lobbying for the use of Huawei’s equipment in Canada’s 5G network. It wants to continue the system where the company’s equipment is allowed in the periphery, but not in the core. The Communications Security Establishment and Public Safety Canada are in the midst of a 5G security review that is expected to be released in the coming months.
Regardless, Telus believes companies need to manage risk upfront in the network engineering and architecture process no matter who supplies the equipment.
Ericsson and Nokia both conduct research and development in China. Ericsson employs more than 12,000 people in Northeast Asia and is hiring for 5G in China, while Nokia has 54 offices in Mainland China, Hong Kong and Taiwan, according to their websites.
Presumably, the Chinese law that compels Chinese nationals to cooperate with the Communist Party would apply to citizens whether they work at Huawei or its western-based competitors.
“What difference does it make? To me, the risk is the same,” the Telus executive said.
But to many governments, there is a difference that boils down to a lack of transparency over Huawei’s ownership structure and relationship with the Chinese government. Australia and the U.S. have banned Huawei, and there’s uncertainty in Europe, although nations such as Germany, Italy and France appear to be leaning towards Telus’ viewpoint.
Huawei knows its denials are getting repetitive. It swears it has never, would never, spy for the Chinese government. It said it follows the rule of law wherever it operates, blaming any suspected bad behaviour on rogue employees. Yes, its founder used to be a military engineer, but it insists it’s not linked to the Communist Party.
Yet no matter how many times it repeats itself, Huawei can’t seem to shake suspicions that it’s an arm of the state, that its high-tech equipment might contain back doors that would let the Chinese government conduct espionage or insert code that could shut down an entire network.
Counterpoint’s Richardson suspects the political drama and resulting business uncertainty took Huawei by surprise.
“They’ve been a little naïve perhaps … all these political shenanigans are not something that they’re used to,” said the 27-year veteran of the telecom industry. “It’s the old chestnut that it’s impossible to prove a negative. They can say till they’re blue in the face, ‘We’d never share information with the Chinese government.’”
Back in the boardroom in Shenzhen, reporters sit across from rotating chairman Eric Xu — also an engineer — at tables adorned with orchids and roses, and beneath a sign stating, “Huawei warmly welcomes the distinguished guests from Canadian media.”
Xu returns to the example of murder and the need to rely on the past to convince people of future behaviour.
“You can only explain I haven’t killed anyone in the past and I can guarantee I will not kill in the future because of my heritage, because of my legacy, etcetera,” he said. “That’s probably the only thing we can do moving forward for Huawei.”
Xu said he appreciates the cybersecurity approaches taken by countries such as Germany, which tests the entire system for vulnerabilities instead of just one player’s equipment in it.
He also praised Canada for its universities, talented students and natural beauty. He approved Huawei’s first research centre here, and brought his family on a tour of Banff and Lake Louise, Alta. He also visited tiny Gravenhurst, Ont., the hometown of Norman Bethune, the physician credited with bringing modern medicine to rural China who still graces the pages of elementary school textbooks in the country.
But it’s hard to overcome the heavy security concerns about Huawei’s equipment with light praise about a cherished friendship between the nations.
Despite the engineering realities of network security, Xu knows he needs to keep pleading his case.
Are U.S. networks, he asks, completely secure because Huawei has no footprint there? If Huawei disappeared completely, he continued, would all the world’s networks be secure?
The answers to both questions is no. But unfortunately for Huawei, skeptics aren’t always swayed by a technical argument, no matter how defiantly it’s made.