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How Chinese Theft Becomes a Global Menace

Jan. 8, 2019: Despite political controversy, Huawei attends the 2019 CES exhibition in Las Vegas, promoting its leadership role in advancing 5G cellular technology. James Mattil/Shutterstock

Huawei Technologies, the Chinese telecom equipment manufacturer, will almost certainly try to negotiate a settlement with the U.S. Justice Department, which announced criminal charges against the company late last month. As many have pointed out, China’s most well-known and important tech business would be better off agreeing to a plea arrangement.

Yet what’s good for Huawei is not necessarily good for the United States. Washington’s better move would be to forgo plea negotiations, go to trial, and seek the maximum penalties, even if that means the company goes out of business. The U.S.—and the world—would be better off with one fewer criminal enterprise whose operations are directed by a hostile power.

On January 28, Acting Attorney General Matthew Whitaker announced that a grand jury in the Eastern District of New York had returned indictments against Huawei; Meng Wanzhou, its chief financial officer; an affiliate in Iran; and a U.S. subsidiary for 13 Federal crimes relating to Iran sanctions.

He also unsealed indictments handed down by a grand jury in the Western District of the State of Washington against two Huawei affiliates for 10 Federal crimes relating to the theft of the intellectual property of T-Mobile. Huawei employees surreptitiously dismembered Tappy, a T-Mobile robot, and walked away with its arm.

Allegations of intellectual property theft have continued to dog Huawei from its first days. Cisco Systems was one of the first victims. The American tech giant in 2003 sued Huawei for the theft, among other things, of source code for routers.

The two companies settled in 2004, but controversy erupted in 2012 when Cisco aired extensive complaints against Huawei after the Chinese company had publicly denied wrongdoing. Then, Cisco revealed that Huawei had copied verbatim not only source code but also command line interface, help screens, and copyrighted manuals.

Cisco was not the only target. In 2008, Motorola sued former employees for divulging trade secrets to Huawei. Two years later, Motorola amended its complaint to allege that these secrets were in fact shared with Huawei’s founder, Ren Zhengfei. Eventually, the suit was settled.

Moreover, Huawei was the target of an FBI sting operation after it clearly—and blatantly—violated its agreement with the Illinois-based Akhan Semiconductor in what was almost certainly an attempt to illegitimately appropriate the secrets of Miraj Diamond Glass, a new type of cellphone screen.

And as Network World writes, “Many say that Huawei stole everything from Nortel.”  

Huawei is trying harder to take tech than develop it, maintains Anne Stevenson-Yang of Beijing-based J Capital Research. “Virtually the entire Chinese bureaucratic apparatus has been mobilized to support Huawei,” she writes in a research note issued this month.  “And, given the way top Huawei executives have dissembled in order to support a cut-and-dried theft of IP, one begins to wonder whether the company’s whole mission might be to acquire foreign technologies under the cover of an independent global conglomerate.”

When a company acts “like a pirate on the high seas, abiding by no laws but its own”—the characterization of Huawei by the Heritage Foundation’s James Jay Carafano—it’s clear the U.S. has good reason to force the company out of existence. As Carafano writes on FoxNews.com, it looks like Huawei is “deeply engaged in economic warfare.”

There have been concerns in Western capitals that Beijing can use Huawei equipment embedded in networks to capture data. The damage from spying is magnified by the building out of 5G networks across the planet, now underway.

The fifth generation of wireless communications will exponentially increase data carried—and the power of those who supply network equipment. The State Department’s Rob Strayer has been warning U.S. partners that China, if it ends up controlling 5G, could steal “trillions” of dollars of intellectual property, insert malware, and shut down networks.

Anxiety about Huawei equipment is not theoretical. Beijing for five years, from 2012 to 2017, secretly took data using “backdoors” in Huawei equipment installed in the new African Union headquarters, which China donated to the organization.

Huawei—in other words, China—is leading the world in the 5G race. So far, the company has contracts to supply or test 5G equipment in more than 60 countries. And this year will be crucial, because many 5G contracts will be negotiated in the coming months. “The generational nature of 5G, the transformational nature of it means there will be a whole generation of lock-in,” Strayer warns.

So will the world end up with a Chinese criminal enterprise dominating the global telecommunication networks? Beijing will soon be asking President Trump to go easy on Huawei, perhaps next month when he meets Xi Jinping, the Chinese ruler, as rumored. Trump once acceded to a similar request. He ordered the Commerce Department to grant a reprieve to Huawei’s cousin, ZTE, China’s second-largest telecom equipment manufacturer, after it was caught violating America’s Iran and North Korea sanctions.

In March 2017, ZTE reached a plea deal with the Justice Department, which the company quickly breached. In April of last year, the Commerce Department imposed a seven-year ban on transactions with ZTE, which was considered a “death sentence” because it was critically reliant on Qualcomm chips and Google’s Android operating system. The Trump administration, however, granted a reprieve in July.

As a part of the July settlement, ZTE pledged to comply with U.S. export restrictions. Senators Marco Rubio and Chris Van Hollen in November charged that ZTE violated the July agreement by installing Dell Technologies equipment in Venezuela. ZTE, therefore, has now broken at least one and probably two settlement agreements with U.S. authorities.

Our sad history with ZTE suggests Chinese officials, who apparently direct the operations of that nominally “private” company, will not work with Washington in good faith. On the contrary, they will pocket concessions and continue to advance their malign goals.

And that brings us back to Huawei. The Chinese foreign ministry called the Huawei indictments an “unreasonable crackdown.” Peter Henning, a former federal prosecutor now at Wayne State University, told Bloomberg that Beijing will get involved in shaping penalties on the company. “This is where diplomacy comes into play,” he said.

“How much will the Chinese government allow?” Henning asked. “This isn’t your normal private company because the Chinese government has so much sway over Huawei, so it becomes a more delicate balancing act.”

“Balancing” is the last thing Trump should try to do. He attempted that with ZTE with unfavorable results, so he should not make the same mistake with Huawei. As Stevenson-Yang wrote in her research note, “Structural reform of institutions like Huawei and ZTE is unlikely.”

It’s unlikely because Huawei, like ZTE, is controlled by the Communist Party. Ren Zhengfei, who retired as a colonel from the People’s Liberation Army, last month said he loved China and supported the Party but “will not do anything to harm the world.”

That’s just not credible. No Chinese company is independent. Huawei, founded in 1987 and which claims to be “employee-owned,” could not have become the world’s largest manufacturer of telecommunications network equipment and the second-largest maker of smartphones on its own in such a short period, especially as it is based in a country notoriously hostile to the private sector.

Unfortunately, there is no compromise possible with that company. The United States, therefore, needs to vigorously enforce its laws to the maximum extent, even if that has dire consequences for the Chinese company or even the People’s Republic itself.

Huawei, whose name translates as “Accomplish for China,” will do what China demands. Huawei is China, and China has abused the American justice system far too often.

Gordon G. Chang is the author of The Coming Collapse of China. Follow him on Twitter @GordonGChang.

 

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