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The Huawei Question

Rajeev Srinivasan worked at Bell Labs and in Silicon Valley for many years. He has taught innovation at several IIMs and writes widely on the impact of technology on society
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Should India keep the controversial Chinese company out of its telecom sector?

Innovation and technology leadership are at the heart of the US-China dispute. Trade deficits and tariffs are the smokescreen behind which the US intends to ‘contain’ China’s rise as a technological powerhouse. The US can do this today, but down the road it might be too late: hence the urgency, before ‘Made in China 2025’ propels that country to leadership in the industries of the future, thanks to focused efforts, but also thanks to widespread theft of intellectual property.

India must learn from the show of resolve by the US. Incidentally, US President Donald Trump can take credit for making this a bipartisan issue. After years of dithering and mealy-mouthing about China, the US is drawing a lakshmana-rekha, announcing that it will protect its own interests.

India should exert its own buyer power, for India-China trade is equally unbalanced and getting worse in China’s favour. We can learn at least three things from the recent episode where Canada arrested Chinese telecom giant Huawei’s CFO Meng Wanshou for extradition to the US for allegedly violating sanctions regarding Iran. (As I write this, she has been freed on $10 million bail, and China has arrested two Canadian citizens in apparent retaliation).

The Iran sanctions violation by Huawei is not a concern to India (although India does have other issues related to its own Iran trade). However, India must first view Huawei with suspicion on other fronts, particularly on forecasts that they may become dominant in 5G, and on persistent concerns about potential siphoning off of critical data.

Second, India must step up its game to take advantage of opportunities thanks to the ‘Thucydides Trap’. Can its strategic goal be articulated better? How can it become a major industrial power? The much-hyped ‘Make in India’ isn’t quite cutting it. Vietnam, Singapore, Malaysia, etc. are capturing the companies fleeing China in the wake of Trump’s tariffs on Chinese-made products.

Third, Trump did a Sun-Tzu-style power-play on China. That nation has been in the habit of blind-siding others and humiliating them (causing them ‘loss of face’) as a tactic to force concessions. Trump did exactly the same to them, and it is instructive to note that the retaliation, at the moment, is against poor Canada, and not against the US.

Is Huawei a concern?

China has the world’s largest mobile market, and India has the second largest (and fastest growing). Therefore India should be concerned about the evolution of 5G standards. In 4G, India has been a passive consumer of standards, with little influence over them. China, on the other hand, was active in setting 4G standards, which is not incidental to the rise of Huawei.

From a technology standpoint, 5G is a game changer, as networks will no longer be primarily about human-to-human communication, but far more about machine to machine communication. Billions of Internet of Things (IoT) devices will begin to talk to each other, largely without human supervision. There will be positive outcomes (eg. smart agriculture with sensors that optimize water, fertilizer and pesticide consumption), but also negative outcomes (eg. hacking and capture of transportation networks, utility grids).

No country would therefore want 5G to be in the hands of a foreign power, especially one as dangerous as China. Observers allege that Chinese companies such as Huawei and ZTE have left open ‘trapdoors’ in their systems that would enable snooping on network traffic and possibly ‘kill switches’. This is a potential national security catastrophe.

Huawei has 80,000 engineers working on 5G with a clear intent to dominate the technology. That’s one source of worry about Huawei. Some accuse Huawei of being an extended arm of the Chinese government, albeit with the trappings of a private company. It has an opaque shareholding structure, and its founder Ren Zhengfei was a former Chinese Army general. (Incidentally the arrested Huawei CFO is his daughter.)

In addition, competitors complain of predatory practices. As early as 2012, a ‘60 Minutes’ episode on US TV network CBS  (this video is not currently available online) implied that Huawei had stolen IPR and trade secrets from Cisco and employees from Motorola. Both companies sued and settled out of court with gag orders.

Other experts suggest that Huawei in essence eviscerated Canada’s Nortel, a formerly dominant telecom network equipment provider, by stealing its intellectual property wholesale. Nortel, once a giant accounting for 33% of the total value of the Toronto Stock Exchange, declared bankruptcy in 2009. In contrast, Huawei has emerged as the leader in the telecom equipment market at 28% of globally revenues, handily outstripping erstwhile leader Ericsson.

What else explains Huawei’s meteoric rise? Some industry observers say it is innovative, and provides good value at relatively low cost. There may also be hidden subsidies. With these, and no doubt a nudge from the often mercantilist Chinese government, Huawei has penetrated markets worldwide.

Its first big break came when British Telecom signed a major deal in 2005, but BT recently announced that it was stripping Huawei systems out of its core network. British Intelligence head Michael Younger questioned the level of Chinese equipment in networks, and warned about cyberwarfare especially with Russia . On December 11th, a US National Security Agency officer, Rob Joyce, noted that there were increasing Chinese cyber-attacks on the US.

Following the principle of being prepared for all eventualities, these anecdotes and concerns suggest that Huawei’s equipment should not be used. The US, New Zealand, Australia, and Japan have all decided to exclude Huawei, and ZTE, from their 5G networks.

This brings up the question of what India should do. Huawei has a sizable engineering presence in India, as well as a significant market share of smartphones sold. Following in the footsteps of the US and allies, should India preemptively block Huawei sales into its 5G network (and even 4G and 3G)? Especially given concerns about cyber-security, this may not be a bad idea.

Stepping up to the Thucydides Trap challenge

Professor Graham Allison of Harvard popularized the idea of the ‘Thucydides Trap’. Citing historical parallels, he suggests that when a rising power and a declining power compete, the antagonism between them may lead to war. In the case of the US vs. China, we are at that point. Trade war now, quite possibly a shooting war in future. Both of them are trying hard to round up allies and partners.

India should not join either of them overtly, but attempt to play them off against each other. There are several good reasons. India, simply by continuing to grow at its current rate, will shortly become the 3rd largest economy in the world. Just as China leveraged its economic muscle into military muscle, India will perforce do the same. Navy Chief Admiral Sunil Lanba suggested that 56 new ships, 6 submarines, and a 3rd aircraft carrier, will be inducted into the Indian Navy in the next decade

Military might should not be confined to just patrolling the Indian Ocean, and making occasional forays into the South China Sea and the Western Pacific Ocean. There should be a conscious strategic intent to create a G3. There is no reason why it should only be a G2, with the US and China being superpower and superpower-wannabe. India needs to imagine itself as a third pole, and work towards that objective.

‘Strategic Intent’ as articulated by the late C K Prahalad consists of imagining one’s place in the world in future, and assiduously building up one’s capabilities to get there. India must clearly articulate its rise to the G3 and communicate that to its own people, who are still stuck in a mindset of India being one among the motley crew of ‘Third-World Nations’, thanks to the unrelenting propaganda in India about the alleged glories of the Non-Aligned Movement.

There is a tendency to think of India as an also-ran in a world dominated by the US, China, and Russia. That’s no longer true. Russia is obviously a has-been. Despite nuclear weapons, and the history of the Soviet Union, it is declining. It faces a demographic collapse, and once hydrocarbon demand falls, its economic power will also diminish. However, India still has a large amount of military hardware from Russia, and needs to maintain good relations. But that does not mean we should kowtow to them as we did in the good old days of the US-Soviet Cold War.

China has peaked too soon. With Deng Xiaoping-style stealth and pragmatism, it was able to set aside imperial pretensions and focus on economic growth. With Xi Jinping’s hubris, the rest of the world is now fretting about China’s further rise. They may find that continued economic growth does not materialize. Today’s trading partners may turn hostile, and there might be a migration of manufacturing away from China, although it must be acknowledged that the electronics supply chain around Shenzhen appears impregnable.

Still, companies are now working on Plan B in case China becomes the target of serious embargoes (as seems likely: let us remember that ZTE was saved from bankruptcy only because Trump relented). The Wall Street Journal reported, for example, that Samsung is closing its mobile phone plant in Tianjin, China, that currently supplies a third of demand, and moving production to India and Vietnam.

Unfortunately, there is no mass exodus of factories to India. This is where India needs to step up and invest in manufacturing and transportation infrastructure as well as R&D and innovation to supplant China in a selected few industries. Of these, electronics, AI, and biotechnology probably are the low-hanging fruit. The lack of semiconductor know-how is handicapping China now; the same is true for India.

Even the US is no longer invulnerable. Given its profligate ways, its many wars, its neglected infrastructure, and increasing inequality, as well as the growing backlash its technology titans now face on account of privacy issues, it is no longer a given that the US will always remain #1.

India will, shortly, overtake Germany and Japan to be the world’s #3 economy. It is not any longer out of the realm of possibility -- even though I acknowledge it is a long shot -- that in twenty years India can overtake both China and the US to become #1. That would be an appropriate strategic intent indeed. And that is not pure fantasy: see how far China has come in thirty years. This could be Non-Alignment 2.0: where India, as one of the poles, tries to gather friends and allies, starting with Vietnam, Japan, Indonesia and Australia. The Quad 2.0 is a beta test.

Bullying, tit-for-tat, and imposing ‘loss of face’

China is a bully, to not mince any words. Its tactics coerce: it demands obedience and obeisance to itself from lesser powers. In The China Order: Centralia, World Empire, and the Nature of Chinese Power, Georgia Tech’s Fei-Ling Wang suggests that “the Han Empire managed to complete the construction of the Qin-Han Confucian-coated Legalist polity as a world empire order, the China order, to govern the whole known world (tianxia). This tianxia Mandate of Heaven is an officially constructed and indoctrinated Chinese ‘culturalism’ or ‘imperial’ universalism… It is based on ruthless uses of force and ruses...”

Tianxia plays a large part in Xi Jinping’s world view: here are his words at the recent 19th Congress of the Chinese Communist Party “Building the Belt and Road… is in keeping with the Chinese people’s caring for distant peoples, and the tianxia concept”.

China views itself as the Middle Kingdom, the natural hegemon destined to rule and accept tribute from all the barbarian vassals. But there is also a nagging suspicion that its claims are not quite so easy to impose on powerful nations. Therefore they have a track record of typical bully behavior: they terrorize the weak, but kowtow to the strong. They also keep trying self-serving narratives and claims until there’s pushback, and which point they backpedal. If confronted with powerful force, they withdraw rather than ‘lose face’.

A corollary to this technique is the deliberate humiliation of those China is in negotiations with. We have seen this time and again in relation to India. When Xi Jinping last came to India on an official visit, there was also a simultaneous large incursion into Indian territory by Chinese forces. Despite official denials blaming local generals, there is no doubt that this was fully blessed by Xi himself, as a tactic to keep India off balance.

There are numerous other instances. One striking example was when Atal Bihari Vajpayee, then foreign minister, was on an official visit to China in 1979. The Chinese chose to invade Vietnam right then; if I remember right, Vajpayee cut short his visit and returned to India. The message was unmistakable, and it was not lost on anybody.

In a small way, India paid them back in the same coin. While the Doklam stand-off was at its height, there was news (denied in India) about a deal selling the powerful Brahmos missile to Vietnam. That was probably a routine denial, as it would make all sorts of sense for India to sell the missiles to Vietnam.

Now the Americans have taken a leaf out of China’s playbook. Xi has ‘lost face’ in a big way as a result of the arrest of the Huawei executive at exactly the same time that he was in trade negotiations with Trump at the G-20 summit. The Americans deny this, but the near-simultaneous acts -- on the one hand, apparently serious trade talks, and on the other hand, an assault on China’s technology crown jewels -- were almost certainly not accidental.

Can the US hurt Huawei? It probably can, as something like 33 of its top 92 suppliers are US companies, whose technologies the company may be hard pressed to find elsewhere. While not as vulnerable as ZTE (which would have ceased operations if the US hadn’t lifted its embargo at the last minute, apparently as a personal favour by Trump to Xi), Huawei would be seriously affected by an American denial of components.

The Chinese response has been extremely instructive. Instead of taking its anger and frustration out on the US, it has been berating Canada (which, being smaller, is more vulnerable to Chinese pressure). It has detained two Canadian citizens. The lessons are clear: where it can get away with bullying tactics, China will use them. Elsewhere, or with someone it fears, China is far more conciliatory. India, decades after 1962, has still not internalized this message: only strength works with China. Supplication invites contempt.

In 1847, Robert Montgomery Martin, a British official, wrote these prophetic words in China: political, commercial and social; in an official report to Her Majesty’s Government: “If then we find, that in the intercourse of China with foreign countries for more than 2000 years, submission has been received with arrogance, and quiescence rewarded with oppression, that resistance has been treated with respect, and force alone procured concessions to justice, we have a guide, when pursuing an upright course of policy, for our conduct towards China.” Nothing has changed in 171 years. India would do well to heed Martin.