Wednesday, October 10, 2012

Thinking About Huawei

I'm not generally a fan of public hearings on Capitol Hill, as they most often serve as political grandstanding platforms for ambitious Chairs and senior members of committees. Just think about mortgages, housing and the financial crisis, and I rest my case.  The Report of the House Permanent Select Committee on Intelligence on Huawei raises interesting questions in several areas we've considered in this blog, e.g. foreign policy, trade policy, national security, enterprise risk management, and corporate governance. 

Here's my first question. We are home to several global leaders in telecommunications equipment, including Cisco and Juniper.  In Europe, we have Ericsson, which has a long history of innovation and proven products in telecom equipment, as well as Alcatel-Lucent, which also has a history of doing business with U.S. carriers and is itself a product of a cross-border merger with a U.S. company.  Alcatel-Lucent, is in a weak financial position, which is something to be taken into account for future business orders, but let that pass for a moment.

Why on earth would U.S. corporations, particularly public ones, be considering switching to a unproven vendor like Huawei?  For telecom equipment, it would have to be cost, performance or innovation.  We already know from data center equipment ordering that pure, unadjusted cost dollars rarely carry the day for IT purchasing.  Shrink-wrapped banks of generic servers may be inexpensive as a stand-alone purchase, but the IT executive building the data center won't get any kudos for saving a few bucks if the system suffers downtime or outages.  The project has to be looked at as a whole. 

The other, missing piece could be innovation, and I confess to not knowing what the issues are first-hand. According to one industry analyst,
"Just as a point of clarification, the (House Permanent Select) committee focused primarily on the communications equipment used for service providers to build out 4G wireless networks, for which there are no viable U-S.-based options."
Does this mean that there are no non-Huawei options, or does it mean that there are European options?  In any case, this argument needs to be fleshed out, and the customers are the ones to ask. 

Trade, economics and industrial policy are inseparable, foundational tools of Chinese foreign policy.  Chinese companies are nowhere near as transparent as Western public companies. Indeed, the Permanent Select Committee's investigations were hampered by this issue, according to their report.
"Despite hours of interviews, extensive and repeated document requests, a
review of open-source information, and an open hearing with witnesses from both
companies, the Committee remains unsatisfied with the level of cooperation and
candor provided by each company. Neither company was willing to provide
sufficient evidence to ameliorate the Committee’s concerns. Neither company
was forthcoming with detailed information about its formal relationships or
regulatory interaction with Chinese authorities. Neither company provided
specific details about the precise role of each company’s Chinese Communist
Party Committee. Furthermore, neither company provided detailed information
about its operations in the United States. Huawei, in particular, failed to provide
thorough information about its corporate structure, history, ownership, operations,
financial arrangements, or management. Most importantly, neither company
provided sufficient internal documentation or other evidence to support the limited
answers they did provide to Committee investigators."
So, let's switch to the viewpoint of a public company.  If the company is looking at adding Huawei to their approved vendor list, would the purchasing, finance and internal audit functions feel comfortable with the level of documentation?  Kick it upstairs to the enterprise risk management function.  How would they weigh risks to the company's data, IP or other key assets? 

Great Britain has taken to a a peculiar system of third party verification of these issues through a jointly funded certification of Huawei systems within a larger installation.  Australia has chosen to exclude Huawei from being a vendor in its national broadband expansion project. 

Overall, it seems, at best, that there may be marginal benefit for a potentially expensive downside for sensitive telecommunications infrastructure.  Why even go here?

Cisco has already locked horns with Huawei over its alleged unlawful use of Cisco's  IP for a routing protocol.  The litigation was settled in Cisco's favor, but terms of the settlement remain confidential.  This issue dates back to 2003-2004. 

Chinese mass markets for products as diverse as automobiles and personal computers will remain protected by non-tariff barriers.  These are choices of Chinese national policy and serves their economic and foreign policy  interests. We should look to our interests in the sensitive field of telecommunications equipment with a full cost-benefit analysis for our interests and security.

The House committee has moved its recommendations to the Executive branch, which it rightly should do. The Federal government should take the House committee's work deeper, using its competencies in intelligence, defense, and IT systems.  There's no need to rush to judgment on these critical decisions.

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