Inside the Controversial Company Helping China Control the Future of the Internet

BY CHARLIE CAMPBELL/SHENZHEN, CHINA  For Time Magzine

Dennis Honrud’s family has been farming wheat in eastern Montana for three generations. Unashamedly old school, Honrud sows only half his 6,000 acres, leaving the rest fallow to avoid soil depletion. “There’s not many of us left,” he laments. Like many workers in the global economy, the 68-year-old needs to stay connected, in his case to monitor crop prices and weather updates from his green John Deere tractor. So he asked a telecom provider to put a cell tower in his backyard.

The Honrud property in Glasgow, Mont., is so remote that it wasn’t well covered by any of the big four American carriers–Verizon, AT&T, T-Mobile and Sprint. So Honrud turned to the local provider, Nemont Wireless, to install the tower. Today, cell service is pretty good. When the occasional car accident happens on the stretch of highway next to the Honrud farm, highway patrol officers no longer need to drive a mile to get a signal. Now they can place a call from the scene. If that hasn’t saved a life yet, “at some point in time it will,” Honrud says.

But there’s a problem. Like around a quarter of the smaller “tier 3” carriers catering to rural areas like Glasgow, Nemont uses equipment provided by Huawei, the world’s biggest telecommunications-equipment company. The Chinese firm generated a mind-boggling $107 billion in revenue last year, selling equipment to customers in 170 countries and regions around the world. It also may be the most controversial company in the world.

The tower built by Nemont in Honrud’s yard in rural Montana. The remote property relies on Huawei technology for all its cell service

Huawei has long been accused of rampant theft of intellectual property (IP), selling U.S. tech to enemy states like Iran and North Korea and being a Trojan horse for the Chinese Communist Party (CCP). Its place as the world’s No. 2 smartphone maker–behind Samsung and ahead of Apple–was achieved despite Huawei handsets being shunned by the big four U.S. carriers out of security concerns. FBI Director Christopher Wray has accused Huawei of “pervasive criminal behavior” designed to “undermine our country’s place in the world.”

On May 15, the Trump Administration placed Huawei on the Commerce Department’s Entity List, meaning American companies require a special license to do business with it. Google began blocking Huawei from parts of its Android operating system in order to comply. U.S. chipmakers, which together sold some $10 billion worth of components to Huawei last year alone, were obliged to follow suit.

The Entity List is not only devastating for Huawei but also for any nation that uses its telecom equipment, given the firm’s reliance on American components. The move was always considered the “nuclear option,” says Samm Sacks, a cybersecurity fellow at the New America think tank who regularly briefs Congress on China policy. “This is not just crippling on Huawei as a firm, but crippling on the entire concept of global tech supply chains,” says Sacks.

Huawei got a temporary reprieve on May 20, when the Commerce Department announced a 90-day exemption. But the firm long ago began working on cutting out its reliance on U.S. materials, producing its own semiconductor chips and working on an alternative operating system to Android. Hu Xijin, editor in chief of China’s state-run Global Times, tweeted May 21 that the blacklisting was “a real turning point” for “U.S. semiconductor companies gradually losing [the] Chinese market.”

This tech cold war matters because it could slow down or dramatically alter the rollout of a technology that is likely to define the future of the Internet for the next decade–the 5G networks in which Huawei has all but cornered the market. The race to roll out 5G is the most consequential fight for global technological supremacy since the U.S. battled the Soviet Union to put a man on the moon. The winner will take home billions, if not trillions, in profits and gain a powerful seat at the table in creating the infrastructure for the next billion Internet users. And right now, it looks like the U.S. is losing.

Huawei technology on a Nemont cell tower outside Scobey, Mont. Benjamin Rasmussen for TIME

The fifth generation of network technology arrived in the U.S. on April 3 in Chicago and Minneapolis. It would have been a banner day for American IT infrastructure, were it not for the fact that citizens of Hangzhou, Shanghai and Wuhan had all been enjoying experimental 5G networks for months. In Fangshan, autonomous vehicles are already using 5G to transmit data to one another to avoid collisions.

China’s edge in 5G is disorienting for the U.S., which is used to dominating new technology and the economic growth that accompanies it. If the U.S. lags in 5G, does it lose the opportunity to birth the next Amazon, the next Netflix, the next Uber? Up until now, the status quo has been that American tech companies innovate while Chinese companies duplicate, but that has much to do with infrastructural advantages in the U.S., along with world-class universities and easy access to capital. What does it mean if the U.S. doesn’t have that advantage? What if the next Apple or Microsoft–trillion-dollar giants that alter the global landscape with every decision they make–comes out of China?

5G means a lot more than just another bar on your cell phone. The hop from 3G to 4G meant we went from being able to read an article on our phones to being able to stream a movie. But the leap from 4G to 5G will mean an exponential rise in download and upload speeds across every Internet-connected device you own, the ability to connect those devices to a single network easily and the ability to off-load computing to the cloud. It’s not only the most significant shift in computing since the smartphone, it will also enable huge advances in industries like automated vehicles (see box, right).

The advent of 5G means practically everything with a chip will be tethered to a wireless network, which brings with it enormous geostrategic implications if a Chinese company is responsible for building those networks. The 5G infrastructure will intertwine factories, power plants, airports, hospitals and government agencies. If it comes under a broad, sustained attack, it “would mean a total collapse of society,” warns professor Lim Jong-in of the School of Information Security at Korea University.

That might explain why the U.S. is taking such a hard line on Huawei, which has spent $2 billion over 10 years to ensure it is in the best position to be the architect of global 5G technology. The company has already signed contracts to provide 5G equipment with 40 international carriers and shipped over 70,000 5G base stations, or short-range transceivers. But Washington is doing everything it can to slow this technological advance–not just cracking down domestically but also putting intense pressure on allies around the world to ban Huawei from their 5G networks on national-security grounds. “If a country adopts [Huawei equipment] and puts it in some of their critical information systems, we won’t be able to share information with them, we won’t be able to work alongside them,” U.S. Secretary of State Mike Pompeo said in late February. Australia, New Zealand and Japan have acquiesced to bans; others, including the U.K. and Germany, are hedging their bets. Huawei has hit back by suing the U.S. government for banning its 5G equipment, claiming the ban was “unlawful.”

Yet there is good reason to be wary. Article VII of China’s 2017 National Intelligence Law stipulates “any organization or citizen shall support, assist and cooperate with state intelligence work.” Even were Huawei not complicit, there is little doubt that the Chinese government could impose its will. Every Chinese company is legally obliged to host internal CCP cells–where employees who are party officials meet to discuss ideology–whose allegiance and purpose is murky at best. “If the CCP tells Huawei to do something, then there’s not going to be a lot of leeway to say no,” says Adam Segal, director of the Digital and Cyberspace Policy Program at the Council on Foreign Relations.

Huawei is now trying to convince the world it is a legitimate company not beholden to the party, and leading the charge is Ren Zhengfei, the former military engineer who founded Huawei with just a $5,600 investment in 1987. He transformed what began as a small outfit reselling Hong Kong–made telephone switches into today’s 188,000-employee colossus. Huawei’s AI-powered factory floor churns out a smartphone every 28.5 seconds. Its conference center is redolent of the Palace of Versailles. The ostentation is at odds with Ren’s humble beginnings. He grew up hungry as one of seven children in a dirt-poor family in China’s impoverished central province of Guizhou, and still speaks with a thick bumpkin accent. He’s twice married and admits to neglecting his three children for long hours at the office. He established a foothold in China’s nascent telecom market by supplying rural communities overlooked by the large foreign firms, and is famous for a customer-centric business philosophy inspired by military tactics. Former employees bemoan a cultish atmosphere where they are described as “wolves” expected to “sacrifice” to compensate for glaring inefficiencies. “It’s the self-immolation of employees that keeps the company running,” one former executive tells TIME. But Huawei engineers also have a reputation for finding a way to make crazy projects a reality, like a 4G base station more than 17,000 ft. up Mount Everest to allow mountaineers and rescue workers cell coverage. The company plans to upgrade this to 5G soon.

For a long time Ren avoided speaking to U.S. media, but he has begun speaking up as the government action intensified. “The U.S. is taking us too seriously,” he says in his Shenzhen office. “So we hope that through dialogues like these we can reveal the truth and better understand each other.” He boasts that 14% of revenue and 45% of staff, numbering 80,000, is dedicated to R&D across 14 international hubs. Huawei filed for 5,405 patents last year–the largest number, by some distance, by a single firm in the world. Forty percent of the world’s population uses telecoms that pass through Huawei equipment, according to the firm.

The U.S. government claims Huawei has made its commercial gains through unfair means–by, for example, stealing intellectual property from American businesses. Huawei offered bonuses to employees who stole other firms’ technology, according to a U.S. indictment filed Jan. 16 (the firm denies this). Huawei has settled IP-theft cases brought by Cisco, Motorola and T-Mobile. In 2018, U.S. company Akhan Semiconductor sent a sample “diamond glass” smartphone screen to Huawei for testing. It was returned late, broken and with missing pieces, the firm says. A subsequent FBI investigation concluded it had been attacked with a high-powered laser in an apparent attempt to reverse-engineer it.

For Akhan CEO Adam Khan, who has invested $6 million since 2007 to hone the technology, the alleged theft was “extremely disappointing” and has national-security implications owing to his technology’s military applications. “I would encourage the U.S. government to keep Huawei at arm’s length,” he says, adding that “many, many” inventors have shared similar allegations. Criminal and civil cases against Huawei related to the alleged theft are ongoing. Ren denies his firm steals technology, insisting he “highly respects intellectual-property rights.”

As well as stealing, there are also allegations of espionage attempts. In January, police in Poland arrested Huawei employee Wang Weijing and a Polish national on suspicion of spying. Huawei fired Wang, and Ren tells TIME that “all employees must not violate local laws and regulations.” Asked whether he is loyal to the CCP, of which he is a member, Ren replies, “I am loyal to my customers.”

Huawei has long been accused of leaving secret vulnerabilities or “back doors” in its software and hardware that would permit illicit access to private data. In 2018, the French newspaper Le Monde reported that the African Union headquarters in Addis Ababa, whose Huawei-built IT system was a gift from the Chinese government, was hacked, thanks to deliberate vulnerabilities. Huawei and China have denied responsibility for the breach.

Ren says he would rather disband his company and go to prison than install back doors in Huawei technology. To betray his customers, he says, risks having to repay billions of dollars in bank loans on his own. “Comparatively, I think going to jail is better.”

A Huawei employee watches a program on his smartphone as he rests at his cubicle during a lunch break at the research and development area in the Bantian campus in Shenzhen, China, on April 12, 2019. Kevin Frayer—Getty Images

The U.S. has so far been unable to prove there are deliberate back doors in Huawei-built tech. But a report in March from an oversight board of the U.K.’s National Cyber Security Centre alleged flaws in Huawei’s software products “that cause significant cybersecurity and availability risks.” Although the U.K. report found no evidence the vulnerabilities were the result of Chinese state interference, U.S. intelligence officials believe there is no doubt that Chinese intelligence has both knowledge of the flaws and sufficient access to exploit them. The greatest danger, Principal Deputy Director of National Intelligence Sue Gordon tells TIME, lies not just in the hardware Huawei and other Chinese firms sell, but also in the software they run, for example the code used in routine security updates.

It’s little wonder, then, that the U.S. is using its powers of persuasion to drive a wedge between Huawei and the rest of the world–not altogether successfully. The E.U.’s executive body rejected U.S. calls for a ban in March. On April 24, after months of indecision, the British government decided to permit Huawei to be used for peripheral 5G equipment while banning it from core infrastructure. Pompeo slamUmed the decision, which divided Prime Minister Theresa May’s Cabinet. “Why would anyone grant such power to a regime that has already grossly violated cyberspace?” he said on May 8.

In Germany, U.S. Ambassador Richard Grenell told the country’s Economy Minister in a letter dated March 7 that the U.S. would limit intelligence sharing unless Germany banned Chinese firms from its 5G networks. That threat appears to have stiffened German resolve not to legislate against Huawei; two weeks later, Chancellor Angela Merkel said she did not believe in singling out a company “simply because it is from a certain country.” Still, German officials say they are not naive about the risks of handing this market to China. Merkel’s Foreign and Interior Ministers urged her to lock Chinese firms out of the 5G rollout last fall.

The cost of saying no to Washington could be more than allies think, experts say. Countries who use Huawei may find they are no longer able to integrate American weapons systems and platforms, making it harder to carry out joint training and security cooperation with the U.S. “The impact to military and intelligence cooperation could further corrode already strained U.S.-allied relationships,” says Timothy Heath, a former analyst at U.S. Pacific Command now at Rand Corp.

But cutting out China could present a threat too. After New Zealand barred Huawei from 5G, Beijing unleashed economic warfare in apparent retaliation, discouraging tourism, delaying seafood imports and even turning back an Air New Zealand jetliner bound for Shanghai after onboard paperwork referenced self-governing Taiwan as an independent country.

And when Canada agreed in December to arrest Ren’s daughter, Huawei CFO Meng Wanzhou, on behalf of U.S. prosecutors seeking her extradition for alleged sanctions contraventions, China leapt into action. The government detained 13 Canadian citizens, charged two with espionage and put another two on death row for drug offenses.

Ren says the charges against his daughter are baseless and politically motivated, and her portrait occupies pride of place in his cluttered office. He denies the government’s actions prove Huawei and the state are in cahoots. “It is right for the Chinese government to protect its citizens,” says Ren. “Especially an executive of a large company arrested for no reason.”

Workers eating lunch at the Huawei campus in Shenzhen, China Kevin Frayer—Getty Images

The U.S. feud with Huawei risks bifurcating 5G’s rollout into two distinct blocs–nations that embrace Chinese 5G and those that reject it wholesale–hampering global connectivity and hurting the bottom lines of companies forced to choose. Technology consultant Stephanie Hare says the lack of trust between the world’s No. 1 and No. 2 economies means every other country is being forced to choose sides, based on its own interests. “There can be no sitting on the fence here.”

That choice might be easier if one side did not have such a clear commercial advantage. Huawei is around 18 months ahead of rivals in rollout capacity. Its 5G base stations and wireless networking equipment are smaller and more economical to run than 4G, as well as typically 30% cheaper than rivals’. Many countries’ 4G infrastructure is already provided by Huawei, which would allow the firm to upgrade them to 5G more quickly and at lower cost than by using a competitor. And the competition is not exactly robust. No specialist companies in the U.S. are able to roll out 5G, meaning American consumers and businesses will have to rely on Huawei’s foreign competitors, chiefly Sweden’s Ericsson or Finland’s Nokia, if the ban persists.

Major corporations would much prefer that than risk working with Huawei. Several executives of multinationals courted by the Chinese company told TIME they balk at the thought of doing business with it, both because of slipshod programming and security risks. TIME saw internal emails of one firm contracted to work with Huawei that urged staff not to install its software because of spyware concerns.

Yet the costs domestically could still be high. Like Glasgow, Mont., nearly every part of the U.S. has Huawei equipment already embedded in wireless infrastructure. The rip-and-replace costs of banning Huawei wholesale–$50 million for Nemont alone, says CEO Mike Kilgore–would jeopardize the survival of these smaller carriers. That means scores of rural Americans–including small-town fire and police departments and emergency responders–might lose their cell and broadband service. The same goes for other countries.

The question now is whether the Trump Administration will find a compromise. Chinese firm ZTE almost collapsed last year after similar action to that taken against Huawei. Eventually, President Trump negotiated a $1 billion fine in lieu that allowed ZTE to keep trading.

A President who can strike deals is what Honrud wanted when he–like 65% of people in Glasgow–voted for Trump. He didn’t expect to have his livelihood used as leverage, but says the technology is “something they can negotiate with.” The Commerce Department reprieve allows existing Huawei equipment like that on Honrud’s farm to keep running, for now. He’s not especially worried about the risk. “If Huawei has something we can’t look into,” he says, “then we’ve got some pretty dumb engineers here.”

With reporting by Simon Shuster/Berlin; Billy Perrigo/London; John Walcott/Washington; Vivienne Walt/Paris; Zhang Chi and Aria Hangyu Chen in Shenzhen; Stephen Kim/Seoul and Jake Swearingen/New York

 

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