Huawei espionage concerns reach UK

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The UK 5G debate is emblematic of protectionist sentiments in the technology sector.

Huawei and the technology cold war

Huawei Technologies Co., Ltd. is a modern Chinese success story. A pioneer in the telecommunication industry, the company has grown exponentially since its early days as a supplier of low-tech hardware to rural China. In a little more than 30 years, it has become a market leader in the equipment required by states and businesses for their telecommunication infrastructure, and is second only to Samsung in smartphone sales. Both business lines have, however, come under significant pressure in recent years, a consequence of the China-America trade war and of allegations of state-sponsored espionage.

The US government has long harboured suspicions about Huawei and its relationship with the Chinese government. The link between enterprise and state dates back to the early 1990s, when Huawei was tasked with providing its technology to the army. Founder Ren Zhengfei had begun his career as an officer in the Chinese army, and maintained strong links with the ruling Communist Party. The relationship was cemented when, shortly thereafter, Huawei became designated as a National Champion by the Chinese government, a prestigious status which awarded it state support and protection, and it is this proximity to the state which has aroused US concerns. In 2012 the House Intelligence Committee raised serious questions about the security integrity of Huawei equipment, and strongly advised private enterprises to avoid using Huawei in their network systems. Further warnings came from authorities such as the FBI, whilst American mobile carriers such as AT&T continued to indicate reluctance to enter into partnerships with the company. Significantly, the National Defense Authorization Act for Fiscal Year 2019, which came into force in August 2018, introduced a provision which banned executive agencies from procuring equipment produced by Huawei. By the close of January 2019, the US Department of Justice had unveiled two sets of criminal indictments against the company, while Ren Zhengfei's daughter Meng Wanzhou, Huawei's Chief Financial Officer, was under arrest in Canada pending extradition to the United States. Suspicions were also felt beyond America's borders, with African Union officials accusing the Chinese government of hacking the servers of their headquarters in Ethiopia—a US$200 million building funded and built by China, with Huawei's technology at the heart of its communication system. 

Huawei's role in UK telecom infrastructure

It is in this context that, on 10 June 2019, the Global Cyber Security and Privacy Officer of Huawei was summoned before the UK Parliament's Science and Technology Select Committee (the "Committee"). Though the company has long been a feature in the UK telecoms market, recent events have given the UK government cause to revaluate the Chinese company's role in the development of the UK's 5G network. In particular, the Committee scrutinised the alleged links between Huawei and the Chinese government, stoked by concerns that recent Chinese cybersecurity legislation would enable China to access Huawei telecom equipment in the UK's infrastructure, the implications of which would be significant for national security and civil liberties. Use of Huawei technology in national communication infrastructure has already been restricted by the UK's close espionage allies Australia and New Zealand, in addition to the US.

At stake are the UK's plans to become a leader in 5G technology, the fifth generation of digital telecommunication systems. Researchers have credited the technology with a number of far-reaching benefits, such as enhanced speed, improved latency and increased reliability. It will contribute to the development of the Internet of Things and power the development of machine learning and artificial intelligence, and has numerous industrial applications that will benefit sectors from manufacturing to agriculture. With these benefits, 5G has been the subject of much investment and study by nation states, and has been identified as a cornerstone development for the future of the digital economy by the European Commission. It has already been adopted in parts of North America, South Korea and Switzerland, with launches across Europe scheduled for 2019. London, Edinburgh and Cardiff have been among the first cities in the UK to receive 5G coverage, albeit to a limited degree, with further carriers due to launch networks later in the year. 

Huawei has been extensively involved in the UK telecoms sector for nearly two decades. The company worked with carrier partners such as BT, EE and Vodafone to develop the 4G mobile network, and with a combination of this expertise, scale and low-pricing Huawei would appear well placed to deliver the UK's goal to be a global leader in 5G technology. However, the company's role in the UK's telecom infrastructure first came into question in April 2019, when a leak from the National Security Council implied that the company would be involved in the development of the country's 5G network. The leak came amid ongoing international concerns about Huawei's relationship with the Chinese government, and followed a critical report authored by GCHQ (a UK intelligence agency) on the national security risks posed by Huawei technology

While the leak stated that Huawei would be barred from involvement in system integral 5G technology, it further reported that the company would be permitted to supply certain non-core technology to the network, including antennas. This broadly mirrored the policy of long-term Huawei partner BT, which had recently confirmed that it had started the process of removing Huawei technology from the core of the new UK emergency services communication system. The Telecoms Supply Chain Review, a security analysis of the UK's telecom supply chain led by the Department for Digital, Culture, Media & Sport, is expected to provide direction to network operators on whether Huawei technology will be approved for use on the 5G network by the autumn of 2019.

US pressure on Huawei in 2019

The UK government's apparent openness to Huawei's involvement in the development of the 5G mobile phone network was met with a significant degree of criticism, notably from US officials. Ahead of President Donald Trump's state visit to the UK in June 2019, US Secretary of State Mike Pompeo expressed his concerns about the security risks presented by Huawei's involvement in the 5G network project. Economic protectionism has been a key pillar of US foreign policy under the Trump administration, with a sharp focus on safeguarding intellectual property and scrutiny of foreign ownership of sensitive assets. 

Huawei has attracted a high degree of interest from the US government, which has accused the company of acting as a conduit for Chinese espionage. On 15 May 2019, US pressure on the company culminated in (i) an executive order banning imports of communication technology developed by companies that pose a risk to the national security of the United States, and (ii) the addition of Huawei to the entity list maintained by the US Commerce Department (the "Entity List"). Lawful sale or transfer of American commodities, software or technology to an entity that has been designated to the Entity List is permissible only where the seller has obtained a licence from the Bureau of Industry and Security of the US Commerce Department. The dual effect of these measures is that American manufacturers are not only barred from importing Huawei technology, but also are prohibited from exporting American technology to Huawei. 

After these measures were implemented, major US technology companies announced that they would restrict trading with Huawei. The unintended economic consequences of the ban for US enterprises soon became apparent, as listed US technology companies with material revenue streams derived from Huawei were exposed to some share price volatility. It is notable that the issuance of a temporary general licence to deal with Huawei by the US Commerce Department in May 2019 led to consequential gains in US technology stocks. In July 2019, the US Commerce Secretary said that his department would issue licenses to exempt companies from the ban on selling technology to Huawei, as long as there was no "threat to US national security". However, as of August 2019, the US Commerce Department has not granted any such licenses despite having received more than 130 applications. Microsoft, being one of the applicants, have recently called on the US to end the ban on supplying technology to Huawei. Tension is set to continue, with the Chinese government planning to release their own "unreliable entity list" in a retaliatory move against the US in the near future.

Increasing restrictions on foreign investment 

The Huawei 5G controversy comes at a time of increasingly protectionist legislative measures across western governments, not least in the UK. In 2018 the UK amended the Enterprise Act 2002 (the "Act") to expand powers of review where M&A transactions trigger national security concerns. The changes to the Act included considerably lowering the target's UK turnover threshold to trigger government review to £1 million (from £70 million) in cases where the acquired entity is a "relevant enterprise". A relevant enterprise is broadly defined by Act to encompass enterprises which, among other things, are involved in the development of quantum technology or computing hardware. This was followed by the publication of a white paper setting out the government's proposed approach to cross-border M&A involving strategic entities and assets. The proposed new regime would materially change the scope of review and, whilst remaining a voluntary system, encourage notification where transactions raise potential national security concerns. Under the proposals, the government anticipates investigating around 200 cases per year and that 50 would require some sort of remedy. Under the current regime there has been, on average, less than one intervention a year. An example of the type of transaction that would be likely to be reviewed is the acquisition of software code used by the data servers of energy providers, which could be manipulated to undermine the UK's national security.

Uncertainty set to continue

The uncertainty around Huawei's role in the UK's telecommunication infrastructure is set to continue, in the main because of the current political landscape in the UK. Brexit remains an ongoing concern, and the UK will be keen to present itself as open to overseas investment in the event that it leaves the European Union on 31 October 2019. Huawei has invested considerable resources into the UK, and is projected to spend £3 billion on UK suppliers between 2018 and 2022. In an interview on 23 May 2019 Chen Wen, Charge d'Affaires a.i. of the Chinese Embassy in the UK, stated that any decision taken by the UK government which would result in Huawei being barred from involvement in the 5G network would have substantial ramifications for inbound Chinese investment.

To further complicate matters, the UK government has recently undergone a leadership change, with Theresa May stepping down as Prime Minister in May 2019 and Boris Johnson taking over in July 2019. May's government was at odds with the Trump administration on Huawei, and her National Security Council has previously issued a provisional decision to grant Huawei limited access to non-core parts of the UK's 5G network. However, her successor, Johnson, is much more publicly aligned with Trump, and both leaders have reportedly discussed Huawei and 5G technology over a phone call and at a bilateral meeting during the G7 summit in August 2019. In the same month, comments by then US national security advisor John Bolton after his meeting with Johnson and other senior UK government officials suggest that Johnson's government may potentially back-pedal on May's decision to give Huawei restricted access to its 5G network. Most recently, the UK defence secretary, Ben Wallace, has said that China needs to modify its cyber-behaviour and adopt a code of "fair play" if it wants the UK government to allow Huawei technology to be used in its 5G networks, which is a position that seems to depart from that taken by Johnson's predecessor and is more closely aligned to that of the Trump administration.

Huawei has made major investments across Europe, fuelled by heavily discounted pricing, and with the implicit support of the Chinese government. Industry analysis has suggested that any measure to restrict Chinese telecom companies from involvement in 5G infrastructure would delay European adoption of the technology by 18 months, and add an additional €55 billion to the cost. For these reasons, UK mobile operators are seeking clarification from the government on their stance. All four operators currently use Huawei's equipment in their networks, and should the government decide that it would no longer allow them to continue to do so, they would be forced to strip out and replace such equipment, which would not only be costly but also put at stake the UK's status as a leading telecoms sector. EE, Vodafone and Three have launched their 5G network in several towns and cities across the UK in May, July and August 2019, respectively, and O2 is planning to launch 5G in October 2019. This swift adoption of 5G has put the UK at the top of the leaderboard, and a negative decision by the government on the use of Huawei equipment will almost certainly have an adverse impact on this. 

While the UK government deliberates over its course of action, not all countries are so reticent to invite Huawei to develop their telecom infrastructure. Huawei has recently signed a 5G agreement with Russian carrier MTS, and launched its first 5G network in cities across Spain in June 2019. Houlin Zhao, the secretary general of the UN's International Telecommunication Union, has emphasised that accusations against Huawei remain unsubstantiated, and believes that they stem from political rather than technological concerns. 

Huawei, for its part, has moved quickly to make opportunities of the threats presented to it. It has reportedly progressed with plans to enter the self-driving car market, powered by its own proprietary AI and 5G technology and undertaken in partnership with European, Japanese and Chinese car manufacturers. Huawei is also rumoured to have begun the process of trademarking its own proprietary operating system, a development which would likely contribute to the long-heralded bifurcation of the internet.

While questions remain regarding the alleged role of the Chinese government in the company's operations, whatever the outcome, the eventual decision on whether to continue to allow Huawei to play a major role in the development of the UK telecoms infrastructure will potentially have ramifications on the UK's communications policy, political standing and its ability to attract foreign investment.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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