The Great Escape: how Huawei came close to building Britain’s 5G networks

It’s crunch time for Britain’s future relations with Beijing. And it could be messy. After lively behind the scenes debate, the Prime Minister, Boris Johnson, is understood to be ready to overturn his decision to allow China’s telecoms giant, Huawei, to build parts of the UK’s 5G digital network.

When the Prime Minister gave Huawei the green-light to play a role in building the UK’s 5G networks in January, the geopolitical landscape looked quite different. Johnson looked set to follow in the footsteps of previous Conservative governments’ courtship to be Beijing’s best friend in the West. With public opinion focused on the Prime Minister’s ambitious “levelling up” agenda, the prospect of cheap and readily available equipment to build the next generation of digital infrastructure seemed to provide a great opportunity.

Yet the decision was also bound up with awkward caveats and uneasy compromises. Huawei, characterised by the government’s own security and supply chain reviews as a “High Risk Vendor”, would be capped to a 35% market share. Huawei equipment would be restricted to the “non-core” areas of the UK’s network, and a host of security measures would be observed to guard against industrial espionage from a company widely believed to be linked with the interests of the Chinese Communist Party.

Now the foundations of this awkward compromise have come under strain, triggered by growing  dissent from influential members of Johnson’s own backbenches.

Such dissent has been strengthened by a new public focus on the role of the Chinese Communist Party in covering up the outbreak of the new coronavirus in Wuhan. It has brought Sino-UK relations into sharp relief. A matter which appeared to be technical now seems existential.

The Prime Minister has been forced to change tack, adopting a more sceptical line on China and Chinese capital investments in the UK to bring himself in line with his own benches in Westminster and the country at large.

Using his inside line with Number 10, The Spectator’s political editor James Forsyth  has revealed that one of Johnson’s closest political allies describes the original Huawei plan as “dead”.

Alternatives are now being discussed by Number Ten. The government is believed to be in negotiations with a Japanese rival of Huawei’s, NEC Corp., as well as the South Korean multinational, Samsung Electronics Co. Ltd., to discuss the possibility of their playing a role in the UK’s new networks.

This fits within a wider Downing Street review of how a new group of “D10” nations – the G7 democracies along with India, South Korea, and Australia – could combine to provide safe suppliers of 5G equipment.

As well as looking for ways to phase Huawei out of the UK’s existing networks, Johnson is also examining a raft of wider policy measures designed to screen and monitor Chinese capital being invested in the British economy more generally.

But the question many in Westminster and beyond will be asking is: how did the UK come so close to having its critical infrastructure built by a possible agent of a foreign government? Why, despite the known risks, was Huawei countenanced by a government which prides itself on carving out a new, independent role for Britain as a global trading nation?

There is an important lesson in this episode for governments across the world that are prone to put short-term considerations above long-term strategic planning.

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To understand the dilemmas surrounding the Huawei Question it is necessary to delve into China’s recent history.

Huawei owes its meteoric rise to international prominence to the particular conditions of China’s state-controlled economic model. The period of opening and reform unleashed by Deng Xiaoping in 1978, and continued to varying degrees by his successors, has propelled China to economic greatness. But the process of opening and reforming is also incomplete in many ways.

As Carl Walter and Fraser Howie explained a decade ago in Red Capitalism, China’s economy is a hybrid of its Communist past and its more recent capitalist reforms. It is divided into two distinctive parts, a “domestic-orientated state-owned economy and the export-oriented private economy”. The revenues of the private economy, won by state-sponsored “National Champion” companies, keep the state-controlled enterprises, banks, and the Communist Party afloat.

Huawei has been treated as a National Champion since 1996. A commercial Leviathan, it has been promoted by the Chinese Communist Party to advance Beijing’s strategy in global markets. The company was founded by the its current CEO, Ren Zhingfei, in 1987 and has since come to dominate not only the Chinese domestic market but also the global telecoms industry. Although, despite such prominence, its precise ownership structure remains unknown.

The Chinese government denies that Huawei is an arm of the Communist Party or the state. But the absence of transparency concerning Huawei’s ownership structure and its activities over the last two decades have complicated Beijing’s protestations that Huawei is a normal company committed to rules-based trade.

The classic case which industrialists cite again and again is the fate of Nortel Networks, a once cutting-edge Canadian telecoms operator which fell victim to cyber-attacks and large-scale industrial espionage. The investigators commissioned by Nortel to examine the cause of this attack believe Huawei to have been its perpetrator.

In 2000, Nortel suffered from a cyber-attack from hackers with a China-based IP address. The attack obtained the passwords of Nortel’s executives, allowing the hackers to download and obtain the company’s intellectual property.

The Canadian firm had used Huawei as one of its 5G vendors in the 1990s. But after the 2000 cyberattack, Huawei began to emerge as a competitor despite there not being any evidence that the Chinese company had carried out the levels of capital-intensive and time-consuming research and development required to reach that level of competitiveness.

It is widely believed by those in the 5G industry that state-sponsored cyber-espionage has allowed Huawei to cannibalise Nortel. They say that Huawei has done so by stealing the Canadian company’s technology and copying its industrial model while calling upon the support of state-controlled banks to give it a price advantage, ultimately undercutting Nortel in its own markets. When this was combined with management errors and the impact of the global financial crisis, Nortel was forced to go into administration in 2009.

There are also anecdotal accounts of the company’s ruthless approach to its competitors on a personal level. One US-based 5G industrialist told me about a time when his company was competing with Huawei in a bid to provide services for a South American firm. He says that after he and his company had finished their pitch, they returned to find their hotel rooms ransacked and overturned. They suspect that Huawei were trying to obtain details about their rival proposal.

The UK itself is not immune to intimidation over Huawei’s services either. In January, in what was seen as a blatant attempt to force London’s hand, the Chinese government suspended a tie-up between the Shanghai and London stock exchange. The move was political – it was made in retaliation to Britain’s support for pro-democracy demonstrators in Hong Kong and intended as a warning for Boris Johnson’s government on the consequences of freezing out Huawei.

Yet there are several governments which have already cut Huawei out of their markets. Many liberal democracies, including Japan, the United States, Canada, and Australia, have since refused to allow Huawei any role in building their own 5G networks. Figures involved with national security across these countries were dismayed with Boris Johnson’ decision.

And the Five Eyes forum made it clear that Britain would have to be cut out of important elements of its intelligence-sharing arrangements, a system forged during the depths of the Cold War, if Downing Street persisted with its Huawei deal.

The greatest fear remains that Huawei’s dominance of global markets also expands the surveillance apparatus of the Chinese state. In 2017, for instance, it was revealed that the cloud computing services and IT equipment provided by Huawei to the headquarters of the African Union in Addis Ababa, had been relaying sensitive data from the organisation’s data centre to a servers in Shanghai. And it had been doing this every day for a period of at least five years.

Such actions suggest that the company is not only interested in dominating the world’s technology markets, but could also be heavily implicated in state-sponsored intelligence acquisition and industrial espionage.

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What exactly is the precise nature of Huawei’s threat to the UK’s 5G networks?

One of the crucial, clinching arguments informing the original Huawei decision on January 28 was the notion that Huawei’s equipment could be contained to non-sensitive, non-core areas of the UK’s 5G networks. BT Group, one of the UK’s most important 5G network operators, believe that they can tap into Huawei’s cheap and readily-available equipment to build the UK’s next generation of digital infrastructure while protecting the sensitive areas of that infrastructure.

In a paper which BT group submitted to parliament on 17 April on 5G security, the company said that: “We see no change in risk with the introduction of 5G relative to earlier generations due to the ongoing protections around the core network”.

By placing so-called “high risk vendors” such as Huawei only in the “dumb” functions of the network, this would allow these vendors to be monitored, BT Group claim. The group argues that BT has a long-standing network design that has allowed it to exclude high risk vendors in the past – including Huawei since 2006 – and includes enhanced security features.

But this argument has proven to be controversial among 5G industrialists and cybersecurity analysts. Its premises have since come under heavy criticism from the government’s own backbenches and from experts summoned to the House of Commons’ committees to provide evidence on 5G security.

Unlike previous digital generations, 5G is unique in the extent to which it relies on an innovation called “edge computing”.  In order to increase response times and speed (what is called “latency”), increase capacity, and optimise the efficiency of the digital infrastructure, the processing power of the network is pushed out towards the edges of the network. This means that the distinction between the core and the edge of a 5G network becomes blurred as the core functions become much more physically distributed throughout the network.

BT Group say that this means that “any single core network issue can be easily defined and contained”.

Others say that, rather than making the whole network more secure from shocks to its parts, this edge-computing system would actually render the whole system much more vulnerable to high risk vendors with malign intentions.

Declan Ganley, Chairman and CEO of Rivada Networks, a US-based telecoms company, told Reaction that “trying to protect the ‘core’ of the 5G networks fundamentally misunderstands how 5G works.”

He explains: “You want trusted vendors throughout the network. The idea that you can have 35% of a network in the hands of a vendor that is answerable to the Communist Party of China, and be safe, is the same as believing that you can be a little bit pregnant. You either have a trusted network or you do not have a trusted network.”

Even if Huawei were to be limited to a portion of the network, Ganley warns, they “could punch a hole in your network and you wouldn’t necessarily see it.”

Evidence submitted by one of Huawei’s industrial rivals – the Swedish telecoms company, Ericsson – echoes Ganley’s remarks. In a diplomatic and carefully-expressed report, Ericsson does not mention Huawei or the particular circumstances of UK 5G security. But the company does warn twice that, according to international standards bodies, “Building a secure 5G network requires a holistic approach rather than a focus on individual technical parts in isolation.”

In the face of criticisms, the case for the 35% compromise is left looking increasingly precarious.

Despite such potential risks, BT Group has warned that freezing Hauwei out of the UK’s networks will incur significant costs for the taxpayer and slow the speed of rollout.

A study conducted by MobileUK has estimated that the cost could be somewhere near £6.8bn for the UK economy. And Oxford Economics, in a study commissioned by Huawei, have cautioned that investment costs will be significantly increased if the Chinese firm were to be locked out of the UK’s market.

Yet critics say that this is a price worth paying, if it means insulating a vital piece of national infrastructure from potential interference by a foreign power.

Tom Tugendhat, chair of parliamentary Foreign Affairs Select Committee, has emerged as a vocal critic of the Huawei decision. He believes that arguments which focus on the relatively low costs of Huawei’s equipment miss the point: “There will be a delay in rolling out 5G as a result of this decision, but all cost decisions are about a balance.”

“These decisions are not cost free, but they are the sort of decisions that governments must make to defend their interests”, he says. “In this case, it is worth sacrificing on the speed of rollout in order to defend our values and security.”

There are widespread fears that Huawei’s cheaper equipment could provide a gateway for anti-competitive practices and state-sponsored espionage. In light of such risks, those who oppose the firm being given a role in building the UK’s digital infrastructure argue that any supposed cost convenience of the company’s technology is cancelled out by the heavier price of security threats to a critical piece of national infrastructure.

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The first question many will be asking is how Huawei came so close to building such critical national infrastructure, despite the obvious risks posed to the UK’s national security.

There are many who believe that the current business model for 5G companies seeking to provide services to the British government is dysfunctional. It runs on a “spectrum auctions” model, in which the infrastructure operators, known as retail carriers – including companies such as BT Group, Nokia, Ericsson, and Samsung – bid for government contracts.

The problem is that this bidding process is very expensive. The five carriers who won the contracts for the UK’s 4G mobile networks in 2013, for example, ended up paying a combined total of £2.3 billion.

The fact that access to these contracts requires so much input capital has a number of consequences. In the first case, it prices smaller companies out of the market, since only larger carriers are able to compete in the initial bidding process. It creates a “carrier oligopoly”, reducing the competition in the market and anaesthetising the emergence of any potential market disruptors.

Once these carriers have won their bids, moreover, the vast up-front payments leave them highly leveraged and indebted. They have spent hundreds of millions of pounds before they have even generated any revenue from their contracts.

The model provides a bad deal both for businesses and for consumers, as companies have an incentive to focus only on the most potentially lucrative areas for their network. This means that more sparsely populated and areas with lower levels of telecommunications usage are often neglected compared to densely-populated hubs where networks are used frequently, such as the UK’s big cities.

The result, as Declan Ganley explained to Parliament in April, is a business model which “turns retail carriers into rent-seekers, more interested in maximising the revenue potential of their existing customers than in seeking to improve their service.”

More than this, Ganley warns, it leaves these leveraged carriers and equipment manufacturers “very vulnerable to predatory pricing and financing from Chinese government supported vendors such as Huawei and ZTE. This is the door through which Beijing has quietly walked.”

Britain’s 5G operators are quite simply hooked on Huawei. The readiness to justify using Huawei’s equipment is understandable in an industry which has already become very reliant upon them. Here, a firm offering cheap and readily available goods, along with generous subsidies, is pushing at an open door. They are providing a lifeline to companies that are so over-extended that they are incentivised to opt for the cheapest option available first, and to find a justification the security threats later, retrospectively.

This is despite warnings that, for all of the discussion of the convenience of Huawei’s equipment, it is not very impressive on a technical level.

Dr Ian Levy, the Technical Director of GCHQ’s National Cyber Security Centre told BBC Panorama last year that Huawei’s engineering practices are “shoddy”, saying that “The security in Huawei is like nothing else – it’s engineering like it’s back in the year 2000…We’ve seen nothing to give us any confidence that the transformation (they are offering) is going to do what they say it’s going to do.”

The real discussion about the convenience of Huawei is not about technical superiority, industry experts such as Ganley warn – it is about financial expediency. What Huawei offers is not superior equipment but generous subsidies. There is a symbiosis between Britain’s broken 5G business model and Huawei’s bid for market dominance.

This is why the UK’s main carriers did not wait for the British government’s call on Huawei to begin using the company’s equipment in building new networks. In fact, carriers such as Vodafone have been deploying Huawei equipment in rolling out new networks since the Spring of 2019.

So extensive is the industry’s reliance on Huawei’s equipment already that putting in place even the 35% restriction, BT Group warned in April, would cost them, and subsequently the taxpayer, around £500 million.

These carriers were confident that their case for including would be successful and were buoyed by suggestions from Theresa May’s government from as early as April 2019 that Huawei could be used in non-core areas of the UK’s network.

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Why were the established retail carriers so confident that the government would be convinced by their case for the inclusion of Huawei?

One explanation could be the quality of Huawei’s lobby in the United Kingdom, which employs former BT Group executives alongside retired civil servants to make an articulate, tailored case vouched in terms designed to win over British governments.

As early as 2015, Huawei managed to make three hugely significant appointments to its UK board. These included Baron Browne of Madingley, a peer of the realm, a former CEO of BP, and a former President of the Royal Academy of Engineering.

He was joined by Sir Andrew Cahn, who served for several years as the head of UK Trade & Investment, the predecessor of the Department for International Trade; and by Dame Helen Alexander, a highly successful businesswoman who served as the first female president for the Confederation of British Industry in 2011.

In one aside on BBC Radio 4 in January 2020, Sir Andrew Cahn said that “Huawei is the John Lewis of China”: “Huawei I think of as a global company that just happens to be based in China”. He argues that Huawei’s owners do not feel that the Chinese government is as supportive of them as it is of the domestic, state-owned enterprises.

And in April this year, Huawei further bolstered its board, probably in anticipation of the need for a renewed drive for access to the UK’s market in the wake of the global health crisis. The former chairman of BT, Mike Rake, was also added to the company’s UK committee. With the case against Huawei gaining ground, the company has sought to double down on its efforts to win over Boris Johnson’s government.

But a wider problem exists, one regarding not only to the rise of China and a flawed 5G business model, but also the short-termism which has gripped Western democracies since the end of the Cold War. Huawei’s strategy plays into the political culture of societies in which difficult, long-term strategic decisions can often be put off for shorter-term expediencies.

Political parties facing immediate financial pressures, and their voters, often have other priorities in mind than tough strategic planning. And while security issues are likely to be brought to the fore after this present crisis, countries across the globe will have to weigh up hard choices. In choosing between national defence on the one hand and quick, cheap goods in areas like 5G on the other, many countries will have to decide between convenience and security.

Before the coronavirus crisis there appeared to be little incentive for the government to change a 5G business model which provides the exchequer with an immediate source of hundreds of millions – and even billions – of pounds from spectrum auctions. In their own way, British governments have also become hooked on quick credit and short-term solutions.

The Huawei episode provides a warning about how the state can be manipulated into derailing and distorting the freedoms required for a fair, genuinely competitive market. Provided the country successfully navigates its way beyond dependency on Huawei, this episode could be seen as a close-shave for Britain, a time when short-termism temporarily clouded a vital question of national security.

It would also be a great escape, after a government which prides itself on defending British sovereignty almost sleepwalked into supporting a policy that would have compromised the country’s technological independence.