Posted by: John Elliott | October 15, 2012

Huawei poses risks for India 50 years after China’s Himalayan victory

There has been a stream of articles in India’s newspapers over the past week marking the 50th anniversary of country’s humiliating defeat by China in a brief Himalayan border war that shattered India’s self-confidence so devastatingly that the country has yet fully to recover. Headlines have included “The war we lost – the lessons we didn’t learn” and “Lessons from 1962 – India must never lower its guard”.

Yet India’s guard is still lowered and lessons have not been learned about anticipating an unexpected invasion – not just by the People’s Liberation Army (PLA) taking up positions on India’s side of mountainous borders, but more importantly by Chinese telecom companies possibly planting leaky and crippling bugs in networks and communications systems.

In a neat coincidence, just as India’s defence pundits were revisiting the failings of the early 1960s, the US Congress’s intelligence committee issued warnings in Washington that two Chinese telecom companies – Huawei and ZTE – were a threat to national security. The report said the companies could disrupt information networks and send sensitive data secretly back to China. Neither company had cooperated fully with the investigation, and Huawei had “provided evasive, non-responsive, or incomplete answers to questions at the heart of the security issues posed”.

Although Huawei and others suggested this was a protectionist ploy encouraged by American telecom companies to beat off low-cost competitors, the report triggered fresh complaints and renewed inquiries. Other countries are also worried, including Canada, Australia and the UK.

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India is clearly vulnerable to these security risks from a country that is its biggest long-term defence threat.

Concerns that could one day lead to war include a 50-year old row over the 4,000-kms border (left – Outlook magazine photo and above) that China will not resolve, plus disputes over access to river waters and potential differences on sea lanes and other issues.

Over the past 10 years, Huawei has become a leading telecom provider in India, along with ZTE. It has a five-year $2bn investment plan and is the second biggest provider of networks after Ericsson, with a 25-30% market share, supplying all of the country’s top telecom operators such as Bharti Airtel, Vodafone, Reliance Communications and Tata Teleservices. It also supplies telecom systems to companies, and has a substantial share of the market for devices such as data cards and phones, and has a large research centre in Bengaluru (Bangalore).

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It is not just telecoms where China is gaining a significant hold on India’s business and economy. Two-way trade currently stands at $60bn, heavily in China’s favour, making it India’s largest trading partner. The target for 2016 is $100bn. Orders for potentially sensitive power plant equipment exceed 44,000MW, triggering protective tariff demands by Indian manufacturers. There are also security concerns about Chinese bids for Indian power transmission grids. Other areas include engineering and construction projects.

There are also growing financial links. China has taken some of the pressure off the heavily indebted Reliance Group run by Anil Ambani. A $1.2bn loan was secured from Chinese banks in January this year to refinance a convertible bond at Reliance Communications. In 2010 Reliance Power ordered $10bn equipment from Shanghai Electric Group financed by Chinese banks, plus $1.9bn for telecoms refinancing.

The Indian government is publicly in denial about the security risks, though the army’s senior signals officer has apparently expressed some concerns. “Chinese manufactured telecom equipment are suspicious as you cannot know what’s inside. You cannot decode the units manufactured by them and thus pose higher risk and threat,” Lt Gen SP Kochhar is reported to have said at a communications seminar in Delhi last week. That echoed worries earlier in the year when Chinese hackers were reported to have invaded Indian Navy computer systems. Three years ago, there were worries when it was discovered that government-owned Bharat Electronics (BHEL) was sourcing encryption communications equipment from China for the Indian Air Force.

I have asked various officials and policy pundits about the risks in recent weeks and most duck the issue, offering no solution. Most take the same line as India’s telecom operators – that the products are irresistible because Huawei’s total costs of ownership are 25-30% lower than rival companies such Alcatel-Lucent,  Ericsson, and Nokia Siemens. India’s telecom imports from China in 2010-11 totalled $6.7bn, ranging from phones and attachments to networks.

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India stopped BSNL, a government owned telecom operator, buying Huawei and ZTE equipment in 2009-10 because of security concerns, but then allowed purchases by the private sector companies after Huawai co-operated with testing and certification of equipment and offered access to sensitive electronic source codes. Speaking last week after the US report was published, India’s telecommunications secretary, R Chandrashekhar, said the telecommunications department “has no problem” because the two companies were working within Ministry of Home Affairs guidelines. He has recently presented an award to ZTE as India’s top broadband infrastructure company.

Shashi Tharoor, an MP and writer, who was previously a foreign affairs minister and a senior United Nations official, told me he was impressed not only about the low costs, but especially because Huawei had been more willing than their European rivals to give then government access to its source codes. He thought however that such manufacturers might need to be restricted for national security reasons – for example they are excluded from some critical networks and sensitive border states, especially in north-east India.

The Economist had a cover story headlined Who’s afraid of Huawei? in August that acknowledged Huawei’s ability “to sneak in malware and sneak out sensitive data”. Westerners fretted that its networks were “used by Chinese spooks to eavesdrop during peacetime and could be shut down suddenly during wartime” and saw the firm as a “potent weapon in China’s burgeoning cyber-arsenal”.

But, unsurprisingly for a free market journal,  it said that “techno-nationalism” was not the answer to fears of cyber-espionage. Noting that Huawei is a $32bn company operating in 140 countries with 140,000 employees, it said it “commands respect by delivering high-quality telecoms equipment at low prices”. It added however that, “given the power of the state in China’s version of capitalism”, the west was “right to be vigilant”.

That hits the point because China’s version of capitalism means that companies owe primary allegiance to Beijing, whether they are in the private or public sector, and will surely do the government’s bidding. Some supporters point out that the PLA, where Huawei’s founder, Ren Zhengfei, used to work, had severed any ties (including possible equity stakes). But a company does not have to be tied to the PLA to obey Beijing.

It is however hard to know what can be done, especially since European manufacturers source components from other Chinese suppliers that might be harder to check than Huawei and ZTE.

‘Too late to eliminate Huawei’

John Gapper, a leading Financial Times columnist, was probably right last week in an article headed It is too late for America to eliminate Huawei. He said that “the time to declare telecoms a strategic, protected industry like defence, was 20 years ago; now is the time to make a deal”.

He suggested that such a deal could involve Huawei opening up its very secretive books and ownership pattern by listing on London or New York stock exchanges, and separating its US (and presumably other country) divisions, as America demands for defence equipment manufacturers.

That might be part of the solution, but surely it would be better for India and other countries to ban Chinese high technology companies from all security and communications sensitive networks and gradually ease them out of as many other areas as possible. The chances of a war with China are remote in the foreseeable future, so India has time, if it starts now, gradually to remove the threat as contracts expire and technologies change.

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Responses

  1. “companies owe primary allegiance to Beijing, whether they are in the private or public sector, and will surely do the government’s bidding.”

    Substitute Beijing with any other capital city.. and the statement is still true. Not buying from China does not reduce any risk UNLESS you source everything locally with local parts…. and then you get AMBASSADOR network switches…

  2. Not exactly true. In China, a dictatorship, companies are especially vulnerable to governmental pressures….

  3. The strategic context in which the Chinese military launched its operation in October 1962, and then unilaterally pulled back a month later might put events in a slightly different light. Documents residing in the US National Archives show that on 5th July 1947, several weeks before India gained dominion status, Pandit Jawaharlal Nehru signed a document authorising US military aircraft engaged in combat against the Communist Red Army in the Chinese Civil War to operate from a number of Indian military air-bases from Agra to Kharagpore. This agreement was revised and renewed several times after India’s independence. In spite of acknowledging Chinese sovereignty over Tibet by signing the 1954 “panchsheel accord” in 1954, India then launched a covert campaign to unseat the Chinese in Lhasa by arming and training Amdowa and Khampa rebels of the National Defence Volunteer Army, patronised jointly by the IB and the CIA, until President Nixon ended US covert operations against China.

    It is against that backdrop of Indo-US covert collusive collaboration that the Red Army acted as it did. The key documents are collected here:

    http://books.google.co.uk/books?id=gLqCAXwCRpAC&printsec=frontcover&dq=Cold+War+in+the+High+Himalayas&source=bl&ots=0Y38R6ZdFe&sig=M3VM-Lq3caSj_8Ekk39RuqGyXf8&hl=en&sa=X&ei=82OGUPb3MYq-0QXJlIDQBA&redir_esc=y

    Sentiments are human, but history needs to be factual.

  4. A well-researched article but fails to also outline the game of Western powers in India

  5. It is very unfortunate that we (specially Indians) realise when things go out of our control. The war may not be imminent in near future but China’s preparations show that they are not going to give us any chance to defend our borders and a defeat as that of 1962 is delivered to us. We are embroiled in corruption and to take away the attention of the public from that matter they are vigourously pushing for reforms where the cheap equipments from China fits in very well

  6. Indian Armed Forces, Politicians, and Anil Ambani need to read Homer’s Iliad.
    Beware of Chinese bearing gifts, in this case, telecom equipment priced substantially below world prices. In an eerily apt analogy, this is a very modern cyber version of the Greek Trojan Horse. The U.S. is right to be worried…


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