Australian Financial Review
March 27, 2012
by John Lee
Reasons of "national security" are easily used as a cover-all to deny foreign entities legitimate access to domestic markets and sectors. The decision to ban Huawei from tendering for major national broadband network (NBN) infrastructure projects will undoubtedly lead to accusations that the Gillard government is being paranoid or xenophobic when it comes to Chinese companies.
But a prudent government taking advice from the Australian Security Intelligence Organisation has made the right call.
When there are genuine national security issues at stake – as is the case in the design and delivery of the NBN's infrastructure – the onus should be on foreign bidders to convince the Australian government that any fear of "national security interests" being compromised is unfounded.
It will be difficult for Huawei Australia and its distinguished board – including retired rear admiral John Lord, former foreign minister Alexander Downer and former Victorian premier John Brumby–to do so. On commercial and technical merit, any bid by Huawei in designing the architecture or building the infrastructure of the NBN will be formidable. It has already delivered a vast wholesale broadband network for the United Kingdom and Singapore efficiently and cost effectively.
However, the problem is not one of competency but lack of transparency and trust. The fact that Huawei's founder and CEO, Ren Zhengfei, was a People's Liberation Army official in the 1980s is not itself the problem.
Ren was one of thousands of PLA officers retrenched in the 1980s during a mass military downsizing program. Ren has presumably been in the corporate rather than military game since 1987. Less persuasive is Huawei's insistence that it is a privately run company that operates on commercial principles and independently of the Chinese Communist Party (CCP) and the state. Huawei promotes itself as a privately run company that is owned by its 65,000 Chinese workers, two-thirds of whom are allocated shares based on their seniority, roles and performance.
Owners of these "virtual restricted shares" (VRS) cannot sell or buy shares in the company. Their VRS holding entitles them to a pro-rata payout when dividends are declared. When they leave Huawei, they must give up their VRS holding.
More important is how executives and board members are appointed within the company. Management and the board are drawn from VRS holders to an executive "union", meaning that Huawei is structured as a co-operative. Huawei refuses to release information on who can stand and how elections for committee places in the union and on the board are run, or the full list of members in the executive union and their respective roles.
Huawei's failure to disclose that the chairman, Sun Yafang, had been a senior official within the Ministry of State Security, the country's primary and largest agency for foreign intelligence gathering, will not have helped its cause.
The suspicion caused by the lack of transparency needs to be placed in the context of China's political economy. Telecommunications is designated as one of seven "strategic" sectors by the State Council.
Beijing expressly seeks to maintain absolute control of these sectors, which are considered vital to China's core national and security interests.
This usually means taking a controlling interest in building up these "national champions", offering them privileged and protected access to markets, cheap capital, tax incentives and other subsidies and, for those with offshore interests, diplomatic support.
Huawei is openly spoken of as a "national champion" by Chinese political and military officials. Being so in a "strategic" sector has given it privileged access to below-market rates as well as special tax and subsidy support.
In return, strategic national champions are expected to pursue Beijing's strategic and political objectives in addition to their own commercial goals. Besides, as a large and critical supplier of telecommunications technology, infrastructure and services to the government and military, it is unthinkable that there can be an "arm's length" relationship between the CCP, the PLA and Huawei's executive union.
Canberra is well aware that more instances of cyber attack and industrial espionage originate in China than anywhere else in the world. Despite Beijing blaming these on rogue citizens, their level of sophistication means that many can only be by instigated by government agencies or large firms.
There is no solid evidence that Huawei has been involved in any of these, or has any intention of building nasties into our NBN.
But a lack of trust and transparency means that the high burden of proof is on Huawei, and not the Australian government and agencies such as ASIO.
John Lee is a Hudson Institute Visiting Fellow and an Adjunct Associate Professor and Michael Hintze Fellow for Energy Security at the Centre for International Security Studies, Sydney University. He is the author of Will China Fail? (CIS, 2008).
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