Did a Chinese Hack Kill Canada’s Greatest Tech Company?
For some of us who graduated at the turn of the millennium as electronics and communication engineers, Nortel Networks was a dream company to land your first job at. Besides the chance to work with the brightest people in communications technology, Nortel was front and centre of the dotcom boom, being the leading supplier of networking technology that would power the internet. Less than a decade later, Nortel would go bust. It wasn’t just Nortel, other marquee networking majors were forced to merge – Alcatel-Lucent and Nokia-Siemens. Consolidation among telecom operators amidst falling tariffs which in turn squeezed network equipment vendors was widely blamed. However, this article throws light another important factor – the emergence of Huawei as a low-cost vendor with competitive technology that gave telecom operators the choice. So, how did Huawei come from nowhere and dominate an industry so heavily driven by intellectual property? The article fascinatingly points to potential IP-theft coupled with state backed financing to win deals at throwaway prices to eventually dominating the industry to an extent that it gets to decide the industry standard for 5G technology.
“…in the late 1990s, the Canadian Security Intelligence Service…became aware of “unusual traffic,” suggesting that hackers in China were stealing data and documents from Ottawa….By 2004 the hackers had breached Nortel’s uppermost ranks… none other than Frank Dunn, Nortel’s embattled chief executive officer…someone using his login had relayed the PowerPoints and other sensitive files to an IP address registered to Shanghai Faxian Corp….
…in 2003, when Cisco said the Chinese company had stolen source code verbatim from a router, cloning its help screens and even copying its manuals, typos and all. In another suit alleging IP theft, Quintel Technology Ltd., a developer of wireless antennas in Rochester, N.Y., cited a Huawei patent application in the U.S. that contained a copyright notice crediting “Quintel Technology Limited 2009.”
…What isn’t in dispute is that the Nortel hack coincided with a separate offensive by Huawei. This one was totally legal and arguably even more damaging. While Nortel struggled, Huawei thrived thanks to its unique structure—it was privately held, enjoyed generous credit lines from state-owned banks, and had an ability to absorb losses for years before making money on its products. It poached Nortel’s biggest customers and, eventually, hired away the researchers who would give it the lead in 5G networks. “This is plain and simple: Economic espionage did in Nortel,” Shields says. “And all you have to do is look at what entity in the world took over No. 1 and how quickly they did it.”
…the established telecom companies mostly ignored Huawei, seeing it merely as a low-cost competitor that would have trouble competing in their home markets. But in 2005, the company stunned the industry, winning a piece of a £10 billion project to replace 16 national phone networks in the U.K. with a single digital one. Nortel and the telecom Marconi Corp. lost out. Then, in 2008, Huawei beat out Nortel on its home turf, landing a contract as part of a C$1 billion wireless network in Canada for Telus Corp. and BCE Inc. In both cases, the Western buyers cited the technical strength of Huawei’s proposals. But it’s widely believed that the gear Huawei sold was also much, much cheaper.
…It overtook Shanghai Bell as the largest domestic maker of switches by bundling free equipment with its contracts. In routers, it took China’s No. 1 spot away from Cisco Systems Inc. by offering a 40% price break on comparable gear.
By the 2000s, Huawei was taking its strategy overseas, with the help of $10.6 billion in credit from China Development Bank and the Export-Import Bank of China, both controlled by Beijing. Its credit line would reach $100 billion over the next decade.
“None of the G-7 countries provide levels of financing anywhere near those of the China Development Bank,” said Fred Hochberg, then head of the Export-Import Bank of the U.S., in a 2011 speech. “That keeps me up at night.”
…In 2005 the China Development Bank lent the Nigerian government $200 million to buy Huawei equipment for a national wireless network, offering an absurdly low interest rate, as little as 1%, according to a study by the Japan External Trade Organization. (The benchmark rate at the time was more than 6%.) Huawei’s overseas sales had been $50 million in 1999. By the end of 2005, they’d surged 100-fold, to $5 billion.”
Huawei’s ubiquitous presence across global networks now has raised concerns on data security:
“…In 2013 the cybersecurity company Mandiant announced it had completed an exhaustive investigation into alleged cyberattacks on 141 companies in the U.S., Canada, and other mostly English-speaking nations over the previous nine years. Researchers found that in almost every case, the data led back to a district in Shanghai near a Chinese military unit tasked with spying on computer networks in the U.S. and Canada…The Chinese government was directly involved in economic espionage.
…In June former Google Chairman Eric Schmidt revived allegations about Huawei building backdoors into its technology. “There’s no question that information from Huawei routers has ultimately ended up in hands that would appear to be the state,” he told the BBC, likening the company to a spy agency.
…Chinese law obligates companies to cooperate with national intelligence work and to keep those requests secret. In other words, if asked, Huawei would have to spy for the state and cover up that spying.”
Huawei is no longer simply a low cost vendor. It literally sets the industry standards:
“…as Nortel was collapsing, Huawei quietly hired about 20 Nortel scientists who’d been developing the groundwork for 5G wireless technology…. Wen Tong, once Nortel’s most prolific inventor and now the chief technology officer for Huawei’s wireless business. Tong led the exodus from Nortel to Huawei in 2009, after spending 14 years at the Canadian company. An electrical engineer by training, he’d emigrated from China to study at Montreal’s Concordia University and had amassed more than 100 patents in wireless research, generating some of Nortel’s most valuable intellectual property.
Thousands were looking for jobs in Ottawa, and Huawei offered scientists such as Tong an increasingly rare kind of sanctuary: a well-funded lab focused on basic science”
Tong led Huawei’s efforts to set the standards for 5G technology with a bit of help from Chinese clout:
“…It seemed clear the Chinese government had pressured its companies not to break ranks with Huawei…The company was also proud of its solution and convinced of its merits. “Huawei had spent so much effort in R&D on polar coding, they just would not give in,” Thelander says. Eventually, around 2 a.m., a compromise was reached: Polar coding was adopted alongside the other protocol. Huawei, in other words, would be central to the development of 5G.
Being the standard setter ensures Huawei royalty payments for years to come. But more important, those who define the standards are the ones most intimately familiar with the technology at the core of the next wave of commercial deployments. In other words, while others are still trying to figure out the blueprint of next-generation infrastructure, Huawei will already be building it.”