February 13, 2011

Disinformation 101: Hua Mei (not Huawei) and Iraq

Long-lingering innuendo suggesting that Huawei supplied fiber optic equipment supporting Saddam Hussein’s Iraqi Air Defense Communications Network appears misleading, whether or not intentionally.

Over the last eight months, an August 18, 2010 letter from eight Republican Senators to Obama Administration Cabinet officials (link to the letter),referencing the purported sale by Huawei of advanced fiber optics equipment used to support Saddam Hussein’s Iraqi Air Defense Communications Network, has driven countless media reports on the same topic. The August 18 letter contained the following hearsay “The Iraq Survey Group reported that Huawei sold communications technology to Saddam Hussein' s regime in possible violation of UN. Sanctions…Some reports indicate that this communications technology included fiber optic equipment used in Saddam Hussein' s air defense network, which routinely fired on US. military aircraft.” (Two subsequent Congressional letters have made similar, if less detailed, references)

The August 18 Senators’ letter did not footnote the “Iraq Survey Group” report, but it did footnote a March 19, 2001 Asian Wall Street Journal article (link to mirror) reporting “U.S. intelligence sources confirm…that Huawei Technologies, one of China's leading makers of communication networks, has helped Iraq outfit its air defenses with fiber optic equipment.”

According to multiple online references, the Iraqi (purportedly NATO code-named "Tiger Song") fiber-optic air defense system may in fact have incorporated American-made technology that evaded export controls administered by the then-Clinton Administration Commerce Department. Specifically, a U.S.-China joint venture called "Hua Mei" is said to have facilitated the sale of advanced, secure AT&T (pre-Lucent) fiber-optic communication systems for "civilian use" inside China.

The U.S. side of the joint venture is reported to have included two American companies: SCM and Brooks Telecommunications International Inc.

The Chinese side of the Hua Mei venture was reportedly run by a newly-formed firm, "Galaxy New Technology," run by a PLA Lt General who was married to the then-head of the PLA military research bureau (COSTIND – the Commission on Science and Industry for National Defense).

It is rumored that the PLA’s Electronics Bureau subsequently modified the American fiber-optics communication system, changing it into a secure air-defense/missile command system, and then exporting the newly modified system to Iraq.

Suggestions that certain Department of Defense entities (specifically the Defense Technology Security Association – DTSA) may have objected to the technology transfer to Hua Mei were addressed in a DoD letter responding to then-Chairman of the House of Representatives Committee on National Security Floyd Spence, who was one of those expressing the concerns (link to DoD correspondence with Chairman Floyd as reportedly obtained via a Freedom of Information Act request – page down from the initial link). In short, the DoD response to Representative Floyd communicated that there was no DTSA or other objection or, for that matter, any DoD review of the transaction due to coincidental 1994 amendments to U.S. Export Control rules which allowed for a new classification (GLX) for exports to civilian entities, beyond DoD’s purview. The DoD letter to Chairman Floyd specifically denied any knowledge of COSTIND or other PLA involvement in Hua Mei.

Further, again at the request of Chairman Spence, the U.S. Government Accounting Office (GAO) undertook a 1996 review “to determine (1) the civil and military applications of the exported telecommunications equipment, its availability, and the importance of these applications to China's military and (2) the process and rationale for liberalizing the export of telecommunications equipment, such as the ATM and SDH equipment shipped to Hua Mei.”

Among other things, the GAO’s resulting report (link to the full GAO Report) commented that while “U.S. company and government officials stated that Hua Mei was a civil end user,” the GAO found that, in fact, “Hua Mei, while a commercial enterprise, has as its principal Chinese partner, a company controlled by the Chinese military... Several members of the Hua Mei board of directors are military officers or have direct ties to the Chinese military. Such a high degree of involvement in Hua Mei could indicate a strong military interest in this company.” The GAO also noted that “The equipment was exported to Hua Mei without Commerce review, even though the company was partially controlled by several high-level members of the Chinese military.” In other words, commodity classification GLX should not have been applied had the facts been properly communicated.

Yet further, in 1997, Congressman Henry Hyde wrote Attorney General Reno a letter outlining his concerns about Galaxy New Technology (link to the Hyde letter). According to Congressman Hyde's letter to Reno, "In 1994, sophisticated telecommunications technology was transferred to a U.S.-Chinese joint venture called HUA MEI, in which the Chinese partner is an entity controlled by the Chinese military. This particular transfer included fiber-optic communications equipment which is used for high-speed, secure communications over long distances. Also included in the package was advanced encryption software."

Also in 1997, the Director of the Commerce Department’s Office of Strategic Trade and Foreign Policy Controls, responded to a Freedom of Information Act (FOIA) request communicating that the Commerce Department’s Bureau of Export Administration (BXA) had identified seven documents related to Hua Mei in its files (link to letter – scroll down). Commerce released three of the documents, withheld one, and referred to the State and Defense Departments to review and determine whether to disclose the other three documents, which Commerce reported to have originated from those Agencies.

The Hua Mei story went more or less dark after that.

The Huawei misinformation began to emerge a few short years later, such as in the Asian Wall Street Journal article referenced above, as well as other remarkably similar and contemporaneous media accounts, like the March 17, 2001 Washington Post article (link) reporting “Pentagon officials have accused the company [Huawei] of laying optical communications cables between Iraqi antiaircraft batteries, radar stations and command centers, which they say could significantly aid Baghdad’s efforts to shoot down U.S. warplanes patrolling the ‘no fly’ zones over northern and southern Iraq.”

And thus, notwithstanding the contradictory facts openly available on the public record, a myth was born, and has been perpetuated since...

February 04, 2011

Export Financing: Pots and Kettles

Big hullabaloo out of Europe this week, with a European Commission investigation reportedly finding that China's largest telecommunications equipment makers benefit from "massive" credit lines from state-owned banks. (see WSJ article)


Seems the Europeans are catching up to their American brethren who've been ramping up the crying-foul-rhetoric over such "preferential financing" for better than a year now. Frankly, if you consider the facts, it seems that there really aren't any pots or kettles in this global kitchen of ours that are not decidedly black.

Ah yes, facts...

Let's look at Huawei (full disclosure: I work there). In recent years, and increasingly stridently in 2010, there have been countless media reports and hyperbolic political rants about the $10 billion in "financing" Huawei purportedly received from the China Development Bank (CDB) in 2004. The fact is, Huawei received no such financing. Rather, the CDB essentially created a "buyer export credit" pool that Huawei's customers could borrow from, provided they met the bank's credit assessment, risk profile, etc. From 2004 to 2009, the total credit extended by or for Huawei's customers from the CDB amounted to around $5 billion (and far less was actually drawn), in pretty stark contrast to Huawei's almost $100 billion in sales over the same period. Doesn't seem as if "massive" Chinese Government credit lines had much to do with Huawei's growth, does it?

But hey, while were doing the fact-checking, let's review some of our other kitchenware. According to the U.S. Export Import Bank's website, specifically the "FY 2010 At A Glance" PDF, the Exim Bank supported over 3,500 transactions in support of U.S. export sales last year alone, to the tune of almost $25 billion in loans, guarantees, and export credit insurance. Last year alone. But all in accord with Organization for Economic Cooperation and Development (OECD) rules, right? Well, almost. According to a January 12, 2011 WSJ article, "...in a move crafted with White House involvement, the U.S. export-financing agency agreed for the first time to match China's cheaper financing terms to get the Pakistan government to buy 150 General Electric Co. locomotives." This, per the Journal, required the U.S. to "work with" the OECD to craft a "new loan model" to come up with the financing terms for the $477 million deal, "one of several steps the Obama administration has taken to pursue its goal of doubling U.S. exports over five years."

Don't get me wrong, I'm not criticizing the U.S. Government for trying to help U.S.-based companies compete against Chinese-based or other companies, nor am I defending any country's manipulation of the marketplace or other industrial policy. I'm just highlighting that we should at the very least remain intellectually honest about what's going on in the world. One-sided media reports and xenophobic political rhetoric that serve to fuel protectionist or, worse, nationalistic fervor, are not in our best interest as Americans. What we deserve, instead, is a fact-based and balanced dialogue.

But, wait, what about the Europeans? That's where this latest salvo came from, right?

Ugh... Europe's a lot of geography to cover, with far too many national and regional and pan-regional organizations and governments, etc. to consider, so, since all of this started around the telecommunications equipment industry, let's take a gander at Sweden, home to world-leading telecommunications infrastructure manufacturer Ericsson.

Sweden's EKN, per the website, "has been commissioned by the government to promote Swedish exports and the internationalisation of Swedish companies...by insuring export companies and banks against the risk of non-payment in export transactions...". Risk free. Nice. According to the EKN, the demand for its guarantees increased sharply during 2009, amounting to 80 billion Swedish Krone (roughly $12.5 billion), more than doubling the previous year. And, as of January 2010, the Swedish Parliament approved a doubling of the guarantee limit to 500 billion Swedish Krone (roughly $77.5 billion) - pretty impressive for a country with a mere 9.3 million inhabitants.

It will come as no surprise that, according to the 2008 EKN Annual Report, EKN guarantees backed "several large Ericsson transactions in India, Pakistan and Turkey." Go figure...

Again, I'm not taking sides, or endorsing anyone's policies or practices, I'm just pointing out that, strangely enough (or actually not at all so), the playing field is actually a lot more level than it is often portrayed to be.

So let's get to the real concern: Biased (intentional or not - I'll be gracious on that point) media reporting or government speak that mis-represents or one-sidedly presents the facts in order to push broader protectionist or nationalist agendas on an under-informed public. Indeed, if you follow the logic of some of the suggestions made in Washington and in the media related to certain Chinese telecom companies, you'd have to assume that should the U.S. and Pakistan go to war, GE - beholdened to the U.S. Government to the tune of almost half a billion dollars for the Pakistan train deal - would naturally respond to its government benefactor's military and political agenda and derail all of the Pakistani locomotives...

Silliness. Utterly ridiculous. GE is an independent global company with obligations and responsibilities in all of the markets in which it does business. GE doesn't answer to the U.S. Government any more than any independent Chinese-based or Swedish-based companies answer to their respective governments.

Enough already. Pot, kettle, black, indeed...