News last Thursday that Chinese telecom giant Huawei’s CFO Meng Wanzhou was arrested in Canada, on charges of violating sanctions against Iran, sent shock waves from North America to Asia. The Trump administration is seeking Meng’s extradition to the United States.
Wanzhou was arrested on Dec. 1, the same day President Trump and Chinese President Xi Jinping negotiated the U.S.-China trade dispute over dinner in Argentina. Some say news of the arrest was responsible for the more than 700-point drop of the Dow Industrial Average in the early morning of Dec. 7.
Why would the arrest of a business executive have such a significant impact? The former chairman of Nissan Motor and CEO of Renault was recently arrested in Japan on corruption and tax evasion charges, but that news didn’t bring down global stock markets. The reason is that Meng is not an ordinary businesswoman and Huawei is not an ordinary corporation.
The Huawei Dynasty
Meng is the daughter of Huawei’s founder, Ren Zhengfei. Ren was an ex-military officer in the People’s Liberation Army. He founded Huawei more than three decades ago and has built it from a small shop into a global telecom giant. Along with his success, Ren has married three times and fathered a number of children. All his children adopted their mothers’ family names to avoid unwanted attention.
Among all of Ren’s children, Meng is probably the one with the highest profile, serving as both the company’s CFO and deputy chairperson, and is rumored to be Ren’s successor. Meng’s mother, Ren’s first wife, is rumored to be the daughter of a high-level government official in the Sichuan province. This relationship reportedly ensured Huawei’s early survival, as Ren’s powerful father-in-law made certain local state-owned enterprises and the military awarded Huawei orders.
Today’s Huawei is one of the largest telecom equipment makers in the world, and has taken leading positions in smart phones, cloud computing, cyber security, and 5G development. It is one of the few homegrown national champion businesses that the Chinese government heavily promotes and invests in, hoping it will overtake the United States and become a global technology leader.
Huawei has been doing everything in its power to get ahead in 5G development, including pouring billions of investment dollars into research and development, filing key patents, hiring foreign experts, and acquiring strategic partners. 5G technology is so important that Trump blocked Singapore-based Broadcom Ltd.’s $117 billion hostile bid for U.S.-based Qualcomm early this year based on the Committee on Foreign Investment in the U.S.’s concern that the merger may give Huawei a technology edge.
Links Between Huawei and the Chinese Government
While Huawei claims it’s an employee-owned private company, some in the United States believe it has deep ties with the Chinese government, especially with the Chinese military. In 2012, Congress issued a damning report concluding that Huawei and another Chinese telecom, ZTE Inc., were a national security threat because Beijing could ask them to spy on behalf of the Chinese government, extract sensitive information, and even disable telecom equipment. This report practically banned major U.S. telephone carriers from using Huawei telecom equipment.
The concern isn’t unwarranted. China often intimidates entrepreneurs by jailing prominent Chinese businesspeople without due process or clear charges. China’s state-run newspaper, China Daily, recently revealed that Jack Ma, the founder of E-commerce giant Alibaba and China’s richest man, is a communist party member — a fact that was conveniently omitted in Alibaba’s IPO filing with NYSE in 2014.
It doesn’t matter whether Ma believes in communist ideology. The fact that China’s state media feels comfortable (or, more likely, was compelled by the Chinese government) to disclose his party affiliation is a reminder there are no true private businesses in China, because the government has firm control over all businesses and entrepreneurs.
Following the U.S. lead, Australia and New Zealand blocked Huawei and ZTE from selling equipment in their countries. Most recently, British Telecom announced it has been stripping Huawei equipment from its core 4G cellular network, after a warning from Britain’s MI6 foreign intelligence service about the potential threat Huawei poses to national and corporate security. Another U.S. ally, Japan, is expected to announce this week a ban on government purchases of telecommunications products from Huawei and ZTE out of similar concerns.
Repeated International Sanctions Violations
Besides engendering fears of intelligence leaks and cyber attacks, Huawei and ZTE have long been accused of repeated sanctions violations by shipping telecom and other technology equipments to countries such as Iran and North Korea. The U.S. government previously warned that companies that violated sanctions against Iran and North Korea will face serious consequences.
But it’s an open secret that Chinese companies often ignored such warnings in the past and didn’t face any serious consequences for their actions, until the Trump administration came along. Through a series of high-profile prosecutions against Chinese businesses and individuals involved in violating sanctions against North Korea, the Trump administration has demonstrated it won’t tolerate such violations like previous administrations did.
In April this year, after ZTE admitted its violation of U.S. sanctions against North Korea, the Department of Commerce imposed a seven-year export ban on ZTE, forbidding American companies from selling parts and providing services to it. The decision brought ZTE to the brink of closing its doors forever. After a plea from Xi to Trump directly, the Trump administration canceled the export ban. Instead, ZTE has agreed to pay a fine of $1 billion and make a number of changes, including replacing its board and executive team in 30 days.
In a recent meeting in China, Meng mentioned that sometimes the company “may accept the risk of temporary non-compliance,” which sounds like an acknowledgement that Huawei has been playing with fire for some time. Steve Stecklow of Reuters reported in 2013 that Meng and Huawei were linked to a Hong Kong-based Skycom Tech Co Ltd., which “offered to sell at least 1.3 million euros worth of HP gear to Mobile Telecommunication Co of Iran, despite U.S. trade sanctions” in 2010.
Although Huawei has repeatedly denied any sanction violations and insisted Skycom and Huawei aren’t related, Reuters found “numerous financial and other links over the past decade between Huawei, Meng and Skycom, suggesting a closer relationship between the two firms.” Some of the documents uncovered by Reuters identified Skycom as a subsidiary of Huawei.
The Wall Street Journal reported that, after the Reuters report, Meng allegedly lied to banks about Skycom being a subsidiary of Huawei, which led “those banks to clear hundreds of millions of dollars in transactions (by Skycom) that potentially violated international sanctions.” Since the Department of Justice launched a criminal probe into Huawei’s dealings in Iran in April 2017, Meng stopped travelling to the United States. This probably explains why she was arrested in Canada and why the United States is seeking her extradition.
China Is Not Happy about Meng’s Arrest
It’s likely the timing of Meng’s arrest — the day of the Trump-XI summit — was a coincidence. National Security Advisor John Bolton said Trump wasn’t notified of Meng’s arrest before the meeting with Xi. Still, when the news of Meng’s arrest broke, many people around the world, especially those in China, found the timing and the manner of Meng’s arrest highly unusual.
China initially responded to Meng’s arrest with fury, calling it a “human rights” violation and demanding Canada release her immediately. They also believed this event was politically motivated as a negotiation tool to pressure China for major concessions in trade. Worrying that the U.S.-China trade war will escalate into significantly slowing down global economic growth in 2019, investors sent indices of worldwide stock markets sharply lower on Dec. 7.
Since the initial furor, the Chinese government has made an effort to separate Meng’s arrest from the ongoing trade negotiations with the U.S. The Chinese government also reached out to foreign businesses in China and let them know they won’t be targeted for retaliatory measures.
Don’t Use Meng As a Negotiating Chip
To save the already fragile trade negotiation, it’s important for the Trump administration to do something similar: Separate Meng’s arrest from trade negotiations with China. Reject the urge to use her legal case as a bargaining chip for trade talks, because there is such a furor in the Chinese public that this tactic will backfire. No matter how much Xi wants a trade deal, he can’t be seen by the public as caving to U.S. demands after this case.
Let the Justice Department do its job. This is a perfect time to show how an independent judicial system works. Given the high visibility of this case, whenever possible, the Justice Department should present the evidence it has against Meng to the public and especially to the Chinese, to quiet any doubts that this is a politically trumped up case.
Since Meng’s arrest, many Chinese business people cancelled their business trips to the United States. The Trump administration should probably reach out to Chinese business communities and assure them that the United States is a country based on the rule of law, and that Chinese business people who conduct legitimate business activities will not be targeted.
Cooler heads on both side have to prevail to ensure Meng’s arrest doesn’t become a catalyst that worsens the trade war between the world’s two largest economies, and leads both countries down a path with no return.