The Huawei Test

By George Gilder

Don’t solve problems.”

So advised the late patriarch of management theory Peter Drucker.

What could Drucker have meant? Problem-solving is the chief preoccupation and agenda of nearly all business managers and their companies.

But when you “solve problems,” as Huawei’s leaders know, you tend to feed your failures, starve your strengths, and sink into costly mediocrity. Problems orient you toward the past. Entrepreneurship is about the future.

“Don’t solve problems,” said Drucker. “Instead, pursue opportunities.” When you pursue opportunities, as Huawei’s amazing history demonstrates, you can transform your entire competitive environment. You can turn your previous “problems” into the maps and matrices of a new business strategy. You can launch a juggernaut of innovation and growth.

Exemplifying this transformative wisdom are Huawei leaders Ren Zhengfei, founder-philosopher, and his extraordinary daughter Sabrina Meng, Huawei chief financial officer and guiding light of a new book published by the company, which launches with her preface. Grasping its visionary principles of finance, you can gain new Druckerian insight into the miracle of Huawei. You may even understand how Ren Zhengfei in just three decades could turn the equivalent of $3,000 into not just China’s telecom-equipment champion but a multinational colossus. It now commands $105 billion of revenues, operations in 70 countries, and 170,000 employees from around the world, 40,000 of them non-Chinese. Its finance division, ruled by Meng, commands hundreds of execs from such schools as Harvard, Cambridge, Wharton, and Yale.

In the United States, anxious experts and rivals have offered many explanations and alibis for the Huawei miracle. They depict Ren as an ex-army officer with sinister ties to the Chinese government. They imply he created his company as an elaborately mounted Trojan horse for communist hackers and spies. As the story goes, huge subsidies and gigantic heists of intellectual property account for Huawei’s meteoric ascent as a state-owned and state-ruled enterprise.

Ren’s army career, however, was routine for Chinese youths of his era and devoted to engineering. As the son of a “capitalist roader” pilloried during the “cultural revolution,” Ren Zhengfei launched one of the first fully private firms in mainland China. Long before the creation of any Chinese stock exchange, he founded Huawei with a major financial innovation, what is called in the U.S. an ESOP (employee stock-ownership plan). Far from leaning on the government, Huawei triumphed by outperforming all the state-owned enterprises previously dominating China’s telecom industry. Huawei’s accountants at KPMG, report no major state subsidies and verify Huawei’s private ownership structure with 98.6 percent of the equity owned by employees and 1.4 percent retained by Zhengfei.

Ren built Huawei in admiration for American openness, now ironically in danger of being lost in a siege of xenophobic fear of Huawei. Meng’s finance book quotes his 2014 riff on American success:

Openness is one of the factors that contribute to the success of capitalism. There was no economic success in China when it shut its doors to the outside world. Therefore, we must open up.

Currently, many people in China hope to grow stronger behind closed doors. This is a mistake. Throughout history, China has shut itself away from the outside world for long periods of time, making it impossible to become strong. The US is the world's most open nation, and thus the world's strongest. Though the US may fall behind from time to time, it has seen constant waves of innovation: Apple, Facebook, and others. As long as the US remains open, who can stop it from moving forward? (Ren Zhengfei, Absorbing the Energy of the Universe Over a Cup of Coffee, 2014)

Ren Zhengfei is also a supply-sider: “Reducing taxes encourages investment. It is like digging a trench in the ground, which makes it easy for water to flow.… Benefits from increased investment can offset loss of revenue from tax cuts for the government.”

All disruptive entrants into markets that were pioneered abroad — from Ford and Edison to Carnegie and Morgan in the U.S. — incur charges of theft for emulating established incumbents. All major business competitors, necessarily imitating one another and using common components under industry standards, provoke tensions over intellectual property. In Huawei’s case, the charges of theft mostly reflect rivals’ shock at Huawei’s success in bursting into a market shaped by standards and inventions from the United States, made by such companies as Cisco, Bell Labs, Qualcomm, and 3Com. In its imitative thrust, Huawei certainly was aggressive, like “fierce wolves,” as its own leaders have acknowledged, and it has paid fines and suffered penalties.

One would never know it reading American journals, but more than 15 years ago the claims of stolen IP were fully ventilated and litigated. It was an episode that rivals should study today before they disparage Huawei’s current constitutional challenge to the U.S. ban of Huawei equipment in U.S. networks.

In January 2003, the American router pioneer Cisco shocked Huawei with a wide-ranging suit for property rights infringement. To prevent any effective response, Cisco unleashed its 70 pages of complaints in a famously patent-friendly venue in a remote district court in Marshall, Texas. A Cisco executive in Asia was reported to have declared: “This time we need to make Huawei go bankrupt.”

To most company leaders, this move would have seemed an insuperable “problem,” solvable only by capitulation and retreat to niche markets in China. But in his characteristic inspirational leadership, Ren saw the Cisco suit not as a problem but as a giant opportunity. Declaring that he trusted the fairness of the U.S. court system, he went to Texas to defend his company against all charges. Huawei proved that many of the alleged cases of theft involved functions such as string comparison routines from “C” language software libraries readily available on the net from third parties. In the end the court vindicated Ren’s confidence by upholding much of the Huawei defense and barring Cisco from raising the issues again in another venue.

Huawei is now a leading player and stakeholder in the global system of intellectual property rights and standards organizations. In recent years, Huawei has paid Qualcomm of San Diego more than a billion dollars in royalties. Last year Huawei bought $11 billion worth of microchips from U.S. companies such as Intel and Broadcom. U.S. optical and other component suppliers such as NeoPhotonics enjoyed some $4 billion of additional Huawei business.

Today with some 2,300 patents in the relevant technology, Huawei is no longer a disruptive follower. It is the world leader in patents for the new industry standard called 5G and offers the only turnkey system. The rest of the world is trying to catch up. The new standard spearheaded by Huawei, the Fifth Generation of wireless architecture, enables a wide range of future industries, from next-generation airport surveillance and security to urban traffic management to self-driving automobiles and battlefield robotics, from internet virtual reality and the Internet of Things to smart cities and intelligent grids. Huawei now has a deep interest in the maintenance of intellectual property rights.

So let’s sum it up.

The U.S. has chosen to attack arguably the most creative and powerful and best-led capitalist company in China. The leading supplier of telecom equipment in the world, it is led by Ren, a charismatic philosopher-king of global industry with a natural eloquence and insight.

The U.S. government regards Huawei as such an immediate threat that it has reached into Canada to put CFO Sabrina Meng, the founder’s elegant daughter, under house arrest in Vancouver. It is no way to treat a lady, regardless of whether one of Huawei’s former subsidiaries blurred the murky rules of the international boycott of Iran with the errant sale of a few personal computers and software and supposedly deceptive relations with banks.

In spite of major royalty payments to U.S. companies, it is being indicted for stealing U.S. intellectual property. It is said to be concealing surveillance devices in its smartphones, worldwide bestsellers behind only Samsung’s. It is said to be hiding chips in its routers and switches that enable them to be controlled from China, jeopardizing our networks and power grids.

Now the U.S. is backpedaling the claims, making the more general argument that as a Chinese company Huawei is necessarily under the control of the Chinese government. Chinese law imposes a requirement that businesses comply with the needs of national intelligence bodies.

A flagrant example of “problem” paralysis, this U.S. claim is even more dangerous than the specific smears of Huawei. Such a rule would apply to any nation, including the U.S. with its aggressive National Security Agency, and would render impossible most international trade in technology. It would cripple the international fabric of supply chains and standards that underlies most world economic growth and opportunity.

In a letter to his employees in the midst of the crisis over the arrest of his daughter, Zhengfei outlined how to turn this “problem” into an opportunity. He wrote: “We must be open, transparent, active and courageous to reveal problems and actively promote improvements. Software development is a creative and artistic work that takes full advantage of our ingenuity and potential. We need to improve and enhance the transparent, traceable and auditable full process management mechanism.” Ren concluded: “We must enhance software engineering capabilities and practices from initial design and complete build to product lifecycle management from a credible perspective.”

Telecom companies and other network managers should take Ren at his word. They should do their jobs and negotiate open and defensible contracts for sensitive equipment. If the pattern of software upgrades are seen as a threat of subversion, the upgrades should be managed by U.S. telcos. If they harbor suspicions, Huawei’s customers should demand access to software source codes, making its software essentially open source, even while protecting intellectual property. Firmware programming for network hardware systems should be cryptographically signed, just as no iPhone or Huawei app will boot unless it is cryptographically signed.

Nearly all Huawei’s American critics implicitly deny that it is possible to accommodate Chinese capitalism without supporting Chinese communism. However, Chinese communist businesses — that is, the SOEs, state-owned enterprises — have steadily shrunk as a portion of the Chinese economy as China has three private firms have boomed. Today Chinese government spending as a share of GDP has dropped to around 17 percent compared to our close to 40 percent. China has three times as many IPOs and more venture capital and more technology by far than we do. We'd better start copying them soon to retrieve our once entrepreneurial and tech-oriented economy.

Our manufacturing failures are an effect not of Chinese machinations but of our green climate-change bureaucracies, monetary prodigality, and anti-meritocratic diversity campaigns. I lost $500,000 on a carbon nanotube filtration company not because of Chinese theft but because of an outrageous EPA decision that carbon nanotubes resemble asbestos and cause cancer. Asbestos claims, nearly all false by the way, led to litigation that destroyed much of our chemical industry (some 36 companies). Chemophobic California regulators have driven almost all U.S. custom wafer fab from Silicon Valley to Taiwan and Israel. It is now illegal in the U.S. to hire the best computer scientists and engineers. Even the Trump administration is outrageously suing Google for sex discrimination. College science and engineering is being massively debauched by climate-change and diversity agitprop, while the Chinese massively study real science and engineering. Rare earths? That takes digging and chemicals. Forget it.

So we can't do nanotech and can't mine rare earths and can't do chemicals and can't hire the best computer scientists, and we take orders of magnitude more time to build a factory, a road, or a city, and we want to blame China for our economic doldrums? China saved our economy by low-margin, high-skilled manufacturing that gave us the world's four most valuable companies which took almost all the profits. Who is exploiting whom?

I hate communism as much as anyone and have devoted most of my career to fighting it. But I scarcely met a real communist during a month in China, speaking at many of their major universities. I found their government bureaucrats far more sophisticated and flexible than ours. None of them mentioned climate change as any kind of threat. Most Chinese kids study engineering and science and completely see through communist lies and flaws. In the U.S., I'm mostly banned from major universities by crypto-communist faculty and students studying diversity and genderitis, and all sicklied o’er by a pale cast of green goo. U.S. crypto-communists are ubiquitous in our schools and far more deadly to the U.S. than Chinese communists. Huawei capitalist engineers making routers and switches and chips for us are incomparably more valuable to the U.S. than most U.S. students complaining about their privileges.

I hate to say it, but without the help of Chinese capitalism we're pretty much over as a global power and economy. With China, we have a chance. But we can't trade and cooperate with them if we interpret everything they do as theft and rapine and concentration camps and Orwellian surveillance. Why am I supposed to care if computers in China survey the streets and airports for terrorists and criminals? We'll be importing their equipment to replace the feckless TSA unionists at airports as soon as there is another jihadist attack in the U.S. They don't have them in China anymore.

The root of our Huawei fears and fantasies is a profound breakdown of security on the internet, which sows paranoia everywhere. The more the industry invests in firewalls and intrusion-detection schemes and hacker SWAT teams, the more hacks occur, with 2018 registering an all-time record of a billion breaches. With the internet a porous pyramid where all the money and data and power rise to the top, no one trusts anyone. With money a manipulable tool of central banks, with $5.1 trillion a day of currency trading — some 25 times global GDP — the world sinks into a primitive mercantilism.

Security is not a video game or a police challenge. It is an architecture. The remedies for the breakdown of internet security and the scandal of manipulable money — the spread of fear and the collapse of trade — are the same: the development of a new computer architecture and a new monetary system based on blockchain cryptography. This solution is on its way. Until it comes, both the U.S. and Chinese governments should end their paranoid maneuvers.

If the U.S can’t deal with Huawei without craven bars and bans, it might as well retreat to a fetal curl, sealing off its “infant industries” and illusions in a commercial theme park bristling with tariffs and quotas and xenophobic regulations. But let’s take inspiration from Peter Drucker. Huawei is not a problem for American technology; it is a huge customer and huge opportunity. It offers a chance to revitalize the U.S. economy and internet security and infrastructure with a new competitive challenge and resource of innovation.

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George Gilder

George Gilder is a Senior Resident Fellow at the American Institute for Economic Research. Mr. Gilder is one of the leading economic and technological thinkers of the past forty years and is the author of nineteen books, including The Scandal of Money and Life After Google. Mr. Gilder is a founding fellow of the Discovery Institute, where he began his study of information theory.