Meng’s arrest could plunge US, China into high-tech Cold War

Meng Wanzhou is the daughter of the man who built China’s high-tech pin-up company Huawei and is considered corporate royalty in the world’s second-largest economy.

But now, the 46-year-old chief financial officer and deputy chairwoman of the flagship firm faces extradition to the United States and a court appearance in Vancouver on Friday after being arrested in Canada over potential violations of US sanctions on Iran.

The fallout from the decision has rocked mainland markets and threatened the trade war truce between Washington and Beijing.

After all, her father Ren Zhengfei built the sprawling telecom titan from scratch in the then sleepy fishing town of  Shenzhen before it morphed into China’s Silicon Valley.

Exactly 31 years later, Huawei has become the biggest private company in the country with 180,000 employees and a global footprint in more than 100 nations.

Combining a thriving consumer mobile sector with an expanding telecom network business, the conglomerate has also invested heavily in Artificial Intelligence, or AI, Virtual Reality, semiconductors and 5G.

“Huawei will be a top three player in the global communications market 20 years from now,” Ren, 74, a former People’s Liberation Army officer, said back in 1992.

He has since been proved right with revenue projected to hit 655.9 billion yuan (US$102.2 billion) this year, a jump of 9.3% compared to 2017. Last year, the consumer division alone shipped 153 million smartphones with revenue numbers hovering around the 236 billion yuan mark.

But as the group expanded worldwide into the industrial side of the telecoms sector, cracks started to appear. The poster child for the acclaimed “Made in China 2025” blueprint, which has become toxic in Washington, was suddenly being heavily scrutinized by Western governments.

Just hours before it was reported that Meng had been arrested, British Telecom revealed it would be removing Huawei equipment from the core of its 3G and 4G mobile operations in the United Kingdom.

5G infrastructure

BT also stressed that it would block telecom equipment from the company operating in sensitive areas of the UK’s next-generation 5G network.

The announcement followed moves made by Australia and New Zealand to curtail the corporation’s involvement in 5G infrastructure systems because of concerns about possible Chinese government involvement, an allegation that Huawei has denied.

Still, the US-China Economic and Security Review Commission recently issued a report stating that Beijing could force China’s main telecom players to “modify 5G components” for the overseas market.

“[They could be] modified to perform below expectations or fail, facilitate state or corporate espionage, or otherwise compromise the confidentiality, integrity, or availability of networks that used them,” the study highlighted.

Back in February, leading intelligence chiefs from the CIA, FBI and National Security Agency told the US Senate Intelligence Committee they would advise Americans not to use products or services from Huawei and telecom rival ZTE.

“We’re deeply concerned about the risks of allowing any company or entity that is beholden to foreign governments that don’t share our values to gain positions of power inside our telecommunications networks,” Chris Wray, the director of the FBI, told the committee.

“That provides the capacity to exert pressure or control over our telecommunications infrastructure,” he added. “It provides the capacity to maliciously modify or steal information. And it provides the capacity to conduct undetected espionage.”

In a response, ZTE denied the charges while Huawei insisted it “posed no greater cybersecurity risk than any ICT [Information and Communications Technology] vendor.”

Then in April, the US Commerce Department found ZTE had violated a settlement reached in 2017 for breaking sanctions imposed on Iran, which forced the company to shut down most of its operations after being banned from importing US components.

China’s President Xi Jinping was forced to intervene to save ZTE from bankruptcy. Three months later, the company eventually reached a deal with US authorities by paying $1.4 billion in fines, as well as agreeing to overhaul its senior management.

But the damage had been done and the shockwaves rippled across Huawei with US authorities launching a criminal investigation into alleged violations of sanctions on Iran.

Earlier this week, Meng became the first high-profile executive to be caught up in the row.

“The company has been provided very little information regarding the charges and is not aware of any wrongdoing by Ms Meng,” Huawei said in a statement on Thursday.

“The company believes the Canadian and US legal systems will ultimately reach a just conclusion. Huawei complies with all applicable laws and regulations where it operates, including applicable export control and sanction laws and regulations of the UN [United Nations], US and EU [European Union],” it added.

A high-school dropout, Meng stated off as secretary for the group before working her way to the top. Her brother Ren Ping also works for the family business.

But it is unlikely they will end up running the company when their father steps down.

“Huawei’s successor should not only have vision, character and ambition but also a good global perspective and the acumen to drive the company,” Ren said in a letter to employees back in 2013. “My family members do not possess these qualities. Thus, we will never be in the running of the successor race.”

China should be fully prepared for an escalation in the #tradewar with the US, as the US will not ease its stance on China, and the recent arrest of the senior executive of #Huawei is a vivid example: Mei Xinyu, an expert close to the Chinese Ministry of Commerce pic.twitter.com/W4fp8YNfmD

— Global Times (@globaltimesnews) December 6, 2018

As for the bigger picture, Meng’s arrest threatens to scupper last weekend’s trade war truce.

The state-run Global Times, which is owned by the mouthpiece of China’s Communist Party, the People’s Daily, has warned that there will be repercussions in a short statement on Twitter.

“China should be fully prepared for an escalation in the #tradewar with the US, as the US will not ease its stance on China, and the recent arrest of the senior executive of #Huawei is a vivid example,” the tweet,  which had opposing fists with Chinese and US flags superimposed upon them, said.

Yet the Foreign Ministry went even further in a prepared statement:

“We have made solemn representations to Canada and the US, demanding that both parties immediately clarify the reasons for the detention, and immediately release the detainee to protect the person’s legal rights.”

Nervous markets reacted quickly to the news with a sell-off in the technology sector reflecting a broader downturn.

In Shanghai, the composite index slipped 1.68% while Shenzhen dropped 2.17% and Hong Kong’s Hang Seng tumbled 2.47%. Elsewhere, Japan’s Nikkei 225 fell 1.91% while South Korea’s Kospi closed down 1.55%.

“The investigation of Huawei could be a prelude to further action against the firm and its senior officials,” analysis from the Eurasia Group said.

For Meng, it could be the start of an extradition nightmare which could end up plunging China and the US into a technological Cold War.