China’s disrespect for the law undermines its businesses

By Martin Vogel

ai weiwei
Ai Weiwei on a video link shortly before his detention

The FT reports on Huawei’s difficulties breaking into the US market.  Over the past decade, the Chinese firm has risen to become the world’s number two supplier of network equipment with growth in most major markets outside America.  But America’s growing distrust of China is proving a huge obstacle and it has failed to win any major contract with a leading US telecoms network:

This is in part because of the rocky state of Sino-US relations, including reports of cyberattacks on US companies such as Google in China. Fairly or unfairly, says James Lewis of the Center for Strategic and International Studies in Washington, America will be loath to entrust a Chinese group with access to its communications network if it has reason to suspect doing so would bolster cyberwarfare capabilities.

“Awareness in the national security policy community of threats in the cyber domain has greatly increased,” says Mr Mancuso. “So if you believe that the Chinese government is engaging in cyber-intrusion, you’ll have a problem with Huawei because Huawei sits smack in the middle of the industry supplying the critical infrastructure.”

The FT describes how Huawei has modelled itself on leading American businesses, taking advice from the likes of IBM, Accenture and Hays Group in order to win acceptance in the business community around the world.  But in contrast to the Europeans, Americans calculate that they cannot trust their communications networks to a firm that is suspected of receiving financial support from the Chinese state.  They fear Huawei may lack the autonomy to resist complicity with cyber-espionage.

The story brings to mind Abraham Lincoln’s lesson that we cannot escape history.  The FT quotes a Huawei executive complaining that Ericsson does not face the same difficulties in the US.  But Ericsson eminates from Sweden, which has a good reputation for respecting the rule of law and is not attracting a name for involvement in cyber-warfare.

Huawei, on the other hand, has a great deal to overcome in terms of the cultural baggage that comes with being a big Chinese player in the sensitive field of technology.  In the week of the detention of China’s most famous artist, Ai Weiwei, there are plenty of reminders that Beijing has at best a loose relationship with the rule of law.  Take this from The Economist:

The government now dismisses the idea that one function of the law is to defend people against the arbitrary exercise of state power. On March 4th a Chinese foreign ministry spokeswoman told foreign journalists who had been beaten up by Chinese police while going about their work: “Don’t use the law as a shield.” Some people, she said, want to make trouble in China and “for people with these kinds of motives, I think no law can protect them.”

One could argue that the treatment of dissidents and journalists has little relevance to the conduct of business.  But, as Jamil Anderlini argues in the FT, corporations too find that the assumptions and traditions that engender trust in business are lacking in China:

China, just as it has been for millennia, is ruled by individuals who make use of weak institutions, including the legal system, to achieve their own objectives. Many thousands of private businessmen have been on the receiving end of this behaviour in recent years, as their companies were swallowed up by competitors owned by the state or by politically-connected individuals. Numerous foreign companies involved in business disputes in China can attest to the frustration of dealing with a judiciary that must do the bidding of the local Communist party and the powerful individuals who control it.

There is a connection between the civic culture and the corporate culture of a nation.  If a state fails to respect the rule of law in relation to its citizens, why would it do so in relation to businesses?  Google decided that the compromises involved in conducting business in China were too great.  Having submitted to four years’ of self-censoring search results for the Chinese market, its Gmail security was penetrated from China in an apparent attempt to spy on Chinese dissidents.

All companies seeking growth in markets with repressive regimes must weigh risks against the potential for profits.  The stakes are infinitely higher when it comes to opening access to sensitive domestic infrastructure to companies with questionable links.

It is perhaps not surprising therefore that Huawei finds it faces higher hurdles in America than its competitors to demonstrate its trustworthiness as a telecoms supplier.  The question arises, though, as to why the Europeans are not so fastidious.  Will they one day regret being so sanguine?

Image courtesy Jurvetson.