Brian Kenny: It was supposed to be a 12-hour layover at the Vancouver Airport en route to Mexico from Hong Kong. But shortly after touching down on December 1, 2018, Meng Wanzhou was taken into custody by the Royal Canadian Mounted Police, setting off a chain of events that reverberates still today.
Meng, who also goes by the name Sabrina, is the CFO for Huawei, China's largest private company. She also happens to be the daughter of founder Ren Zhengfei. She was arrested at the request of the United States, charged with defrauding multiple financial institutions and breach of US imposed bans on dealing with Iran. But in the aftermath of her arrest, President Donald J. Trump would offer to personally intervene on her behalf if it meant salvaging deteriorating relations with China.
Today on Cold Call, we'll discuss Professor Bill Kirby's case entitled, Huawei: A Global Tech Giant in the Crossfire of a Digital Cold War. I'm your host, Brian Kenny, and you're listening to Cold Call recorded in Klarman Hall Studio at Harvard Business School.
Bill Kirby examines contemporary China business, economic and political developments in an international context. In addition to many books and articles, he's written over 40 cases on China. I guess we can add this one to the collection. Bill, thanks for joining me today.
Bill Kirby: It's a pleasure, Brian.
Brian Kenny: I'm going to ask you to start by imagining you're in the classroom. What would your cold call be to the students to get the class going?
Bill Kirby: I don't really have to imagine since I taught this case for the first time yesterday. We had as guests some senior executives from Huawei. And so, the cold call to start it was: Is a tech war a winnable war? There are many people who have argued, and I think not wrongly, that a trade war is, at the end of the day, not an easily winnable war. And in terms of the recent, at least first innings of this US-China trade war, we are, at best, at least in my view at status quo ante, without any significant benefit to either side, but with a lot of damage having happened in the term of this war. Is a tech war, a war over technology and technological dominance, something that is winnable in a world that is as interconnected as ours? Such a long-winded cold call to start it.
Brian Kenny: We're going to talk more about what's happening in China right now in the face of this new pandemic that has started to emerge on the scene and a lot of this ties together in very interesting ways. But you are a business historian, you know a lot about China. You've been studying it for decades. Why did you decide to write about this particular case? And how does it relate back to the things that you research?
Bill Kirby: Well, many different ways. First of all, it's one of the technological giants in the world in telecommunication systems and in the making of smartphones and some of the best smartphones on the market in the world are Huawei phones. Second, it is at the core of major disputes between China and the United States. In a moment truly of inflection as to where this most important bilateral relationship will go in the future, for it has been a very rocky last several years in the US-China relationship and the arrest of Ms. Meng has raised the temperature dramatically in China, but also in this country.
Third, however, it's a fascinating company for somebody who does business history. Mr. Ren Zhengfei is born of two school teachers, who had been associated with the old nationalist government before the Chinese Communist Revolution of 1949. He is born in a dirt-poor province of Guizhou and his parents are discriminated against, as you know not really agents. But as those close to the old regime. He has what you would call a bad class status.
And he works his way to get to university, to a technical university in Chongqing, and eventually finds his way into a ministerial-like operation, part of which is run by the People's Liberation Army and into the world of technology but very, very rudimentary stuff, and finally makes his way as many Chinese are trying to do at this time, toward a better future in the New Economic Zone of Shenzhen, just north of Hong Kong.
And he arrives in Shenzhen and together with some friends and family, it was the only way people could raise money in those days who are not affiliated with the government, he raises $5,000 to begin this company which we know today as Huawei.
So, there is a bootstrapping element to this that is easy to forget when you see what an extraordinarily large company and what a global company Huawei today is.
Brian Kenny: What's it like being an entrepreneur in China these days, but also when he was just starting out? Was it different than it is today?
Bill Kirby: Sure, it is different than it is today. There are many fewer sources of funding available. Everything really, we're talking about the early 1980s and the mid-1980s, most everything is still state controlled. Credit, either state controlled or from underground banks where you would pay 60 percent to 100 percent a year, which is actually pretty high.
As his company grows, he is not allowed to access any comparatively inexpensive loans from state banks. He gains money over time from other private enterprises that are growing in this kind of private business culture of Shenzhen, this new economic zone, but he does that at interest rates ranging from 30 to 50 percent a year.
It's pretty hardscrabble operation. But he will have seen in his birth province of Guizhou, how people survive and the worst period of Chinese communism within which he grew up. They survive by doing a number of enterprises that will be called illegal, but they are necessary for the survival of individuals.
There is a kind of what you might call local state entrepreneurship all across China, particularly strong south of the Yangtze River, in which local party secretaries and local governors are strongly encouraging the enterprises that are going to bring employment and prosperity to their citizens.
Brian Kenny: Let's talk a little bit about Huawei. What's the business landscape for them? Who are their competitors? And we talked about the fact that they're just a behemoth in size. What does that mean just in the landscape that they're situated in?
Bill Kirby: Well, they have grown to be a behemoth in size, but it's a fascinating story of how that came to be. This is a company that has had three near death experiences over the course of the last 20 or so years. They are initially not very successful in China. They are not successful in the rollout of 3G platforms, in part because the dominant carrier in China, China Mobile, was experimenting and wished at the end of the day to go with a China's specific type of CDMA, a form of technology for mobile phones. So, they went, but Ren Zhengfei took an enormous bet and he bet on the international standard, even though it froze him out of his home market of China.
Brian Kenny: Wow.
Bill Kirby: And he pursued R&D at a very high level. Even today, given the size of the company, even today, more than 14 percent of revenue is put into R&D in this company. And so, it is one of the most R&D intensive even of major technology companies. But he goes abroad and he signs contracts with British Telecom, with German firms, with other European firms, becomes very successful in Europe, before that, in Africa, and in Russia, and in Latin America. Successful you might argue in every continent, except North America, and actually in every major country except the United States and China.
His success in China is predicated upon being successful in Europe and by the fact that back in China, China Mobile and others recognize that they really do have to go to international standards for mobile technology and not have their own that are separate from others. They want China Mobile, ideally, to be a platform that could be global itself in time. And so, his bet on international standards pays off very, very large. And then with the rollout of 4G, he comes to dominate the Chinese market.
Huawei employers are known for their 996 culture. They work nine hours a day, six days a week. And that is probably an understatement.
Brian Kenny: Is this what you refer to in the case as the wolf culture?
Bill Kirby: Well, the wolf culture is an exaggeration really of [something] Ren said in an interview in 2018. Huawei, as he put it, will always have a wolf culture. The wolf is sensitive and smells opportunities to rush forward. The wolf always fights with his pack and does not rely on individual heroism. So, the collective here.
Brian Kenny: So, let's go back to the scene that we sort of opened up with, which is his daughter being arrested in an airport in Vancouver. What's Ren's reaction to something like that?
Bill Kirby: I asked him about that, and he was very straightforward in his response. He said, "Well, I didn't hear about it for another day or so," which is very interesting. Perhaps he was off somewhere out of communication, which would be surprising but always possible. When he found out what had actually happened, he didn't do anything, didn't say anything to anyone. But he got on a plane, took only his personal secretary and flew to Buenos Aires to give a speech that she had been scheduled to give, gave the speech and came home.
Brian Kenny: Okay.
Bill Kirby: That was his response.
Brian Kenny: Not what you would necessarily expect.
Bill Kirby: Right. I think another part of his response is longer term in the sense that there is, when one speaks with him, a significant sense of resentment of the American government for what they are trying to do the company and of course, as a father of what they have done to his daughter.
Brian Kenny: So, why don't we zero in then on December 2018. We have the arrest in Vancouver. He's alerted to it. Was their substance to the charges that the US was bringing?
Bill Kirby: The fundamental charge goes back to the accusation that Huawei, like another Chinese company, ZTE, had violated American sanctions against Iran and sold items to Iran in a deceptive way in order to avoid … the American response. What's different about the American response to these two companies doing this? In the first instance, ZTE, which is also from Shenzhen, pays an enormous fine, more than a billion dollars, and promises never to do it again. And then they immediately do it again. Then the American administration has the capacity to do with ZTE that it does not with Huawei, really to force them out of business.
But the Americans blink and Mr. Trump makes an arrangement with President Xi of China in order for ZTE to resume business and to pay another billion-plus dollar fine. So, ZTE is criminalized and fined, but then get back into business and can go forward. No one is arrested for this purpose. So, the arrest of Ms. Meng as the CFO for Huawei, now perhaps the American government will say, which they have not said that they didn't arrest anybody from ZTE because they didn't have the opportunity as they did with Ms. Meng. Perhaps that is the case. I don't know. But in any event, it's a major escalation of the way in which these accusations are being treated.
Brian Kenny: And humiliating publicly.
Bill Kirby: And of course, publicly humiliating.
Brian Kenny: And to him personally, because this is his daughter.
Bill Kirby: Absolutely. And by blindsiding our Canadian friends.
Brian Kenny: There have been many accusations going back years about China's reverse engineering of American technologies and suspicion about them, corporate espionage, things like that, just basically not playing fair. So, I'm sure this action was applauded by a lot of folks on the American side of things. Is there substance to those accusations? And did you see that as sort of a fundamental catalyst for what happened here?
Bill Kirby: What's interesting is that, in the legal case about with Ms. Meng, there's nothing about intellectual property theft, or about reengineering or anything of the sort. It really is about Iran. And so, we do have to kind of separate those two things out. There's been a long-standing dispute between the United States and this company over this suspicion that, as a major Chinese technological company that is dominant in the infrastructure of cellular information, that at the end of the day can serve the interests of Chinese intelligence.
And despite the fact that they're not a state-owned enterprise of China, as a major company in this industry in China, and given the nature of a 2017 national intelligence law in China, that could be read as requiring a company to cooperate with the government on issues of national security. There's a sense that Huawei is very possibly in the service of the Chinese state. Huawei has denied this consistently. But both the United States and the company have missed several opportunities to truly investigate if this is possibly true or not based on the nature of their technology at the moment.
Huawei has an office in Washington, and this is really the heart of the case. How do you deal with and what are the challenges in public relations and in government relations facing any international company, particularly one under such levels of suspicion?
One of the driving questions very possibly as we look at the complexities of this case is … this move to next generation technology 5G. The Americans in some sense are not in charge of their own technology. It won't be an American firm right now that will be a leader in this technology at least in the infrastructure of it. It will either be a Chinese firm or it will be a Swedish firm or a Finnish firm—Ericsson and Nokia are the other two beside Huawei who are dominant.
Brian Kenny: The case points out how complicated this gets very quickly because a lot of American firms are buying parts from Huawei. This is not just Huawei facing barriers doing business in the United States, it goes in the reverse, too. So, we are in a global economy, like it or not, and to sort of ban a company of this size and influence can actually hurt American businesses as well.
Bill Kirby: Right. And I think the biggest challenge, if you look at this as a business case of a multinational company in how it manages its different interests around the world, Huawei is now as it was not when it began, huge in China and it will dominate 5G in China. It will likely dominate 5G in many parts of the world. And yet, the Americans do have the capacity to deal them very serious injury. Particularly in the European markets and then if that were successful in other international markets. Huawei can live without the United States market. But what they cannot live with successfully for the long run is a major diminution of their capacity in the rest of the world.
And that is at the heart of this dispute right now. And the challenge that they have as a multinational company based in Shenzhen with their own very unique corporate culture with Mr. Ren who owns less than 2 percent of the shares of this company. At least in a formal sense, it's a company in which all employees are shareholders, and they are employee owners of the firm. And yet there isn't any question that Mr. Ren is the man in charge.
This same culture, however, has not translated into success in the political culture of the United States. I visited their Washington offices, which are a large suite of offices very close to the White House, almost now entirely empty. Two very talented and very lonely people are in the Washington offices as well, trying to advise Shenzhen on how best to interact with the United States. But all the major decisions are being made 7,000 miles away.
Brian Kenny: What are some of the strategies they're trying to deploy?
Bill Kirby: One belated effort was the hiring a gentleman named Michael Esposito, who as a lobbyist got a very substantial salary as reported in the case. Because the hope was that Huawei like ZTE could eventually elude this confrontation by going to the top and having President Trump intervene on their behalf, as he said he might.
Brian Kenny: He offered to do it.
Bill Kirby: He did offer to do it. But I have no, how do you reach Mr. Trump? It's not an easy thing to do. Certain corporate cultures don't succeed in other countries. But reaching the American government, whether it is in the commerce department, in the defense department, or in members of congress, in the best of times, is a pretty complicated operation. You really have to understand how this country works and how it really doesn't work. What are the functions and dysfunctions of the American political system? And here, the learning curve is so steep that I believe there's a great deal more that this company will need to learn in order to succeed.
China and the coronavirus
Brian Kenny: Let's just pull the lens back a little bit from Huawei and look more broadly at China in the midst of the coronavirus, the spread it began in China in Wenzhou. It's certainly spread rapidly there. What's the situation like in China these days? How have they sort of been able to grapple with this?
Bill Kirby: There are kind of two broad inferences to draw that are not unlike inferences that one could draw from the rise of the SARS crisis in 2003. So, the first appearance of this virus in any major way appears in the city of Wuhan, a very large city of 14 million people in the absolute center of China. It's really the crossroads of China, in terms of business and in terms of communications. The first cases are noted in early December. They become noticed in hospitals across Wuhan through the middle of December and alarms are sounding by the third week in December, but doctors are told not to spread the news.
And so precious weeks pass before it is realized or before any steps are taken to deal with what is quickly becoming very large, bad news. The Wuhan government, almost surely after checking with Beijing, continues with major political events in early January where delegates from all over Hubei province, a province of nearly 70 million people, come together in Wuhan. These delegates gather in early December. Wuhan continues to hold Chinese New Year's festivities such as an outdoor banquet for 40,000 people.
Finally, on January 20, it is announced that Wuhan will be blockaded as it were, will be forced into quarantine. But in between those times, while bad news is being suppressed. And in Chinese politics, it's always bad politics if you're the local official to give bad news up top.
And bad news is almost always suppressed. The first instinct up top is to suppress it nationally. These two things came together to cost maybe six or seven weeks. And during that period, 5 million people leave Wuhan for Chinese New Year to go across the country to see their parents and other relatives, as is normal in Chinese New Year. And so, this is how a local epidemic that is already very significant becomes a national catastrophe.
But the same kind of heavy state-led measures that suppress the information in the early stages of the disease are to a very considerable degree responsible for the fact that the disease is not growing any further in China today. There are new cases every day but the number of new cases goes down every day.
Brian Kenny: They're able to clamp pretty tightly.
Bill Kirby: In Wuhan as well as elsewhere. With extraordinary measures, limiting movement, not just movement from city to city or block to block but movement out of your apartment I have a good friend whose parents live in Shandong Province, to the far northeast … far away from any cases, at least at the moment. And they are not allowed out of their apartment without a hall pass. Just like you and I might remember from high school, you couldn't leave the classroom without a hall pass. That is true of hundreds of millions of Chinese.
Brian Kenny: They have local party representatives who are monitoring things right down to the street address.
Bill Kirby: Right, and not just party representatives. China has a long tradition predating the communists, where they have … local neighborhood committees, and these committees are often in atrophy or doing little for much of the time, but in a time of emergency they can be mobilized politically to watch each other. Whatever else they are good at, Communist systems are very good at getting people to watch each other. And in this case, for medical purposes, happily.
Brian Kenny: Do you see the sort of capability that they've demonstrated to go from, I guess what I would call, chaos to control? Does that help them and their dealings with the Trump administration as we look at this, the way these trade negotiations are playing out? Can they just clamp down and sort of weather the storm?
Bill Kirby: Certainly, up to a point they can, although it has been a considerable cost to some parts of the Chinese economy and significant pain to the private export-oriented sector of the economy. I think the greatest challenge for the Chinese government…they hate unpredictability. And the current American administration has been so unpredictable that I've talked to senior Chinese leaders here in this country and in the United States early on in the Trump administration, when it took nearly two years for the Trump administration to appoint anyone senior in state or in defense with any significant knowledge about China to help advise the executive branch on China policy. And one could ask—and I get the same answer too often to make one comfortable—who can you talk to? And the answer was, well, there's always the Kushner's. That to me is not an ideal way to run American foreign policy.
Final thoughts
Brian Kenny: Let's take it back to Huawei again for the sort of final thoughts on this. If there's one thing that you're hoping our listeners will sort of take away and remember from this case, what would that be?
Bill Kirby: I think both the case of Huawei and the struggles the Americans are having trying to figure out how to block Huawei without knowing what the alternative for the United States will be, without becoming a total laggard in this next generation of technology, this is one takeaway. That is to say if we are not to lead in this area, how can we allow a foreign country to lead.
We are in a place of such anxiety in this country that we are threatened to become paranoid about dealing with anyone who may actually be better at some things than we are. And that's a comparative advantage. China is not a technologically backward place. It has extraordinary universities. It has some of the best engineering universities in the world. And it is not a surprise that in certain areas and we can see this in other areas of infrastructure, whether it's high speed rail or hydropower, China is among the world's leaders, port development, if not the world's leader.
There's kind of a growing fear of "China" as if it's one thing, as if it's one person, failing to recognize how much we have gained by our interaction with China over the last four decades, how much China has gained, matured and changed 80 percent certainly for the positive in this regard, how much both countries have gained economically, broadly speaking from this relationship, and if the coronavirus has taught us anything else, it is how deeply entwined our economies and in fact, our cultures are today.
And when you think of how the US-China relationship has evolved over time, there are permanent differences that are likely to remain, permanent differences of political system, ideological differences. These have moments at the forefront or in the rearview mirror, but never out of the way. They are there.
Today, I argue and I tell my students, and I told the class yesterday, we are basically married. Now, not always happily married. Maybe it's an arranged marriage. Or maybe an arranged marriage by two lineages from different villages. But we are married. And when one of us rolls over the other one falls. And we have children, 370,000 Chinese study in this country every year, these are our children. They will make extraordinary careers back in China and around the world. And we are part of that development.
They bring talent to our shores, the thousands of Americans who study in China and the tens of thousands of American firms that work in China and make money in China. Nobody stays in a market very long when they can't make money. These are part of our collective family as a word and as parents we have a responsibility to look out for their and our collective future. What we need now are some really grown up parents.
Brian Kenny: Great thoughts from a really rich case, Bill. Thanks for joining me today.
Bill Kirby: It's my pleasure, Brian. Thank you.