By Jeff Ferry, CPA Research Director
Last week, Canadian authorities arrested the Chief Financial Officer of Huawei, Sabrina Meng Wanzhou. The US government alleges that she was involved in a plot to circumvent US sanctions on Iran by using a dummy company, secretly owned by Huawei, to sell networking equipment to Iran.
Some of the US and European press have labeled Huawei a Chinese “national hero,” praising the company as one of China’s top technology companies. The reality is that Huawei has been a leader player in stealing western technology by blatantly using it without paying royalties for patents. Huawei also hires western engineers to gain access to their confidential knowledge, and often directs engineers to steal documents from US and other western technology companies.
Huawei is no minor player either. It is the world’s largest provider of Internet and telecom equipment. Last year, its revenue was $92 billion and this year it expects to breach the $100 billion mark. It is the world leader in equipment for cellular networks, for fiber-optic networks, and recently became the world’s number two manufacturer of smartphones, ahead of Apple. Just as the US Internet could not function without Cisco, the Chinese Internet could not function without Huawei. Everywhere else in the world, the two companies go head-to-head. Huawei is alleged to be privately owned, but has always benefited from generous Chinese government support. It was founded by a former officer in the Chinese Army, Ren Zhengfei, who is secretive and rarely gives interviews. One of his daughters, Sabrina, is Huawei’s CFO, while his younger daughter, Annabel Yao, is a Harvard student who recently took time out from her studies to be a debutante at a Paris society ball.
The US government, along with governments in Europe, Australia, and New Zealand, is worried about national security issues involved in building the next generation of 5G high-speed wireless networks using Huawei equipment. For the US, nothing could better illustrate the security issues that arise from leaving technology development to the “free market.” Two decades ago, the US had three world-class wireless technology companies, Lucent Technologies, Nortel Networks, and Motorola. Today, these three companies no longer exist as independent entities. Their decline was due partly to their own management mistakes, but also to the relentless downward pressure on equipment prices from Huawei, which used Chinese government support to drive down prices in the networking industry.
Today, Huawei is playing a key role in helping Beijing fulfill its ‘China 2025’ objectives of becoming a world leader in technology. Here are five of the most egregious instances of Huawei’s IP theft.
1. Huawei Steals Motorola’s Wireless Technology.
On February 28, 2007, a Motorola engineer named Hanjuan Jin was stopped by customs agents at O’Hare Airport. Agents searched her and found $30,000 in cash, a carry-on bag full of Motorola documents marked “confidential and proprietary,” and a one-way ticket to Beijing. She was arrested.
Subsequent investigations by the FBI revealed that Jin was simultaneously working for another company, Lemko, while she was working for Motorola. According to court documents filed in Chicago by prosecutors in 2010, Lemko was founded by Motorola engineer Shaowei Pan in 2004, shortly after Pan met with Huawei founder and CEO Ren Zhengfei and other top Huawei executives on a trip to China. According to federal prosecutors, Lemko’s goal was to build wireless technology for Huawei based on Motorola technology. Pan later emailed Ren to say: “If our plan can progress smoothly, Lemko will be the company we are planning to establish, and it will be independent of Motorola Inc.”
According to his LinkedIn page, Pan earned a PhD at the University of Wisconsin and worked at Motorola for 10 years, in which time he was responsible for 60 patents and rose to become Director of Architecture in Motorola’s wireless business unit. Federal officials said that although Pan wiped his computer clean with file-destruction software, some documents survived. According to federal prosecutors, Pan sent pages of confidential Motorola documents detailing Motorola’s wireless network designs to a Huawei vice president. Until at least 2006, Pan requested and received numerous “dump files” and “log files” containing confidential Motorola software code from two Motorola engineers, one being his wife and the other a Chinese-born Motorola employee named Xuefeng Bai.
The court document says: “Defendant Shaowei Pan and the other defendants secretly were engaged in new product development for Huawei…Huawei and its officers knew they were receiving stolen Motorola proprietary trade secrets and confidential information without Motorola’s authorization and consent.”
The case was settled in 2010 on confidential terms. Huawei has since built the world’s number one wireless infrastructure business, with a 28 percent share of a $37 billion global business. Its “EasyGSM” base station for 2G wireless networks, which was effectively Motorola technology according to federal prosecutors, played a significant role in its growth. Motorola’s wireless business declined, and the company was sold to Nokia in 2010. Engineer Hanjuan Jin, caught redhanded, was convicted in criminal court, and sentenced to four years prison. Incredibly, Shaowei Pan still runs Lemko, a wireless technology company in Schaumburg, Illinois, although its website contains no customer names.
2. Huawei Hacks Cisco’s Source Code.
In 2003, Internet equipment market leader Cisco Systems filed a lawsuit against Huawei, accusing the Chinese company of a “systematic and wholesale infringement of Cisco’s intellectual property.” Cisco accused Huawei of stealing the software code for Cisco’s Versatile Routing Platform routers. Routers are the key “intelligence” inside the global Internet, directing billions of Internet bits and bytes down the right path at blazingly fast speeds.
The case was settled confidentially in 2004, so there are few details available. But in 2012, a senior Huawei executive claimed publicly that the Chinese company did not use Cisco source code. Cisco General Counsel Mark Chandler reacted angrily, invoking the right under the 2004 settlement to correct any public misstatements by the other party. In a Cisco blog, Chandler wrote, “this litigation involved allegations by Cisco of direct, verbatim copying of our source code, to say nothing of our command line interface, our help screens, our copyrighted manuals and other elements of our products.”
Chandler then quoted from the June 15, 2004 report by the court-appointed “Neutral Expert.” This report condemned Huawei’s IP theft in no uncertain terms: “The Cisco code was electronically copied and inserted into [Huawei’s] [CODE NAME REDACTED]…Two library files from Cisco’s Internetwork Operating System were compromised….Huawei replaced the library code…but the replacement methodology was flawed and must be redone.”
Although Cisco’s confidential settlement got Huawei to remove the copied source code, Huawei’s growth continued unabated. In 2002, Huawei’s revenue was just $2.1 billion. Cisco’s revenue that year was $18.9 billion, nine times greater. Last year, Huawei’s revenue reached $92 billion, 87 percent ahead of Cisco’s $49.3 billion. Early this century, Cisco began a campaign to win more business in China. The company pledged in 2007 to invest $16 billion in China over a subsequent five years and to double its manufacturing capacity there. It bought around 50 companies in China. Highly respected Cisco CEO John Chambers once told a group of Asian journalists: “If I wasn’t American, I’d be Chinese.”
Yet in 2016, Cisco had to admit that its China revenue was disappointing. Analysts estimate it remains a single-digit percentage of Cisco’s total. Chinese favoritism for local companies, particularly in valuable technology industries, makes it virtually impossible for US companies to succeed there. And Chinese companies, with Huawei as a trailblazer, explicitly target US rivals. In its 2013 Annual Report, Huawei founder Ren Zhengfei called on the company’s 150,000 employees to work hard and focus on overtaking US competitors: “The light that shines in Silicon Valley continues to shine. It is still a model for us to learn from…the Strategy and Development Committee proposed surpassing US companies and enjoying the ride…if we are complacent and stand still for just three months we will be erased from history.”
3. Huwaei Violates PanOptis Patents, Ordered to Pay $10 Million in Damages.
The ink is barely dry on this one. On August 27, a jury in Texas found Huawei guilty of violating five patents held by an American firm, PanOptis, and awarded PanOptis $10.56 million. The damages were high because the jury decided the patent violations were “willful.” The patents involved software techniques used by smartphones to receive and display video, as well as other essential smartphone services. In its filings, PanOptis executives said they held many meetings with Huawei, including traveling to Shenzhen at their own expense to discuss licensing arrangements. Huawei refused to license the patents, yet incorporated the technology in virtually every major Huawei smartphone.
4. Huawei Tries to Use MPEG Technology Without Licensing It, Gets Caught.
It’s not just US courts that have found Huawei guilty of patent and intellectual property infringement. Just one month ago, a court in Dusseldorf, Germany found Huawei, along with its smaller Chinese rival ZTE, guilty of infringing several patents of the MPEG consortium. Those patents cover the software algorithms that enable computers and smartphones to turn high-definition video into low-bandwidth forms of video known as AVC and H.264, that can be transmitted on wireless networks and then viewed on smartphones.
As an industry consortium, MPEG takes a non-combative approach to technology companies, nearly all of whom are happy to license AVC video technology at the reasonable rates it asks. Commented MPEG CEO Larry Horn after the decision: “The Landgericht Düsseldorf’s decision confirms the importance of respect for intellectual property…We continue to welcome Huawei and ZTE to join the nearly 2,000 Licensees who have entered into our AVC License.”
5. Huawei Infringes on SolarEdge Patents.
Already the leading player in the worldwide networking industry, Huawei has also extended its interests into solar power. It is now one of the leading manufacturers of inverters—the devices that convert the direct current produced by solar cells into alternating current used in homes and businesses. In the solar industry too, Huawei appears to be up to its old tricks, according to competitor SolarEdge.
SolarEdge is a young company in the inverter business. Founded in Israel and listed in the US on the NASDAQ stock market, SolarEdge holds 126 patents in solar power technology. In June of this year, SolarEdge filed a lawsuit against Huawei, charging it with patent infringement and intellectual property theft. “Innovation requires significant financial investment and years of dedication and hard work from skilled R&D engineers,” said SolarEdge founder and CEO Guy Sella. “The PV industry cannot sustain such efforts under the constant threat of, in our view, illegal use of proprietary technology and we will not remain silent as our intellectual property is exploited.”
Huawei issued a statement denying patent infringement. A decision in the case is yet to come.
Conclusion
In some of its court filings, Huawei cites decisions by Chinese courts stating that patent royalties demanded by US companies are too high and unjustified. This provides some insight into Chinese thinking. It is an article of faith within the Chinese Communist Party and Chinese corporate leaders that American companies are exploiting their technological edge to shut out Chinese companies. Despite the fact that virtually every other country in the world agrees with, and participates in, the global system of patent protection, Chinese leaders fundamentally dislike it and repeatedly try to undermine it. This justification underlies the widespread IP theft and related practices by which China has tried to wrest technology from US companies without paying for it.
Huawei is indeed a leader in this practice, and perhaps the most successful Chinese company in building a huge global business based on copycat technology, very low prices funded by state subsidies, a protected home market, and aggressive sales techniques in overseas markets. It is not surprising to see the Communist leadership working hard to free Sabrina Meng Wanzhou. Ren Zhengfei is calling in his chips for his daughter.
For the US, Huawei’s role in busting Iranian sanctions is just one matter. The broader issue—of a networking industry that has been turned upside down by Huawei’s aggressive actions—is equally important. Today the US has no wireless system manufacturer to lead the charge on 5G wireless networks. Becoming dependent on high-quality European companies like Ericsson seems preferable to depending on Chinese companies. But the need for an American company in this vital industry is overwhelming.
