50 years after the 1962 defeat

A STREAM of newspaper articles last month (October) marked the 50th anniversary of China’s 1962 war victory with headlines such as “The war we lost—the lessons we didn’t learn” and “Lessons from 1962—India must never lower its guard”. India’s guard is however still lowered and lessons have not been learned about anticipating an unexpected invasion– not just by the People’s Liberation Army (PLA) taking up positions on India’s side of mountainous borders, but more importantly Chinese telecom companies possibly planting leaky and crippling bugs in networks and communications systems. Just as the defence pundits were revisiting the early 1960s, the US Congress’s intelligence committee issued warnings in Washington that two Chinese telecom companies—Huawei and ZTE—were a threat to America’s national security. The report said the companies could disrupt information networks and send sensitive data secretly back to China. Neither company had cooperated fully with the investigation, and Huawei had “provided evasive, non-responsive, or incomplete answers to questions at the heart of the security issues posed”. Although Huawei understandably suggested this was a protectionist ploy encouraged by American telecom companies to beat off low-cost competitors, the report triggered fresh complaints and renewed inquiries. Other countries are also worried, including Canada, Australia and the UK—and of course India which is clearly vulnerable to these security risks from a country that is its biggest long-term defence threat. Concerns that could one day lead to war include the 50-year old row over the border that China will not resolve, plus disputes over access to river waters and potential differences on sea lanes and other issues. In 10 years, Huawei has become a leading telecom provider in India, along with ZTE. It has a five-year $2bn investment plan and is the second biggest supplier of networks after Ericsson, with a 25 to 30 per cent market share, serving all of the country’s top telecom operators such as Bharti Airtel, Vodafone, Reliance Communications and Tata Teleservices. It also supplies telecom systems to companies, and has a substantial share of the market for devices such as data cards and phones, plus a large research centre in Bengaluru. It is not just telecoms where China is gaining a significant hold. Two-way trade currently stands at $60bn, heavily in China’s favour, making it India’s largest trading partner. The target for 2016 is $100bn. Orders for potentially sensitive power plant equipment exceed 44,000MW, triggering protective tariff demands by Indian manufacturers, and there are security concerns about possible Chinese bids on India’s power transmission grid. There are also growing financial links. China has taken some of the pressure off the heavily indebted Reliance Group run by Anil Ambani. A $1.2bn loan was secured from Chinese banks in January this year to refinance a convertible bond at Reliance Communications. In 2010 Reliance Power ordered $10bn equipment from Shanghai Electric Group financed by Chinese banks, plus $1.9bn for telecoms refinancing. The government is publicly in denial about the telecom and other possible security risks, though the army has expressed some concern, echoing worries earlier in the year when Chinese hackers were reported to have invaded Indian Navy computer systems. Three years ago, it was discovered that government-owned Bharat Electronics (BEL) was sourcing encryption communications equipment from China for the Indian Air Force. I have asked various officials and policy pundits about the risks in recent weeks and most duck the issue, offering no solution. Most take the same line as India’s telecom operators—that the products are irresistible because Huawei’s total costs of ownership are 25 to 30 per cent lower than rival companies such Alcatel-Lucent, Ericsson, and Nokia Siemens. India’s telecom imports from China in 2010-11 totalled $6.7bn, ranging from phones and attachments to networks. India stopped BSNL, a government owned telecom operator, buying Huawei and ZTE equipment in 2009-10 because of security concerns, but then allowed purchases by the private sector companies after Huawai co-operated with testing and certification of equipment, and offered access to sensitive electronic source codes. Speaking last week after the US report was published, India’s telecommunications secretary, R. Chandrashekhar, said the telecommunications department “has no problem” because the two companies were working within Ministry of Home Affairs guidelines. Shashi Tharoor, the MP who was previously a foreign affairs minister and a senior United Nations official, told me he was impressed not only about the low costs, but also that Huawei had been more willing than its European rivals to give the government access to the sensitive electronic source codes. He thought however that the manufacturers might need to be restricted for national security reasons, for example they are excluded from some critical networks and sensitive border states, especially in north-east India. Supporters point out that the PLA, where Huawei’s founder, Ren Zhengfei, used to work, has severed ties with the company (including possible equity stakes). But a company does not have to be tied to the PLA to toe the national line. Under China’s version of capitalism, companies owe primary allegiance to Beijing, whether they are in the private or public sector, so will do the government’s (or the PLA’s) bidding. It is however hard to know what can be done, especially since European manufacturers source components from other Chinese suppliers that might be harder to check than Huawei and ZTE. John Gapper, a leading Financial Times columnist, was probably right in a column he wrote last month. The headline was “It is too late for America to eliminate Huawei”, and he noted that “the time to declare telecoms a strategic, protected industry like defence, was 20 years ago; now is the time to make a deal”. He said that such a deal could involve Huawei opening up its very secretive books and ownership pattern by listing on London or New York stock exchanges, and separating its US (and presumably other country) divisions, as America demands for defence equipment manufacturers. That might be part of the solution, but surely it would be better for India and other countries to ban Chinese high-technology firms from all security and communication sensitive networks and gradually ease them out of as many other areas as possible. The chances of a war with China are remote in the foreseeable future, so India has time, if it starts now, gradually to remove the threat as contracts expire and technologies change.