By Chris at www.CapitalistExploits.at
An old acquaintance (the CIO of a $800 million macro fund) rang me up last week to chew the fat on the Huawei deal and the ramifications.
And so — since I'm a lazy bastard — I figured I'd use the meat of the conversation for this article.
You're probably aware of the bans the US government has now placed on dealing with Huawei. Specifically prohibiting American firms from selling them (and others on the blacklist) high tech products.
The ramifications are endless. Literally. But first...
What Preceded It?
Ever since the Cold War, the US and its allies have jointly being poking around spying on their (and literally anyone's) lives.
The system used?
Echelon, which was codename for the network of satellites, server farms, software backdoors negotiated with "friendly" tech companies, and goodness knows what else.
Eventually this data collection and spying network swallowed the usual suspects, today fondly referenced as "the Five Eyes Intelligence Alliance". The Canucks, the Brits, the Ozzies, and the Kiwis.
If you remember the Ed Snowden affair and the NSA, you'll recall that the world got a peek into this surveillance network that is spearheaded by the Americans.
In any event, the days of spies being cold eyed killers in trench coats passing paper bags to dodgy looking men in the park at midnight are long gone.
Rather, today they're more likely to be 20-something geeks sporting acne, Coke bottle spectacles, and glued to screens, punching away excitedly at keyboards talking in a lingo no normal person would understand.
The reason for spying in the first place is because wars are often won by preventing your opponents from conducting attacks against you. Forewarned is forearmed, as the saying goes.
In the modern world we've governments with the technology capable of knocking out power grids, transportation systems, and communication systems (or gas pipelines).
From December 2011 through June 2012, cyber spies targeted 23 gas pipeline companies with e-mails crafted to deceive key personnel into clicking on malicious links or file attachments that let the attackers slip into company networks, says the Department of Homeland Security (DHS) report.
The report does not mention China, but the digital signatures of the attacks have been identified by independent cybersecurity researchers as belonging to a particular espionage group recently linked to China’s military.
Or — as the US Government found out in 2015 — the classic espionage route, too, can be exploited, revealing the underbelly ripe for a good kicking.
From the New York Times:
Attack Gave Chinese Hackers Privileged Access to U.S. Systems
For more than five years, American intelligence agencies followed several groups of Chinese hackers who were systematically draining information from defense contractors, energy firms and electronics makers, their targets shifting to fit Beijing’s latest economic priorities.
But last summer, officials lost the trail as some of the hackers changed focus again, burrowing deep into United States government computer systems that contain vast troves of personnel data, according to American officials briefed on a federal investigation into the attack and private security experts.
Undetected for nearly a year, the Chinese intruders executed a sophisticated attack that gave them “administrator privileges” into the computer networks at the Office of Personnel Management, mimicking the credentials of people who run the agency’s systems, two senior administration officials said. The hackers began siphoning out a rush of data after constructing what amounted to an electronic pipeline that led back to China, investigators told Congress last week in classified briefings.
The above simply highlights the new battleground, which I'm sure you already knew existed.
What Huawei brings to the table is that it was and is China's weapon or answer to Echelon.
The Chinese don't have the global alliance partners (yet) to put together something rivaling Echelon.
Instead, their tactic is one of owning the exchange points in the communications systems and then having the ability to capture information flowing through those exchanges. Huawei have over the last decade made a massive push towards fiber optic cables, telecom towers, and of course the routers, phones and computers connected to the internet.
Gaining Market Share
When you look at Huawei's strategy of bidding on massive international projects for the installation and maintenance of these systems, you have to scratch your head.
The economics rarely make sense when looked at purely from a business sense.
That's because these guys aren't doing this purely from a business sense. They're doing this from a geopolitical and national interest standpoint. And Huawei, unlike their non-Chinese competitors, enjoy the backing of the CCP, who are subsidising the hell out of these bids.
What's fascinating is that it's been working, even though surely to the West's intelligence agencies this strategy must have been as transparent as air.
Still, what are the West's options?
Subsidise Western competing firms and thereby destroy the capitalist market mechanism and arguably the very democratic structure of government? The backlash wouldn't be easy to manage, and once down that path, where does it lead to?
I'm sure the intelligence services all get it that Huawei's "corporate strategy" is simply China's intelligence services strategy.
But Joe Sixpack on the street probably doesn't appreciate this. Instead, he thinks Huawei is just like Apple, Cisco, or Nvidia... only Chinese. Clearly, that's as wrong as a Grandma's moustache.
What this means in practical terms is this: Huawei is intimately intertwined with the CCP.
China's Achilles Heel
Huawei, or should I say China, isn't technologically self sufficient.
They're heavily reliant on Western technology and American technology in particular to build their products.
Frankly, I've been gobsmacked that the US didn't put a nail in this coffin years ago. Think about it...
The CCP is trying to monitor global communications, which is fine and expected (every state player wants this, whether they admit to it or not). But they expect the rest of the world to pay them to do so and willingly provide the enabling technology for it to all happen.
It always seemed to me like a really dumb idea, simply because it is so transparent (a simple look at the economics of Huawei's bids on projects would have told anyone that something was amiss), and the strategy assumes your opponents are morons. Trouble is, thus far that seems to have have been the case.
Which brings us to the 5G rollout that Huawei have been pushing with the gusto of a fat kid after the last cupcake.
The implementation of Huawei's running 5G networks in foreign nations would provide the Chinese with incredible capabilities.
Imagine owning the underlying infrastructure on which all transportation, communication, energy infrastructure, and business systems are run on. Imagine not only the data collection available... but the ability to turn those systems on and off at will.
Italy: Hello, this is Italy here.
China: Yes, just a quick call out of courtesy. We'll be stationing a military submarine in Genova from next week.
Italy: The hell you will! ([covering mouthpiece] "Hey Luigi, these damn Chinese want to put a f*cking sub in our port")
China: You do want your electricity to keep working, don't you?
Unsavoury? Sure but realise that nationalism, patriotism and dare I say it tribal instincts are making a comeback. Ignore it at your own peril.
We're all familiar with Russia's ability to turn off the gas to Europe and how that provides them leverage, but few seem to think of the technology aspect of what 5G networks mean on a geopolitical scale.
And so here we are as the Americans finally seem to have seen what was in front of them for so long and they've now sent a very blunt message to the Chinese: "Hell, no! Enough is enough, folks!"
Huawei bonds immediately got torched.
And the Laowai have since been dumping Chinese stocks with vigor.
What Comes Next?
I wrote some time back about the coming "resource nationalism", and I believe we're on the very cusp of this becoming a major issue... and not just with respect to China.
As political cohesion continues to disintegrate, the necessity for critical supply of resources will come front and centre... and part of that will mean they will be increasingly used as economic weapons.
In war you win by identifying your opponent's weaknesses. And so, I present to you China's reliance on energy.
China knows this.
It's why nuclear power is going to simply become an ever bigger component for them. Watch!
What Does America Have Going for It?
Well, the US can certainly do some major economic damage to China.
And China doesn't want unruly masses who are unhappy because they can no longer feed themselves.
What Does China Have Going for It?
Unlike the US leadership, the Chinese government can wait it out knowing that team Trump is up against an election cycle and the US needs to get a deal done. China, not so much.
Trump has to play chess, but China are playing go.
Also, though they don't want to, China can — and will — simply quash any civil uprisings with brutal force.
What would you do if you were the Chinese leadership?
Purely to save face, you may look at a tit-for-tat. Banning US tech firms in China? Or simply creating domestic outrage such that Chinese consumers react "patriotically"
This was after the world court ruled against China in a spat over the South China seas.
Or you could subtly visit a rare earths mine, reminding the US that you hold some 90% of global supply.
And rare earths took off like a scalded cat:
Make no mistake about it, global financial markets are becoming more politicised by the day. And unless we pay attention, we risk being run over.
"The development of the Internet has posed new challenges to national sovereignty, security and development interests." — Xi Jinping
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