Huawei CEO Says Chinese Cyber-Security Rules Could Backfire

China can only ensure its information security in the long run if it keeps its market open to the best technology products, be they foreign or domestic, Huawei's rotating chief executive Eric Xu told Reuters on Tuesday.

Xu's remarks are a rare example of a top Chinese CEO openly questioning the direction of Beijing's information security policy, already a source of concern for countries who fear it will limit opportunities for their technology firms.

In recent months Chinese leaders have advanced, albeit fitfully, several technology "localization" measures to minimize the threat of foreign cyberspying, by encouraging or requiring use of domestic products in important systems.

But such policies could hamper free competition and innovation in Chinese industry and undermine Chinese security in the long term, Xu said in an interview on the sidelines of Huawei's annual global analyst summit in Shenzhen.

"If we're not open, if we don't bring in the world's best technology, we'll never have true information security," Xu said, comparing China's enterprise (corporate) computing industry to primary school students competing against foreign rivals at university level.

"Even if you localize, make your own CPUs (central processing units), make your own operating systems, make your own database software, it would still be at a grade school level, (with) your (security measures) transparent to the college students," Xu said.

"The only way you can answer the security problem is to keep improving your technology."

Good money after bad?
Xu's scepticism comes despite the fact that his company should, in theory, be one of the biggest beneficiaries of China's domestic technology push.

The world leader in manufacturing equipment for telecommunications carriers like Telefonica and British Telecom, Huawei in recent years has expanded into enterprise technology, offering competitive alternatives to Western-made servers and data storage for banks and government agencies.

Although Huawei would gain more contracts if foreign products were kept out, Xu said, the overall quality of technology used in China could drop.

"From China's perspective, to determine whether this is a good thing or bad thing we have to look at whether the market has healthy competition," he said. "Is this good money replacing bad money or bad money replacing good money?"

He also feared the repercussions for international trade.

"If the Chinese market is not open, then the European market won't be open, other markets won't be open, then what's the result?" he said. "The result is everyone draws a line around their own territory."

Washington worried
Xu's comments echo concerns expressed by the White House and U.S. business lobbies, who have likened China's cyber-security policies to protectionism and fear it will discriminate against players like Intel Corp, Cisco Systems and Qualcomm Inc.

The cyber-security dispute has strained U.S.-China ties in recent months, although regulators in Beijing said last week they would temporarily suspend the implementation of rules governing bank-technology purchases.

Xu said Huawei's critical view of current policy was shared by others within China's government and technology industry, but when asked if he had expressed that view to the Chinese leadership, he declined to say.

"Our perspective is recognized by some technical experts in the country," he said. "Localization doesn't guarantee security; anyone who understands a little bit about technology understands this."

China's Ministry of Industry and Information Technology and the Cyberspace Administration of China were not immediately available to comment outside of normal business hours.

Founded by a former Chinese military officer, Huawei itself was locked out of a major market in 2012, when it was labelled a national security risk in a U.S. Congressional report.

The company's lobbyists in Washington have slammed the report's findings as false and politically influenced while positioning Huawei as a champion of free-market competition.

Huawei's telecom carrier business in 2014 recorded a 20 percent increase in revenue to 288 billion yuan ($46.45 billion), placing it neck-and-neck with Swedish rival Ericsson.

But the company has forecast growth in its carrier division to flatten in several years with growth in its enterprise computing division to pick up the slack.

Xu declined to address the prospect of Huawei seeking to enter the U.S. telecoms market despite speculation that American carriers would like to see another vendor choice following Nokia and Alcatel-Lucent's proposed $16.6 billion merger.

"Our problem in America isn't about the carriers not wanting to work with us," Xu said, adding that countries should follow the example of Britain, which issued an independent audit this year finding Huawei's equipment did not pose a risk to its cyber-security.

© Thomson Reuters 2015