Chinese Telecom 101: David Wolf’s “Making the Connection”

David Wolf’s recently published, “Making the Connection – The Peaceful Rise of China’s Telecommunication Giants” is an important and informative work about the evolution of China’s telecom industry – but readers looking for a definitive investigation of Huawei’s pedigree, ownership, and involvement with the Chinese government are likely to be left disappointed.

Let’s start by addressing the elephant in the room. The book was supported with a grant from the Huawei Corporation. The author puts the disclaimer on the copyright page, right up front & clear as day. While he is not trying to hide anything, the reader approaches this work with a degree of suspicion and skepticism that is never quite dispelled. Wolf, publisher of the excellent blog Silicon Hutong, has earned a reputation as a straight-shooter who analyzes industry & political situations fairly and impartially. Huawei, however, is well known for its aggressive and imaginative PR efforts – so the author assumes the burden of demonstrating that this book is unbiased and credible. Huawei has an image problem in much of the Western world, whether deserved or not. The US House Intelligence Committee, as well as the governments of both Australia and India, have all publically branded the company a threat to national security. Huawei has also been implicated in at least one major case of IP theft (involving Cisco), and Symantec recently dissolved a joint venture with the firm. In spite of Huawei’s notoriety, “Making the Connection” barely makes even passing reference to public accusations that have resulted in the firm being banned from bidding on infrastructure projects in both the US and Australia.

The crux of “Making the Connection” is that the success of Chinese telecom giants like Huawei and ZTE is not due to government support, but rather to Beijing’s benign neglect of the scrappy entrepreneurial firms. Wolf presents some very thought-provoking and credible ideas. He succinctly and thoroughly examines the historic progression of the telecom industry in China, and is even-handed and persuasive when chronicling the record of government and institutional involvement. The work is insightful in describing the successes and failings of multinational corporations in China, and his discussions of how Western giants lost their leadership position in China’s telecom industry is both credible and eye-opening. Anyone interested in learning about competitive forces and responses in China should consider the first half of “Connection” required reading. There are few people who understand the mechanics and background of Chinese telecom as well as Wolf does, and he is at his best when explaining how the industry evolved and developed. He puts to rest many easy preconceptions about role that government policy really plays in Chinese industrial decision-making, and he is able to place a highly technical industry in well-ordered historical perspective.

He is less effective at fleshing out fully-formed profiles of industry players. He treats the PLA and Chinese government as the villains of the story, with Huawei and ZTE cast as the swashbuckling heroes – winning against all odds. Unfortunately, Wolf expects readers to take Huawei’s independence on faith simply because it is neither a wholly-owned SOE (state owned enterprise) nor a division of the army. One of the most controversial aspects of Chinese business today is the degree of influence that Beijing is able to exert over private Chinese companies. It’s easy to see how SOEs like China Mobile and policy organs like the railroad are directly controlled by policy makers, but it is far more difficult to discern how private firms are influenced by Beijing. It is unfortunate that this work doesn’t shed any light on the issue.

“Making the Connection” seems to ask readers to make the naïve assumption that Huawei and ZTE are operating with complete independence. Not only is this unrealistic for major players in a pillar industry like telecom, but it prevents the author from discussing Huawei’s current regulatory struggles in the US and other countries. It is admirable that Wolf has the discipline to focus on the development of the telecom industry within China, but by ignoring the charges being leveled by foreign governments he is sacrificing credibility and exposing the weakness of his own argument. We are expected to believe that Huawei and ZTE triumphed in China’s “competitive crucible” because of their independence, but it is precisely that independence that many observers are so skeptical about.

In spite of the suspicion surrounding Huawei’s connection to the PLA, “Connection” explains away the controversy easily. Wolf introduces Huawei as, “Founded in 1988 by Ren Zhengfei, a former researcher with a small military research center in Sichuan. Ren had been out of the army for over a decade…” and then says little more about any PLA link. At no point does he brook the argument that Huawei and ZTE might be successful precisely because they actively seek to accommodate Beijing’s policy goals. Instead he relies on aphorisms, such as “the mountains are high and the emperor is far away” and “winning is flying low.”

It would have been a much more effective book if Wolf had dealt with the official public accusations leveled by the US and Australian governments. Credible or not, claims that Huawei is working with or on behalf of the Chinese government will have a very real impact on its growth and development. Huawei has done a lot to dispel rumors that it is a security risk, and taken extraordinary measures such as revealing source code and giving government regulators a level of transparency that other technology companies wouldn’t dream of providing. Wolf missed an opportunity to present both sides of the issue and clearly state the Huawei position and response to some very serious charges. He would have been much more convincing had he taken the time to dismantle the claims of the various Western governments that branded Huawei a threat. Any book that sought to explain the modern rise of US corporations like Halliburton, Exxon, or Goldman Sachs without thoroughly exploring their relationship to the US government and lobbying efforts would seem incomplete and suspect. In China, where guanxi and policy play such a large role, it defies credibility that leading companies in such a sensitive industry enjoy complete freedom from Beijing.

Wolf returns to form in his final chapter, where he sums up his view of the telecom industry – and Chinese competition in general. His warnings that Westerners ignore Chinese competition at their own peril may seem a bit obvious to those with years of China experience, but will come as valuable food for thought to most American managers. Likewise, his observations about Chinese innovation being different but not inferior to Western creativity is essential for decision-makers who already compete with Chinese companies — or will soon. He has some very interesting things to say about the limitations of government control and the evolution of state capitalism, though he may be extrapolating a bit much from the failure of a few SOEs in the telecom business.

Overall, “Making the Connection” has more important things to say about the history of the telecom industry than about the individual companies operating within it. It is a valuable work for international managers and policy-makers, with some powerful insights about the nature of Chinese competition and innovation.

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