Special Report: U.S. and China wage war beneath the waves - over internet cables

Telecom Egypt SAE

24/03/2023 11:00

(For more Reuters Special Reports, click on  SPECIAL/ )
    By Joe Brock
       SINGAPORE, March 24 (Reuters) - It started out as
strictly business: a huge private contract for one of the
world’s most advanced undersea fiber-optic cables. It became a
trophy in a growing proxy war between the United States and
China over technologies that could determine who achieves
economic and military dominance for decades to come.
    In February, American subsea cable company SubCom LLC began
laying a $600-million cable to transport data from Asia to
Europe, via Africa and the Middle East, at super-fast speeds
over 12,000 miles of fiber running along the seafloor.
    That cable is known as South East Asia–Middle East–Western
Europe 6, or SeaMeWe-6 for short. It will connect a dozen
countries as it snakes its way from Singapore to France,
crossing three seas and the Indian Ocean on the way. It is
slated to be finished in 2025.
    It was a project that slipped through China’s fingers.
    A Chinese company that has quickly emerged as a force in the
subsea cable-building industry - HMN Technologies Co Ltd - was
on the brink of snagging that contract three years ago. The
client for the cable was a consortium of more than a dozen
global firms. Three of China’s state-owned carriers - China
Telecommunications Corporation (China Telecom), China Mobile
Limited and China United Network Communications Group Co Ltd
(China Unicom) - had committed funding as members of the
consortium, which also included U.S.-based Microsoft Corp and
French telecom firm Orange SA, according to six people involved
in the deal.
    HMN Tech, whose predecessor company was majority-owned by
Chinese telecom giant Huawei Technologies Co Ltd, was selected
in early 2020 to manufacture and lay the cable, the people said,
due in part to hefty subsidies from Beijing that lowered the
cost. HMN Tech’s bid of $500 million was roughly a third cheaper
than the initial proposal submitted to the cable consortium by
New Jersey-based SubCom, the people said.
    The Singapore-to-France cable would have been HMN Tech’s
biggest such project to date, cementing it as the world’s
fastest-rising subsea cable builder, and extending the global
reach of the three Chinese telecom firms that had intended to
invest in it.
    But the U.S. government, concerned about the potential for
Chinese spying on these sensitive communications cables, ran a
successful campaign to flip the contract to SubCom through
incentives and pressure on consortium members.
    Reuters has detailed that effort here for the first time.
It’s one of at least six private undersea cable deals in the
Asia-Pacific region over the past four years where the U.S.
government either intervened to keep HMN Tech from winning that
business, or forced the rerouting or abandonment of cables that
would have directly linked U.S. and Chinese territories. The
story of those interventions by Washington hasn’t been
previously reported.
    SubCom had no comment on the SeaMeWe-6 battle, and HMN Tech
did not respond to requests for comment. In a statement last
year about infrastructure projects, the White House briefly
noted that the U.S. government helped SubCom to win the
Singapore-to-France cable contract, without giving details.
China’s foreign ministry did not respond to requests for
comment. China Telecom, China Mobile, China Unicom and Orange
did not respond to requests for comment. Microsoft declined to
comment.
    Undersea cables are central to U.S.-China technology
competition.
    Across the globe, there are more than 400 cables running
along the seafloor, carrying over 95% of all international
internet traffic, according to TeleGeography, a Washington-based
telecommunications research firm. These data conduits, which
transmit everything from emails and banking transactions to
military secrets, are vulnerable to sabotage attacks and
espionage, a U.S. government official and two security analysts
told Reuters.
    The potential for undersea cables to be drawn into a
conflict between China and self-ruled Taiwan was thrown into
sharp relief last month. Two communications cables were cut that
connected Taiwan with its Matsu islands, which sit close to the
Chinese coast. The islands’ 14,000 residents were disconnected
from the internet.
    Taiwanese authorities said they suspected a Chinese fishing
vessel and a Chinese freighter caused the disruption. However,
they stopped short of calling it a deliberate act and said there
was no direct evidence showing the Chinese ships were to blame.
China, which considers Taiwan a breakaway province, has
ratcheted up military and political efforts to force the island
to accept its dominion.
    Eavesdropping is a worry too. Spy agencies can readily tap
into cables landing on their territory. Justin Sherman, a fellow
at the Cyber Statecraft Initiative of the Atlantic Council, a
Washington-based think tank, told Reuters that undersea cables
were “a surveillance gold mine” for the world’s intelligence
agencies.
    “When we talk about U.S.-China tech competition, when we
talk about espionage and the capture of data, submarine cables
are involved in every aspect of those rising geopolitical
tensions,” Sherman said.
    Two of the projects upended by the U.S. government involved
cables that had already been manufactured and laid thousands of
miles across the Pacific Ocean. U.S. tech behemoths Google LLC,
Meta Platforms Inc and Amazon.com Inc were major investors in at
least one, or in Meta’s case both, of those cables, according to
public announcements made about the projects. The delays and
rerouting of the cables cost each of those companies tens of
millions of dollars in lost revenue and additional costs, four
sources who worked on the projects said.
    Amazon, Meta and Google declined to comment about these
projects or the cable wars.
    SubCom’s cable coup is part of a wider effort in Washington
aimed at reining in China as Beijing strives to become the
world's dominant producer of advanced technologies, be it
submarines, semiconductor chips, artificial intelligence or
drones. China is bulking up its military arsenal with
sophisticated armaments. And Beijing has become increasingly
assertive about countering U.S. influence worldwide through
trade, weapons and infrastructure deals that are drawing wide
swaths of the globe into its orbit.
    The U.S. cable effort has been anchored by a three-year-old
interagency task force informally known as Team Telecom.
    To oust the Chinese builder from the Singapore-to-France
cable, the United States proffered sweeteners - and warnings -
to the project’s investors.
    On the sweetener side, the U.S. Trade and Development Agency
(USTDA) told Reuters it offered training grants valued at a
total of $3.8 million to five telecom companies in countries on
the cable’s route in return for them choosing SubCom as the
supplier. Telecom Egypt and Network i2i Limited, a company owned
by India’s Bharti Airtel Limited, got $1 million apiece, USTDA
said. Djibouti Telecom, Sri Lanka Telecom and Dhivehi Raajjeyge
Gulhun of the Maldives each received $600,000. None of the five
responded to questions from Reuters.
    Meanwhile, American diplomats cautioned participating
foreign telecom carriers that Washington planned to impose
crippling sanctions on HMN Tech, a development that could put
their investment in the cable project at risk. The U.S. Commerce
Department made good on that threat in December 2021, citing HMN
Tech’s intention to acquire American technology to help
modernize China’s People’s Liberation Army.
    A senior U.S. State Department official confirmed that the
department had advocated through its embassies to help SubCom
win the contract, including warning other countries about the
security risks posed by HMN Tech. Though the cable won’t come
ashore in Chinese territory, the U.S. government believed HMN
Tech could insert remote surveillance equipment inside the
cable, the official said without providing evidence. The
Commerce Department declined to comment.
    Two months later, in February 2022, SubCom announced that
the cable consortium had awarded it the contract to build the
SeaMeWe-6 cable. China Telecom and China Mobile, which were due
to own a combined 20% of the cable, pulled out because the
Chinese government wouldn’t approve their involvement in the
project with SubCom as the cable contractor, three people with
knowledge of the matter told Reuters. China Unicom remained.
    China’s foreign ministry and its defense ministry, which
handles questions for the People’s Liberation Army, did not
respond to Reuters’ questions.
    On June 26, 2022, the White House published a fact sheet
citing various upcoming infrastructure projects, including the
SubCom undersea cable deal. The document said the U.S.
government had “collectively helped secure” the award of that
contract for SubCom.
    The White House did not respond to a request for further
comment.
    
    TENSIONS RISING
    U.S.-China relations are at the lowest they’ve been in
decades. The two countries have clashed on a host of issues,
including China’s tacit support for Russia’s invasion of
democratic Ukraine, its crackdown on Hong Kong, and the future
of Taiwan, which Chinese President Xi Jinping has pledged to
bring under Beijing’s control. In February, the United States
shot down a Chinese spy balloon that floated into American
airspace. China has claimed it was a weather balloon that got
blown off course and accused the Americans of overreacting.
    President Joe Biden’s policies are increasingly isolating
China’s high-tech sector with the aim of bringing some
technology manufacturing back to America while keeping
cutting-edge U.S. innovation out of Chinese hands.
    Over the last year, the Biden administration has pushed
through a landmark bill to provide $52.7 billion in subsidies
for U.S. semiconductor production and research. The Commerce
Department in December added dozens of Chinese firms producing
technology such as drones and artificial intelligence chips to
its so-called Entity List, which severely restricts their access
to U.S. technology.
    Chinese Foreign Minister Qin Gang, speaking in Beijing this
month, said the two superpowers are destined for “conflict and
confrontation” unless Washington abandons its policy of
“containment and suppression” towards China.
    Three companies have dominated the construction and laying
of fiber-optic subsea cables for decades: America’s SubCom,
Japan’s NEC Corporation and France’s Alcatel Submarine Networks,
Inc.
    But a seismic shift occurred in 2008 when Huawei Marine
Networks Co Ltd entered the fray. Owned by Chinese telecom
Huawei Technologies, the Tianjin-based company initially built
small cable systems in underserved markets such as Papua New
Guinea and the Caribbean.
    Fast-forward 15 years and the firm, now known as HMN Tech,
has become the world’s fastest-growing manufacturer and layer of
subsea cables, according to TeleGeography data.
    But the company’s short history has been shaped by
deteriorating U.S.-China relations.
    In 2019, Huawei Technologies came under fire from the
administration of then-U.S. President Donald Trump. The Commerce
Department banned Huawei and 70 affiliates from buying parts and
components from U.S. companies without government approval.
    That move was part of a global campaign by Washington and
its allies to stop Huawei Technologies from building
fifth-generation, or 5G, communications networks around the
world due to concerns that host nations would be vulnerable to
Chinese eavesdropping or cyberattacks, the details of which were
revealed in a previous Reuters investigation.
    Huawei Technologies said at the time that it was a private
company that is not controlled by the Chinese government.
Contacted for this story, Huawei Technologies said it fully
divested its stake in Huawei Marine in 2020 and is no longer
connected with the cable-laying company, which rebranded as HMN
Tech under new Chinese ownership.
    HMN Tech expanded its ambitions with the PEACE cable, which
came online last year and connects Asia, Africa and Europe. The
firm was poised to make another great leap with the
Singapore-to-France project before SubCom snatched it away.
    The following account of how that deal fell apart for the
Chinese players is based on interviews with six people directly
involved in the SeaMeWe-6 contract. They all asked not to be
named as they were not authorized to discuss potential trade
secrets or matters of national security.
    
    BACKROOM BRAWL
    Large undersea cables cost several hundreds of millions of
dollars. They are usually paid for by a consortium of tech or
telecom companies that can spread the cost and risks, as well as
take responsibility for any cable landing that ends up in their
countries.
    In the case of SeaMeWe-6, there were more than a dozen
companies funding the cable, and there was immediately a split
in the group, which would need to reach a consensus to select a
contractor for the project, the people said.
    China Telecom, China Mobile and China Unicom were resolutely
behind HMN Tech, which had come in with a bid of around $500
million. Microsoft, Orange and India’s Bharti Airtel expressed
concerns about the risk of potential U.S. pushback on HMN Tech’s
involvement. Still, it was hard to argue with the price.
SubCom’s bid was closer to $750 million.
    On a series of video calls in mid-2020, the consortium
members verbally agreed that HMN Tech would build the cable.
SubCom would be the reserve in case the Chinese firm pulled out
or failed to deliver on the terms of its proposal.
    But behind the scenes, SubCom and the U.S. government were
sowing seeds of doubt about whether HMN Tech was the best
company for the job.
    SubCom had already successfully applied for loans from the
federal Export-Import Bank of the United States to support its
bid. It also secured advocacy assistance from the Department of
Commerce, which quickly mobilized U.S. embassies around the
world to lean on consortium members in their host nations.
    U.S. ambassadors in at least six of those countries,
including Singapore, Bangladesh and Sri Lanka, wrote letters to
local telecom carriers participating in the deal, according to
people involved. One of these letters, seen by Reuters, said
picking SubCom is “an important opportunity to enhance
commercial and security cooperation with the United States."
    Separately, ambassadors and senior diplomats met with
executives at foreign telecom companies in at least five
countries. The message: HMN Tech could be subject to U.S.
sanctions in the near future. That in turn would make it
difficult for the telecoms to sell bandwidth because their
biggest likely customers - U.S. tech firms - wouldn’t be allowed
to use the cable.
    One senior Asian telecom executive recalled a meeting in
mid-2020 with a top U.S. diplomat and an American digital trade
attaché. The U.S. officials explained how sanctions on HMN Tech
would render the cable virtually worthless, providing him a
printed spreadsheet with an economic analysis showing just that.
    “They said we’d go bankrupt. It was a persuasive argument,”
the executive told Reuters.
    Two other Asian telecom executives in the consortium told
Reuters they met with both Chinese and U.S. diplomats, who urged
them to back HMN Tech and SubCom, respectively.
    By the end of 2020, several consortium members, including
Bangladesh Submarine Cable Company Limited, India’s Bharti
Airtel, Sri Lanka Telecom, France’s Orange and Telecom Egypt,
told their partners they were having second thoughts about
choosing HMN Tech as a supplier, mostly over the fear of
sanctions.
    None of these companies responded to requests for comment.
    In February 2021, with the consortium partners at
loggerheads, SubCom and HMN Tech were given a chance by the
group to submit a “best and final offer.” SubCom lowered its bid
to close to $600 million. But HMN Tech was now offering to build
the cable for $475 million.
    Several consortium members, including Microsoft, Singapore
Telecommunications Limited (SingTel) and Orange, argued to the
other participants that when the risk of sanctions was factored
into the bids, SubCom was offering a better deal. The three
state-owned Chinese companies strongly disagreed. The companies
all declined comment.
    On a tense final video call in late 2021, an executive from
SingTel, the chair on the cable committee, urged the companies
to vote on a final decision before the whole deal collapsed, two
people who were on that call told Reuters.
    China Telecom and China Mobile threatened to walk off the
project, taking tens of millions of dollars of investment with
them. But the majority of the consortium picked SubCom, and the
two Chinese state-owned firms departed. Two new investors -
Telekom Malaysia Berhad and PT Telekomunikasi Indonesia
International (Telin) - joined the deal, and some of the
original members raised their stakes to make up the shortfall,
the people said.
    Telekom Malaysia and Telin did not respond to requests for
comment.
    In addition to the successful campaign to freeze out HMT
Tech from the Singapore-to-France cable, teams across the U.S.
state and commerce departments and the Office of the U.S. Trade
Representative once again coordinated with the White House to
use diplomatic pressure to boot the Chinese firm from a project.
This time it was a cable connecting the three Pacific island
nations of Nauru, the Federated States of Micronesia and
Kiribati, according to two sources involved in that deal.
    The United States, Australia and Japan announced in December
2021 that they would jointly fund a cable on the same route,
known as the East Micronesia Cable. In a joint statement this
month, the three said they had met on March 8 to help “push
forward” on this cable, without giving a time frame.
    The U.S.-China backroom brawling over undersea cables is
threatening to overwhelm the subsea cable industry, which has
always relied on careful diplomatic collaboration to survive,
said Paul McCann, a Sydney-based subsea cable consultant.
    “I've never seen such geopolitical influence over subsea
cables in the 40-odd years I’ve been involved in the business,”
McCann told Reuters. “It's unprecedented.”
    
    TEAM TELECOM
    At the heart of Washington’s newly aggressive strategy is
Team Telecom. That’s the informal name for an interagency
committee set up through an Executive Order signed by Trump in
April 2020. The mission: safeguarding U.S. telecommunication
networks from spies and cyberattacks.
    Team Telecom is run by the National Security Division of the
Department of Justice (DOJ). That division is headed by
Assistant Attorney General Matthew Olsen. Nominated to that
position by Biden in May 2021, Olsen has worked in a string of
intel posts. He served as director of the National
Counterterrorism Center under former President Barack Obama from
2011 to 2014, and before that as general counsel for the
National Security Agency, the U.S. spy nerve center.
    The DOJ declined to make Olsen available for an interview.
    While the State Department and its partners have helped to
prevent China from obtaining new subsea contracts in foreign
places of U.S. strategic interest, Team Telecom has focused on a
purely domestic concern: stopping any cable from directly
connecting U.S. territory with mainland China or Hong Kong due
to worries about Chinese espionage.
    To that end, the team makes cable licensing recommendations
to the U.S. telecom regulator, the Federal Communications
Commission (FCC). Since 2020, the team has been instrumental in
the cancellation of four cables whose backers had wanted to link
the United States with Hong Kong, Devin DeBacker, a DOJ official
and senior member of Team Telecom, told Reuters in an interview.
    Hong Kong, a former British colony that transitioned to
self-rule and is dubbed a “special administrative region” by
China, has long been the investment gateway to the communist
mainland because of its well-developed financial sector, open
economy and highly-educated workforce.
    However, in 2019, Beijing launched a security crackdown and
increased surveillance in Hong Kong, prompting mass
demonstrations. As China tightened its grip, Washington became
concerned that Chinese spy agencies would intercept data on the
planned undersea cables if that equipment ultimately came ashore
in Hong Kong, said DeBacker, the chief of the Foreign Investment
Review Section of the DOJ’s National Security Division.
    “That provides a physical access point in what is
effectively Chinese territory,” DeBacker said. “Because of the
way that China has eroded Hong Kong's autonomy, that enabled the
Chinese government to have a direct, all-access path,
effectively a collection platform on U.S. persons' data and
communications.”
    Washington’s decision to nix any Hong Kong terminus for the
four planned subsea cable deals upended the plans of Google,
Meta and Amazon. These tech titans have been among the biggest
investors in new cables over the last decade as they seek to
link up a network of data centers in the United States and Asia
that underpin their fast-growing Cloud computing businesses,
according to TeleGeography.
    The first, a project owned by Google and Meta known as the
Pacific Light Cable Network, will now only transmit data from
the United States to Taiwan and the Philippines, after Team
Telecom recommended that the FCC reject the Hong Kong leg. The
section of the cable going to Hong Kong, spanning hundreds of
miles, is currently lying abandoned on the ocean floor, two
people involved in the deal said.
    In an unsuccessful appeal to the FCC, Google and Meta said
Team Telecom’s argument that China might intercept data on the
cable was “unsupported and speculative,” and that its decision
was “a referendum on China, rather than the assertion of any
real specific concern,” according to an Aug. 20, 2020,
submission by the companies that is available on the FCC
website.
    Similarly, the Bay to Bay Express Cable System, developed by
Amazon, Meta and China Mobile, will not run as planned from
Singapore to Hong Kong to California. As part of a deal struck
between Amazon, Meta and Team Telecom, China Mobile left the
consortium and the cable was rebranded as CAP-1, with a new
route from Grover Beach, California, to the Philippines, three
people involved said. The cable had already been almost entirely
laid along the original route, and the section to Hong Kong now
sits unused in the depths, the people said.
    Google, Meta and Amazon declined to comment. China Mobile
did not respond to requests for comment.
    There is evidence the U.S. campaign has slowed China’s
subsea cable juggernaut.
    HMN Tech supplied 18% of the subsea cables to have come
online in the last four years, but the Chinese firm is only due
to build 7% of cables currently under development worldwide,
according to TeleGeography. These figures are based on the total
length of cable laid, not the number of projects.
    In a tit-for-tat maneuver, China has thrown up a roadblock
on a cable in which Meta is an investor, according to two cable
consultants with direct knowledge of the project.
    That cable, known as the Southeast Asia-Japan 2 cable, was
planned to run from Singapore through Southeast Asia and touch
down in Hong Kong and mainland China before going on to South
Korea and Japan. China has delayed giving a license for the
cable to pass through the South China Sea, citing concerns about
the potential for the cable manufacturer - Japan’s NEC - to
insert spy equipment on the line, the consultants said.
    In response to Reuters’ questions, an NEC spokesperson said
it does not comment on individual projects, but said that it
does not insert surveillance equipment into its cables.
    Meta and China’s foreign ministry did not respond to
requests for comment.
    In recent years, the U.S. government has blocked American
firms from using telecom gear from Chinese firms that Washington
has deemed to be national security threats, and it has banned
several Chinese state-owned telecom companies from operating in
U.S. territory.
    Among them is China Telecom, which had previously won
authorization to provide services in the United States. The FCC
revoked that authorization in 2021, saying China Telecom’s
America’s unit "is subject to exploitation, influence and
control by the Chinese government.” The agency cited examples of
the company using its access to U.S networks to misroute
international traffic back to Chinese servers.
    China Telecom failed to convince a U.S. court to reverse
that decision.
    The Chinese Embassy in Washington last year said the FCC has
"abused state power and maliciously attacked Chinese telecom
operators” without any factual basis.
    Team Telecom’s DeBacker said China uses similar tactics on
undersea cables, declining to give specific examples.
    “The risk is real," DeBacker said. "It has materialized in
the past, and what we're trying to do is prevent it from
materializing in the future."

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
U.S. and China wage war beneath the waves - over internet cables
   https://www.reuters.com/investigates/special-report/us-china-tech-cables/
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Joe Brock in Singapore
Additional reporting by Phil Stewart, David Lawder and David
Shepardson in Washington; Brenda Goh in Shanghai; Eduardo
Baptista in Beijing; Sarah Wu in Taipei; David Kirton in
Shenzhen; Ruma Paul in Dhaka; Munsif Vengattil in New Delhi; and
Tim Kelly in Tokyo
Editing by Marla Dickerson)
 ((Joe.Brock@thomsonreuters.com;))