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    Tuesday, August 20, 2019-8:59:36P.M.

     

     

     

     

     

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FEATURE | In global tech battle, a balky US ally chooses China

MANILA — The U.S.-China technology war is raging around the world, but the Philippines is no longer torn. It is binding its telecommunications future to China’s.

The country got its first taste of next-generation 5G services in late June with gear supplied by Huawei Technologies Co. This month, a new carrier backed by state-owned China Telecommunications Corp. will begin rolling out a network largely designed in China, to be executed by Chinese engineers in the Philippines.

The moves are a blow to the U.S., which has in recent months pushed allies to shun Huawei. U.S. officials contend Chinese companies could be compelled to conduct espionage for Beijing.

As countries like the Philippines reject pressure from Washington, Chinese companies are embedding themselves deep in strategically important infrastructure. These developments tie countries to Beijing through a new wave of technology that promises to reshape society, from economic growth to military planning.

Huawei, which has repeatedly said it wouldn’t spy for China, estimates its 5G equipment will spread across more than 130 countries, including in Europe. Huawei’s 5G system is up and running in South Korea and will be deploying in the United Arab Emirates this year. Both countries are U.S. allies.

Chinese companies’ dominant presence in Philippine telecom networks stands to move the Southeast Asian country further away from the U.S., its treaty ally — testing a relationship that has already grown strained.

Secretary of State Mike Pompeo said on a trip to Manila in March that, “America may not be able to operate in certain environments if there’s Huawei technology adjacent to that.” Other officials have since warned that the U.S. could curtail information it shares with the Philippines over concerns data could be stolen by Chinese companies.

The deal with China Telecom is part of a foreign policy shift under President Rodrigo Duterte, who has expressed distrust of the U.S. He has pursued Chinese investments and played down his country’s disputes with Beijing in the South China Sea, dismissing warnings he is giving China greater control over the contested waterway.

Mr. Duterte has come under international scrutiny for his brutal war on drugs in which tens of thousands of people have allegedly been killed. Human-rights groups have raised alarms over what they see as the growing intimidation of political opponents and journalists, which Mr. Duterte denies.

After taking office in 2016, one of Mr. Duterte’s early priorities was to improve his country’s telecom services. Citizens have long complained that phone and internet services are slow and unreliable.

With his push, the Philippines introduced a new telecom company in which China Telecom holds a 40 percent stake — the maximum permitted under Philippine law. Mr. Duterte has said he is counting on it to speed up internet connectivity in a market long controlled by two carriers.

Philippine officials say the venture, Dito Telecommunity Corp., will benefit from China Telecom’s experience serving hundreds of millions of subscribers in China, as well as its deep pockets. China Telecom will take the lead on technical operations, said Adel Tamano, a spokesman for Dito Telecommunity. Its local partner, the Udenna Group, has no telecom experience, with business interests in other areas such as shipping, logistics and real estate.

“A lot of the work has been done outside the country, in China,” said Mr. Tamano. Chinese engineers will oversee technical matters for at least three years, until their Filipino counterparts are trained, he said.

China Telecom is eager to acquire a majority stake, said Eliseo Rio Jr., an undersecretary in the Philippine government’s information and communications technology department. To make that happen, the government is seeking to lift foreign-ownership limits. An amendment is pending approval in the Philippines Congress.

China Telecom said it supports the government’s initiative and that its future investment strategy in the venture will depend on how it progresses.

Tom Uren, a cyber-specialist at the Australian Strategic Policy Institute, a think tank, said a Chinese telecommunications firm could enable hackers by helping them gain entry into a network, or simply by sharing how it is configured. Chinese engineers could duplicate data, read unencrypted correspondence or even bring down phone services to sabotage Beijing’s opponents.

If a conflict broke out, “it’s almost impossible to imagine China wouldn’t take advantage of its position” as a telecom partner, he said.

A Filipino telecom executive who works closely with cybersecurity teams said: “When those who could potentially threaten your network are inside running it, you’re as vulnerable as you can be.”

China Telecom said in response that the new Filipino telecom operator is “deeply committed to the security of its network.” The consortium will “ensure it handles user data in strict compliance with the data-protection regulations,” it said.

China’s foreign ministry said those raising questions about the China Telecom venture were “trying to politicize normal business cooperation.”

In a 2018 paper, researchers at the U.S. Naval War College and Tel Aviv University said China Telecom had “hijacked” internet traffic flowing in and out of the U.S. on several occasions in 2016 and 2017 and redirected it through China. Such a diversion could allow Beijing to copy information-rich traffic and exploit it, co-author Yuval Shavitt said.

Of the Philippine venture, he said: “You’re letting them into your home, so the bottom line is, you trust them.”

China Telecom said the hijacking allegations are unfounded and resulted from “erroneous routing configuration” by another operator.

Mr. Tamano said Dito Telecommunity plans to spend $5 billion in five years on its network: “If this is a spying venture, it is a very expensive spying venture for something they can do a lot more cheaply.”

The group has hired a former Philippine military general with expertise in signals and communications to beef up cybersecurity. Under pressure from lawmakers, the government is taking its own measures. It has signed up New York-based Verint Systems Inc. to install cyberintelligence tools into the network, said Mr. Rio, the communications technology official. Intrusions or diversions would alert the company as well as authorities.

Filipino officials and business leaders said they believe Chinese companies have become a target for the U.S. because Beijing is threatening American supremacy. Everyone spies, Mr. Rio said, adding: “They can still be a threat even if they’re not here.”

Civil-rights activists worry that once the network is fully on, Beijing could give Filipino leaders lessons on how to restrict online access and monitor citizens. Pierre Tito Galla, the founder of a local technology-focused advocacy group Democracy.Net.Ph, said his team would be watching for any signs of a Chinese-style Great Firewall going up to censor cyberspace.

Surveillance systems built by Huawei are coming to the Philippines, including 10,000 high-definition cameras. The project, intended to help police fight crime with facial-recognition technology, will be funded by Chinese loans. Congressional critics had blocked it, citing privacy and security concerns, but Mr. Duterte vetoed their decision.

Huawei is also the front-runner to supply the new China-linked telecom network. Dito Telecommunity expects to leverage China Telecom’s longstanding ties with the equipment maker to clinch a good deal, its spokesman Mr. Tamano said.

Huawei already leads the Philippines market by a mile. It provides most of the gear used by the two major operators, Globe Telecom Inc. and Smart Communications Inc.

Just 10 years ago, Globe relied on European providers Ericsson AB and Nokia Corp. That changed in 2010, when the company decided to overhaul the network with equipment from Huawei, then a third-tier supplier.

Huawei representatives didn’t speak fluent English and Western industry leaders dismissed them as lightweights, Philippine executives recalled. But the Shenzhen-based company offered innovative products at prices most others couldn’t match and was “eager, willing,” said Globe’s chief executive, Ernest Cu. In 14 months Globe’s network was all Huawei.

Around the same time, diplomatic relations between the Philippines and China were plummeting. In 2012, China seized the fisheries-rich Scarborough Shoal in the South China Sea from Manila. It also accelerated the building of artificial islands near the Southeast Asian country.

Worried Philippine officials called for an audit to check for Beijing-directed backdoors or hidden code. In response, Globe hired firms from Israel and the U.K. to run tests.

The network got a “clean bill of health,” Mr. Cu said. Still, Globe began investing in its own cybersecurity system.

To settle the maritime disputes, the Philippines filed an arbitration case against China with an international tribunal and in 2016, it won. Soon after, its government and banking systems were hit with massive denial-of-service cyberattacks originating in China that knocked critical websites offline, Philippine officials said. China rejected the ruling and denied any involvement in the attacks.

Mr. Duterte’s 2016 election reversed Manila’s China policy. The president sought closer economic ties with Beijing and signed on to China’s Belt and Road infrastructure initiative. He slowed progress on a military pact with the U.S.

In a November 2017 meeting with Chinese premier Li Keqiang, Mr. Duterte offered China “the privilege to operate the third telecom carrier in the country,” his office said. Beijing chose China Telecom for the job, Philippine officials said.

China Telecom needed a local partner, and joined hands with a Philippine company with no experience in telecom but that has well-known ties to Mr. Duterte. The company’s owner Dennis Uy, a third-generation Chinese-Filipino businessman, had contributed to Mr. Duterte’s election campaign. Mr. Uy has publicly said he is close to the president.

At first, executives at Mr. Uy’s original enterprise, the Udenna Group, were reluctant to enter a business out of the company’s comfort zone. “But we wanted to support the president. This was important to him,” said spokesman Mr. Tamano, who was also at Udenna.

Although Mr. Duterte had publicly declared his favorite, the government department overseeing telecom was setting up a competitive process to pick a new carrier.

Mr. Rio, the official in charge of selection, confronted the president’s advisers. “That’s what the president wants,” Mr. Rio was told, according to people with knowledge of the conversation.

Mr. Rio says he stuck to the rules and created a fair bidding process. Three sets of companies submitted bids; two were disqualified for not meeting the requirements. In the end, the China Telecom-backed group was the lone qualifying candidate.

Dito Telecommunity’s spokesman, Mr. Tamano, said the deal didn’t result from Mr. Uy’s relationship with the president. Mr. Rio said Dito Telecommunity was the best equipped to take on industry incumbents.

Globe unveiled a Huawei 5G modem at a party last month. The next day, Mr. Cu reached out to his other supplier, Nokia, and coaxed executives there to catch up with their Chinese rival.

Mr. Cu said Huawei was 12 to 18 months ahead of Nokia, whose products were reintroduced into his company’s network a few years ago. A spokeswoman for Nokia told The Wall Street Journal the company was working with customers to support 5G rollouts.

If the “doomsday scenario” of a digital cold war played out in the future, Mr. Cu said, “the U.S. will be the one isolated.”