How the Clean Network Changed the Future of Global Technology Competition – Harvard Business Review

BRIAN KENNY: 5G, the 5th generation network, its been touted as a real game changer. TechCrunch says that with the leap to 5G networks, we can start to completely reshape entire industries. We can rethink how we run our cities and manage critical national infrastructures. 5G will deliver data 40 times faster than the current maximum speeds. That means machines can communicate instantly without any human intervention and do things on our behalf and for our benefit without our engagement. Exciting, right? And also a little scary because along with all the promise of the 5G network comes the same peril of network security thats always existed with the internet. And the more we come to rely on it, the more vulnerable we are. Today on Cold Call, weve invited professor Meg Rithmire and case protagonist Keith Krach to discuss the case entitled, The Clean Network and the Future of Global Technology Competition. Im your host, Brian Kenny, and youre listening to Cold Call on the HBR Presents Network.

BRIAN KENNY: Meg Rithmire studies the comparative political economy of development, with a focus on China and Asia, and she is the author of Land Bargains and Chinese Capitalism. Keith Krach is the former Under Secretary of State for Economic Growth, Energy and the Environment, and he has a long and distinguished career as an entrepreneur and business leader, including as the chairman, president, and CEO of DocuSign and he holds an MBA from Harvard Business School. I could go on and on and on, but I wont because we have a great conversation to get to. Thank you both for joining me today.

KEITH KRACH: Thanks so much for having us.

MEG RITHMIRE: Great.

BRIAN KENNY: Keith, we love having the protagonist in on the conversation because you experienced it, you lived it. So were really going to be interested in hearing your perspective and insights on how all of this unfolded. Meg, its a great case and its ripped from the headlines, so I think people will be really interested in hearing your take on why you decided to write this case and how it relates to what you do as a scholar. Lets just dive in. Before we get started, Meg, Id like to ask you to tell us what would your cold call be when you step into the classroom to start this discussion?

MEG RITHMIRE: Well, theres only one question to ask in this case, which is: Evaluate the Clean Network initiative. So was this a good idea? How did it go? In terms of cold calls, its an interesting one because the studentsthey have very different perspectives, some based on where theyre from. Even among American students and among Chinese students, theres very different perspectives on this.

BRIAN KENNY: Yep. Youve been studying China for many years. Why did you think that this was an important story to tell, an important case to write?

MEG RITHMIRE: Well, my research over the last several years has really been about Chinas industrial policy, Chinas science and technology policy. As you said, I am a specialist on China. My first book was on property rights in China. Now my research is much more about Chinas role in the world and other countries reactions to China and what it means for global capitalism. So I wrote this case for the course that I teach in the second year of the HBS MBA program, which is called, Managing International Trade and Investment. Its usually firm-based cases that look at the politics and macroeconomics of globalization. So when Im teaching my students about globalization and the rules that govern their business environments, the relationship between the U.S. and China is huge in structuring business environments, not only in the United States and in China, but in every country across the globe. You read this case and you realize, Gosh, what must it be like to be the CEO of a telecom company in Spain and have the Under Secretary of State from the United States calling you up and telling you, This is the kind of business decision you should and should not make, or we strongly encourage you to do this. This is not the typical mode of doing business, of doing diplomacy, but I think the case and the scenario of Chinese firms in the world and American political reactions to those Chinese firmsits heralding a new era for how globalization works and how states are interacting with firms. And clearly, this is high drama. And for our students theyre sitting in this classroom doing their MBA, like Keith did a few decades ago. Then, Keith goes on to run a few companies and then, finds himself in the middle of a geopolitical firestorm, where hes using both politics and a business background to think about a problem of extreme importance. You cant get more dramatic than that. So as a case, its perfect to talk about U.S., China, to talk about what role businesses have, business leaders have. Its an opportunity I could not turn down.

BRIAN KENNY: Im waiting for the Netflix series, I know thats going to come out soon. Keith, were going to find out from you directly in a couple of minutes what making those calls was like and what the reaction you got was. But before we go there, Meg, let me just ask you to set the stage a little bit more for us by talking about Chinas investment strategy and their manufacturing strategy in the U.S., and how that relates to the case.

MEG RITHMIRE: I started at the school ten years ago. China was a destination for foreign direct investors from manufacturers. It was a low value add, labor arbitrage role in global supply chains. Now the China that we have in 2020, which is when the case is really set, is a technological behemoth that is seeking to become even more capacious in its technology than it has been over the last 15 years. So that transformation has everything to do with The Clean Network. The global financial crisis revealed to Chinas leaders how much they depended on foreign demand, on exports. Later, other kinds of episodes revealed how much they depend on foreign technology. So here, are the Snowden revelations are really important. So frequently, I start talks on things like this by saying, Theres a national security agency inserted a backdoor into a companys technology for a foreign country and actually, its Cisco and the NSA. When China learned that, they got incredibly scared that were depending on semiconductors from abroad, were depending on mainframe computers that are existing in the United States and elsewhere. So they adopted a drive to domesticate that technology, called Made in China 2025. China has had state-owned enterprises for a long time, but Made in China 2025 and this new industrial policy is about sending state money from the Chinese government to firms of all kinds, no matter who owns them. Its very difficult, now you look at any company in the Chinese economy, and if theyre in any sector thats important to the futureAI, semiconductors, electric vehicles, batteries, anything like thatyoure going to find some element of state ownership in that firm. That presents this tremendous political challenge to the rest of the world, which is how do we think about where the Chinese state ends and firms begin? That kind of political problem is one that, I think, Keith and his team were dealing with. And then, we saw huge rise and then fall of Chinese high-tech investments in the United States. So this idea that what they should do with this funding is, in part, it takes forever to build your own semiconductor. Theres this law about it. I wont go into it. But its very difficult just to develop all this technology yourself, and so the idea was, Well, we should go out and acquire companies in the world, whether in Israel or Korea, Taiwan, the United States, that have this know-how. It took a few years for people in the United States and in Korea and Taiwan and Israel to say, Gosh, what is happening here? Were nervous about this. Were nervous about these investments. So then you start to see a bunch of policies, like the overhaul of the Committee on Foreign Investment in the United States, those kinds of things, which are limiting Chinese investment in the United States. But then you come to, what do you do then, about the presence of Chinese firms in other countriescountries that we trade intelligence with, countries that we work in? That is the problem, really, that is at issue in this case.

BRIAN KENNY: That means it gets very complicated very quickly. Keith, let me turn to you. So Ive got to ask, what were your responsibilities at State, did you know what you were getting into, I guess, is part of the question?

KEITH KRACH: Well, I originally came to Washington because of what I had seen in China in terms of DocuSign, when I was running DocuSign. Id been going there since 1981, but this time it was different. I went on a listening tour to see if we should enter the market. And I could see how much Dictator Xi really amped up aggression, I could see their economic aggression. I saw their drone swarm strategy. Everybody was telling me to download Tencent every 30 minutes. And all I knew is the guys with the best technology win the war, so I went out to Washington. I got asked to serve. And I had experienced intellectual property theft from the Chinese when I was the CEO of Ariba. I had seen what happens when we build manufacturing plants over there when I was VP at General Motors and those kinds of things. I can actually see what the weapons of mass production have done, back where I grew up in Ohio, where my dad had a five-person machine shop abd I was welding in there at age 12. So I knew I would get this mission and I was responsible for running United States economic diplomacy. One of the questions they asked me in my Senate confirmation hearing is what would be my China strategy. And I said, My China strategy would basically be three things and it would harness U.S.s biggest competitive advantage. Number one, rally our allies and our partners. Number two, leverage the resources and innovation of the private sector. And then number three, amplify the moral high ground of democratic values. So when I came in, I was given the mission to develop an operationalized global economic security strategy to drive economic growth, maximize national security, and combat China Inc.s economic aggression.

BRIAN KENNY: One of the first things you did was a listening tour. So the climate at the time that you stepped into this between China and the United States, this is during the Trump Administration, things were tense already because we were looking at trade wars and other things like that. You stepped into a hornets nest, I guess, is what Im saying. And you went on this listening tour. What were the things that you heard and the insights that you brought back from that?

KEITH KRACH: I had probably about 60 bilateral meetings with foreign ministers, economic ministers, finance ministers, and it almost seemed like all countries were terrified of China. Nobody wanted to use the word China or Huawei. The big aha, I think, came when I asked about the relationship with China and they said, Well, theyre really important trading partners to us, but then itd be like theyd look both directions and lean in and say, But we dont trust them.

BRIAN KENNY: Yep.

KEITH KRACH: And this happened over and over again. Thats really why I told my team, Look, were going to make our strategic positioning all about trust. You do business with people you trust, you partner with people you trust, you buy from people you trust. Its the basis of every relationship. That was something that when you look at our objectives of The Clean Network, this applies to all areas of economic competition with China.

BRIAN KENNY: So lets go back just for a second because, Meg, I want to ask you about this climate question as well. It was during this period of time, and weve mentioned Huawei a couple of times, and ZTE is written about it in the case, theyre central characters in this case. The Canadian authorities had picked up the CFO of Huawei and she was being held on charges. Shes the daughter of the founder of Huawei. Things are really amping up at this time. This is, maybe, some of the drama you were alluding to. How is all that playing out in the background here?

MEG RITHMIRE: Well, I have to say my personal connection to this is I was on a train from Shanghai to Beijing when Huawei was blacklisted, was put on the entity list. And I was on a plane to arrive to Shanghai the week before when the trade talks fell apart. So there is this general feeling, especially in China and among some around the world, that the trade stuffall of this is the United States just targeting China. All of this is politicized. Its making an enemy of China. My views on China are quite nuanced, but my strong view is that the trade conflict and whats going on with Huawei are very different issues. The trade conflict is about these long-standing business practices that China has had that other countries have also been frustrated with and these things. Whereas, this issue of what do you do about Chinese high-tech firms? What do you do about possible government involvement with technologies that are what we might call dual use or omni use, that could be used for intelligence purposes? Thats a very different set of issues. Its hard because the relationship between these two countries, that theyre two, clearly, of the largest economies in the world, theyre very important countries. And so we tend to see all of these things as tied up together, but theyre actually quite different in some ways. The reality is with the detention of Meng Wanzhou, the CFO of Huawei who you mentionedthat was Department of Justice indictment based on Huawei and which ZTE had also violated the sanctions against Iran. If you read the indictment there, its clear that they did, in fact, violate the sanctions against Iran. So thats not about Huaweis business practices. Thats not about its links to this and that intelligence network in China. Its about violation of sanctions, and evidence is there on that. The blacklisting of Huawei though, thats a different issue altogether. So its important, I think, to disentangle some of this. But certainly the climate between the U.S. and China has deteriorated significantly. I would say, importantly, that trend predated the election of Donald Trump. Barack Obama was the first president who actually used CFIUS [The Committee on Foreign Investment in the United States] to block a Chinese tech acquisition. So that was happening in 2016 and early 2017 before Donald Trump took office.

BRIAN KENNY: Yeah. Great point.

KEITH KRACH: And I might add, by the time we got these authorities, it was clear that the Chinese Communist Party had a master plan to control 5G communications. This is just not about the next generation of smartphone; this is about controlling power grids, utility systems, sewage systems, manufacturing processes, all communications around the world. It looked like Huawei was unstoppable. They announced 91 deals, 47 in Europe. They looked like they were going to run the table. It was a desperate situation. The previous U.S. attempts had failed and Im quoted in the case that what was going on is, and the U.S. was banging the table and saying, Dont buy Huawei. So I come in from the private sector, from Silicon Valley, and I go, Thats the craziest thing I heard of because where I come from, you dont even mention the competitors name. And then, we did something that, to me, was second nature, but in a government, it was unprecedented. I said, Why dont we treat these countries and these telcos like a customer, and the customer is never wrong. By the way, we should have a value proposition. That was a key part of the strategy, no doubt about it. The other thing that Ive learned in Silicon Valley is that everybody wants to go with a leader in a rapidly-changing market. Huawei was the clear leader at the time. And leadership in a rapidly-changing market is not defined by size. Its defined by momentum. So the object of the game was to reverse Huaweis momentum and give it back to the Western firms. As Meg said, this is a precursor for Chinas economic aggression. This is textbook casestealing intellectual property, government subsidies in not only research, but in financing. So this was an important precedent that was being set. This was a national security issue.

BRIAN KENNY: Lets talk about your strategy for reversing the momentum. How did you start to go about doing that?

KEITH KRACH: The Clean Network was part of our global economic security strategy. We had three basic pillars. The first is to turbo charge U.S. economic competitiveness and innovation, and youre seeing the result of some of that nowfor example, with the United States Innovation Competitive Act, that $250 billion to invest in research. The second one is safeguard Americas assets, and not just intellectual property, but also, our financial systems, healthcare, education systems. Then the third one was to build a network of trusted partners. So The Clean Network is an alliance of democracies of like-minded countries, companies, and civil society that operates by a set of trust principles for all areas of economic collaboration. Those are things like transparency, reciprocity, respect for rule of law, respect for property of all kinds, respect for sovereignty and nation, respect for human rights, respect for the planet. What China Inc. had been doing is theyve been taking those democratic principles that we honor and they do not, and theyve been using it against us. What we did is, in essence, we took those very trust principles that theyve been using against us, we flipped them on their back. We used it against them because theyd been using it for their strategic advantage. So, basically, we weaponized the very principles that protect our freedoms.

BRIAN KENNY: How did you do this? What are these calls like? Youre setting up meetings. Who are you meeting with, and what are the conversations? Whats the tenor of the conversations because Meg pointed out before this is a really unusual way to conduct diplomacy?

KEITH KRACH: So we had a three-prong strategy and that was with countries and with telcos and with clean companies. Calling on CEOs of foreign companies, what I found is kind of an unconventional approach in the government sector, but for our team, it was natural. So we called on them, and then, obviously, a lot of prime ministers, a lot of economic ministers, when we go to the different countries. Then with the CEOs, the clean companies, these were the end users and important companies in these countries and for these telcos, and that came into play very strategically in our seven value propositions. So heres how it would typically go, Were going to put Huawei in. Were going to put them on the edge, not the core. Theyre really inexpensive. And what Id say is, I go, First of all, 5G is a system, so if you have them on the edge, theyre in the core. The second thing is, so theyre charging you money, well, if theyre charging you money, youre getting ripped off because in a lot of countries and for a lot of telcos, theyre giving it away for free. They want the data. And let me tell you about this National Intelligence Act, which Ill be honest with you, I didnt even know existed when I was back being a CEO. And that is that any company, a state owner or otherwise, any person has to turn over any information, proprietary technology, intellectual property, or data upon request to the Communist Party, the VLA, or the government, which is basically one in the same, or you suffer the consequences.

BRIAN KENNY: Mm-hmm.

KEITH KRACH: And the question comes down to one question and one question only. Who do you trust? That was the thesis, and that resonated big time.

BRIAN KENNY: So Meg, this is hard ball, unlike has been played with China before, I guess, is my question?

MEG RITHMIRE: Well, its a couple of things that are different from before. I just want to reiterate or emphasize what Keith said, this National Intelligence Law. So it was a part of a suite of laws that China has passed since 2013so cybersecurity law, national security laws, etc, which are, they do have such a vague phrasing and such wide jurisdiction for the party state and it made a huge difference. In a place like the UK, which had a technical solution to the Huawei issueso they established this Huawei Oversight Center where they were looking at the source code from the company. So, basically, the issue being you cant put in a back door because we have our technical experts sitting, observing your code in the UK for the equipment that Huawei was deploying. But then, once you have this law in China, and we dont know how its implemented because when the Chinese security agencies implement the law, were not going to hear about it. Its not going to be on the front page, so we dont know.

BRIAN KENNY: Right.

MEG RITHMIRE: And it changed the minds of a lot of countries. So one thing I do in class, which is a really fun thing to do, which is, I say to the students, If you are Huawei, how would you feel about this law? They say, Gosh, I would hate it. Because, of course then, all of this work weve done for years, trying to figure out who really owns Huawei? Who does Huawei really answer to? Well, it doesnt matter anymore if you have a law like this in China. And Ive heard a lot of people from a lot of different parts of the Chinese tech sector, etc., say they hate these laws because it makes it impossible for them to persuade foreign countries that theyre really operating commercially and wont have to hand over their data. Legally they do, so it makes a huge difference. But yes, this is unprecedented. So there are a number of things about whats going on here. The idea that the United States would be devoting incredible diplomatic resources to a global campaign against a single company is really unprecedented. I think it shows you how global capitalism is changing with the entry of China. This model that is new to us is changing the way that business is done. And one thing thats significant here is that this was an attempt at multilateral negotiation. It was diplomatic. It wasnt about getting in peoples faces or at least not primarily about that. And the other thing thats interesting about it is that not only do you have Under Secretary Krach asking you, Choose one firm over a Chinese firm, but choose a European firm. So there are no American 5G end-to-endtheres just no company that can do this in the United States. So I would love to hear Keith talk a little bit about that as well. What is it like to advocate for European companies when you are the Under Secretary of State for the U.S.? So whats the view for U.S. competitiveness because I think thats quite interesting.

KEITH KRACH: So if you look at the objectives, we had three objectives for The Clean Network. I think this is really, really an important point because it wasnt just about 5G. It wasnt just about Huawei. The first objective was to really prove that China Inc. is beatable by defeating of the CCPs master plan to dominate 5G. So The Clean Network represented the first government-led initiative that actually defeated China Inc., and a very important one, and that is dominate 5G, which is the backbone for their surveillance state. Theres no question that they are tied to the Chinese Communist Party. But theres a second part to that objective one, and that is to open up the playing field and enable U.S. entrance and other countries entrance to the market because they had been subsidized in Huawei so much that the pricing umbrella was so low that it didnt make sense for the big tech players to jump in the market or the innovators to go. So we had to neutralize them, lift the pricing umbrella, so these guys could earn a profit. Indeed that happened, and now Microsoft is coming in, Dell, Cisco, all these innovators. The second objective was to deliver an enduring model for competing with China, Inc., measured by meeting ten essential factors. Theres a chart on that in the case study on those ten. We clicked them all off. But its things like executability, its things like repeatability, its things like affordability. The final objective was to provide a head start on building a strategic platform that could be leveraged in all other sectors of economic competition. After a few months, we announced clean apps, clean cable, clean carrier, clean cloud. And we also had programs going, in terms of clean infrastructure with, clean financing, which was the BlueDot initiative, which now is the B3W, which the G7 nations have accepted. We have clean minerals with clean energy. So it was a model going forward. I think one of the important points out there is that with this being the only successful government-led initiative that really has proven tangible results, this is a great model going forward.

BRIAN KENNY: Yeah. Well, Meg, let me ask you this. Obviously, this didnt come without criticism. So Im wondering what did the critics have to say about this, and is there validity to some of the criticisms?

MEG RITHMIRE: Well, they say many, many things. So let me say a few of the prominent criticisms. So one is, and you heard Keith just talking about its an alliance of democracies, etc. So one criticism is, and one student did say in class, Well, why is Vietnam a member? Whats Krach doing in the UAE? These are not democracies? Which leads you to think, Okay. Well, should this be about democracies or should this be pretty hard, cold, realpolitik? Dont accept China. We clearly share intelligence with countries that are not democracies Pakistan, Saudi Arabia, etc. Do we want those countries using Huawei or do we want them not using Huawei? So one criticism the students have is, Its nice to hear someone talk about values, etc., but please give me a break. The United States does not really care that much about those values in other countries. Another is, The United States is just weaponizing its critical hub. So if you think about how sanctions work and what does it mean to blacklist a company, put it on the entity list, which is that were basically saying, and like we did with Huawei and ZTE and Iran, If you have any U.S. business, then youre exposed to U.S. law and that our sanctions are applied extra territorially. Any country that violates the U.S. sanctions, even if they have nothing to do with the United States, if they have other business in the United States, then theyre vulnerable. So a lot of what some criticism is, is like, Look, this is the United States bullying countries to take a side in a fight thats between U.S. and China has nothing to do with me. So my best response is, If I think U.S. value chains in semiconductors or in other things are going to be weaponized in this fight, I should disintermediate the United States. So you find interesting companies that are saying, Great. Now I have to have a supply chain that is compliant with Chinas views and a supply chain thats compliant with the U.S. views. Its going to be more expensive and its going to be frustrating to me. So what impact does it have on the United States? Im not saying I agree or disagree with these different kinds of criticisms, but there are things that have been said. One criticism that came from China, which was, This has no stability. We know that U.S. administrations change every four to eight years. This Clean Network thing was really successful in a year, getting 60 something countriesKeith can tell you the numbersto sign on, but whos to say that theyll stay signed on for the next two years? This isnt NATO. Its not a treaty, right? Its just a soft agreement. And thats what made it fast and effective, but its also what makes the commitment shallow. Those are the main criticisms that come up in class and in discussions of it.

KEITH KRACH: But the one thing, I think, thats really important is that this is democracy versus authoritarianism. And if you look at those trust principlesrespect for rule of law, respect for sovereignty of nation, respect for human rights, respect for the planetthese were the key things it was based on. Another criticism was that China couldnt join The Clean Network. By the way, that was not true at all because the trust tenets of The Clean Network explicitly state, The goal is to include all countries and organizations as participants. The countries that currently do not abide by the trust principles will be excluded from Clean Network membership until they reformed the problematic practices and laws. So no nation is excluded forever, and The Clean Network doesnt require a country to choose between a partnership with the U.S. or any other nation. And I think that was really important. We got 60 countries, representing two-thirds of the worlds global GDP, 200 telcos, a host of clean companiesfrom Oracle, HP, Fujitsu, Siemens, NEC, companies like thaton The Clean Network. At the end of the day, and I think this was an aha for the class, was it puts China in a catch-22 because they either live by these principles and change their practices, or theyre going to get excluded from potentially 80 percent of the markettheir choice. The important thing in this type of economic statecraft is to maintain the moral high ground. In other words, its your choice and its based on these trust principles.

BRIAN KENNY: Yeah. A lot of hard work, but obviously a lot of great progress as a result. This has been a fascinating conversation. Meg, I want to give you the last word as the case author. If theres one thing you want people to remember about this case, what would it be?

MEG RITHMIRE: So my answer is that were all becoming a little bit Chinese in a way. China as a model for political economy, for economic development, and for the way that the state relates to the economy is different than anything we have seen in modern capitalism. The responses that companies and countries have to that are going to vary. But I think were going to find that every country and every company adopt some of what China does in order to counter it. So in the United States, for now, were now having huge investments in our own industrial policy, something that would have been unthinkable 20 years ago, have government investments in semiconductors? This is not what the United States government typically does. I want people to learn from the case that there are so many tools that companies and governments are going to use to address what is the perceived threat from China, and business leaders have got to pay attention to those tools, how effective they are, and how theyre changing the competitive landscape. Basically, what happens in China is super important for what happens in the rest of the world, and the case really illustrates that, I think, in stark colors.

BRIAN KENNY: On that note, Meg Rithmire, Keith Krach, thank you so much for joining me. Its been great having this conversation with you.

MEG RITHMIRE: Thanks so much.

KEITH KRACH: Great. Thanks so much.

BRIAN KENNY: Were excited to be celebrating the 100-year anniversary of the case method at Harvard Business School. Its a year-long celebration, kicking off this month alongside our new academic year. If you want more on the history of the case method, visit our website: http://www.hbs.edu/casemethod100.

BRIAN KENNY: Cold Call is a great way to get a taste of the case method, after all each episode features a business case and its faculty author. You might also like our other podcasts: After Hours, Climate Rising, Skydeck, and Managing the Future of Work. Find them on Apple Podcasts or wherever you listen. Thanks again for joining us. Im your host, Brian Kenny, and youve been listening to Cold Call, an official podcast of Harvard Business School, brought to you by the HBR Presents network.

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How the Clean Network Changed the Future of Global Technology Competition - Harvard Business Review