US and China wage war beneath the waves - over internet cables

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.