My Way or the Huawei: Security & Chinese Tech

♠ Posted by Emmanuel in , at 11/23/2010 12:10:00 AM
Poor, poor Huawei. All it wants is to sell routers and other telecoms hardware in the West, but it keeps getting caught up in the great game of geopolitics between America and China. To make a long story short, the recurring theme is one of US regulators barring Huawei from doing business Stateside over purported security concerns. Not only does is deal in equipment crucial to the information backbone of the Internet, but more sinister motives are attributed to it being unable to fully disprove that its ownership includes Red Army interests. In an interesting twist to the IPE notion of "sovereignty at bay" which in its traditional sense involved American companies doing the bidding of the US government overseas, Huawei is suspected of being a Trojan horse to pry away American trade secrets and the like.

This is the third time I am retelling basically the same story, albeit with different antagonists each time. The first time around, the US Congress effectively discouraged Huawei from buying 3Com (also see BusinessWeek's Bruce Einhorn). Wary of this experience, Huawei and another Chinese equipment manufacturer, ZTE, teamed up with American partners in a bid to sell telecoms equipment to service provider Sprint Nextel to assuage concerns over national security grounds. But alas, that effort came to naught over the same grounds. Does anyone still buy America's free trade shtick?

But wait, it gets even worse. The Wall Street Journal recently reported that Huawei is in hot water over not clearing a measly $2 million acquisition of a Bay Area start-up with the Committee on Foreign Investment in the US (CFIUS), the interagency body that vets foreign investors:
Huawei Technologies Ltd., whose efforts to buy big U.S. companies have been stymied by security concerns, has landed in hot water in Washington for acquiring a small technology firm without first running the deal by the government. In May, the Chinese telecom gear maker paid $2 million to acquire staff and intellectual property of 3Leaf Systems, a Bay Area start-up that developed technology for making collections of server computers work together like a more powerful machine.

Huawei and former 3Leaf executives say they didn't think the acquisition required a review by the Committee on Foreign Investment in the U.S., or CFIUS, because they didn't buy all of the company's assets. The inter-agency body reviews acquisitions that could have national security implications. But Pentagon officials, who found out about the acquisition after it was completed, disagreed and have taken the unusual step of asking the company to retroactively clear the deal with CFIUS, people familiar with the matter said.

The dustup over such a small purchase is a reminder that U.S. security officials are keeping Huawei on a short leash. Huawei has grown quickly overseas to become the world's No. 3 seller of telecom network equipment, but security concerns have thus far kept it from completing major acquisitions or winning big contracts in the U.S. market.

Attorneys representing Huawei submitted a CFIUS application for the 3Leaf deal late last week, company executives said. Retroactive reviews have only happened in a handful of cases. If CFIUS decides the deal poses a threat to U.S. national security, the panel could force Huawei to sell the company or limit its use of the technology it purchased. The Treasury Department, which speaks for the interagency panel, declined to comment.

Huawei executives insist they weren't trying to hide anything from the government and note that they filed with the Commerce Department seeking to classify the technology under export control requirements before the company completed the acquisition. The Department of Commerce does not have the authority to stop an acquisition. "From the outset, we've been very transparent," said Bill Plummer, vice president of external affairs for Huawei USA. "At that time the perception was because of the unique nature of the activity and the acquisition of the patents that it simply wouldn't trigger a CFIUS review..."

Huawei bought intellectual property and hired 16 of the roughly 50 employees at 3Leaf, leaving behind hard assets like buildings and equipment for creditors. CFIUS doesn't review patent purchases or hiring, but the panel felt Huawei effectively bought the company, people familiar with the matter said.

The incident comes as Huawei seeks to repair its image with U.S. officials. In an effort to crack into the U.S. market, the company has hired a bevy of former U.S. officials and lobbyists to make the case that it doesn't pose a threat to U.S. security. Stewart Baker, an attorney with Steptoe and Johnson and former assistant secretary for policy at the Department of Homeland Security, said the incident shows Huawei has a ways to go. "At a minimum, it shows they still don't understand Washington," he said.

Politics can be an issue, so companies need to be conservative, said Nancy McLernon, chief executive of the Washington-based Organization for International Investment, an association representing foreign companies that invest in the U.S. "Politics and the overreaction of political concerns factor in a great deal with these companies," Ms. McLernon said. Huawei has been accused of having close ties to the Chinese government and military. Huawei has repeatedly denied such links and says it will open its equipment and software to third-party inspection. Its gear is widely used in Europe.

Huawei executives continue to build their presence in the U.S., having closed deals with smaller operators like Clearwire Corp. and Cox Communications Inc. Since creating its North American headquarters in 2001, the company has opened 13 offices and eight R&D centers throughout North America. Its American work force doubled in the past year to more than 1,000, and executives plan to hire several hundred more people in 2011...

"To build up your reputation, you have to do that step by step," said Charlie Chen, senior vice president for North American marketing and development for Huawei USA. The company is committed to growing in the U.S., "no matter how long it takes," he said.
Let me put it this way: 3Com was a pittance of a deal at $2.2 billion compared with America's world-leading external deficit which it needs to fund via foreign inflows of this sort. What more a lousy $2 million acquisition? Magnitude aside, the problem with Huawei is that it isn't obliged to report its ownership structure as a private entity. Although there are constant rumours that it will soon have an IPO, there is no firm sign of this happening yet. Until then, there will always be a cloud of suspicion hanging over it that I don't think will be mitigated by constant reiterations about not being under the influence of the military. Whether true or false, the impression remains there.

When there's no getting over that rainbow. When the smallest of deals won't come through.