When last we left Huawei, Chinese IT giant and wannabe North America player, it had run into a nasty reception at the U.S. House Intelligence Committee (yeah, I know, an oxymoron), which issued a report about Huawei, ZTE (another Chinese IT firm) and potential national security vulnerabilities. The conclusion was essentially “We don’t trust these guys and do not think they should be allowed to do deals in America.”
By itself, the House report doesn’t mean anything. The committee does not have the authority, for example, to squash a specific M&A deal. So one question I had at the time was “What happens next?” In other words, what will be the actual fallout from all this furor, or will it simply mean that Huawei will go with a low profile and not pursue inward U.S. deals for a while?
Well, now we have an indication that the U.S. government is backing up the harsh rhetoric with at least a bit of action, starting off with an investigation of Huawei-made switches used at the Los Alamos national laboratory.
A letter from the Los Alamos National Laboratory in New Mexico, dated November 5, 2012, states that the research facility had installed devices made by H3C Technologies Co, based in Hangzhou, China, according to a copy seen by Reuters. H3C began as a joint venture between China’s Huawei Technologies Co and 3Com Corp, a U.S. tech firm, and was once called Huawei-3Com. Hewlett Packard Co acquired the firm in 2010.
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The letter says a working group of specialists, some from the lab’s counter intelligence unit, began investigating, “focusing on sensitive networks.” The lab “determined that a small number of the devices installed in one network were H3C devices. Two devices used in isolated cases were promptly replaced,” the letter states.
The letter suggests other H3C devices may still be installed. It states that the lab was investigating “replacing any remaining H3C network switch devices as quickly as possible,” including “older switches” in “both sensitive and unclassified networks as part of the normal life-cycle maintenance effort.”
So, what’s the fallout here? (Perhaps I shouldn’t use that term when discussing Los Alamos.)
It looks like the lab is doing a thorough investigation of what parts they’re using, with the goal of replacing at least some switches supplied by the H3C joint venture, after a network engineer alerted higher-ups about the possible security problem. It’s interesting that this whole thing involves 3COM, which as you may remember was the target of a takeover bid that included Huawei that fell through because of U.S. political pressure over national security concerns.
Reuters says that in 2010, HP “acquired the firm.” Not sure whether that means 3COM or the JV. If the former, that means Los Alamos was worried about parts made by a JV that includes Huawei as a partner. Needless to say, I’d love to know what the equity split is in that JV (i.e., who has operational control).
This also raises a number of other questions in my mind:
1. Was this a direct result of the House committee report or just a coincidence?
2. What are the applicable U.S. government procurement rules here, and have they changed in recent months?
3. Are similar investigations ongoing at other comparable facilities?
4. Are all Huawei parts and devices on the “bad guy” list?
5. What does this mean for other Chinese firms like ZTE? Other foreign suppliers?
6. Does this tell us anything about the U.S. government’s plans for Huawei? In other words, is this war about to escalate?
7. Will this have any effect on U.S. firms looking to make deals with Chinese companies (e.g., Joint Ventures)?
Knowing Congress, why do I get the feeling that the Republican-controlled House might see it in their best interests to float this story out there to gin up an excuse for more hearings designed to embarrass the Obama administration? A complete waste of time of course, but it wouldn’t surprise me.