Viva La Frustración: Huawei’s Continuing Problems in the Americas

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FYI: I discussed this case yesterday at length with Josh Gartner. You can hear that conversation on the China Policy Pod.

If you haven’t been following the odyssey of Chinese telecom company Huawei in its attempts to make headway in the United States, you’re missing out on an epic tragedy.

The most recent blade sunk into Huawei’s expansionist guts came from the Committee on Foreign Investment in the US, a security review body commonly referred to as CFIUS, which recommended that Huawei divest itself of technology assets purchased from defunct tech firm 3Leaf last year. For several days, Huawei played it uncommonly tough, declining to go with the CFIUS fix, which would have forced President Obama to make the call. Well, yesterday they threw in the towel.

Why is this tragic? This is now the third time that Huawei’s US plans have been thwarted. They were first given the cold shoulder in 2008, when Huawei, and a group of other investors, tried to buy in to 3Com. CFIUS put the kibosh on that deal as well, resulting in a similar “voluntary” withdrawal by the Chinese company.

A couple years later, when US telecom company Sprint solicited bids for equipment needed for an upgrade of its cell phone network, Huawei (and fellow Chinese firm ZTE) participated, at least for a while. Ultimately it was 3Com all over again, furious gnashing of teeth were heard from the usual suspects in Washington, and the bids of the Chinese firms were tossed in the dust bin.

Third time’s the charm? Sadly, no. Huawei purchased patents from 3Leaf last year, and all appeared to be going well. This was deceptive, however, since as it turns out, Huawei had inexplicably failed to report the transaction to CFIUS. Once they found out, the familiar pattern set in, with CFIUS recently suggesting to Huawei that it better find another buyer for those patents or suffer the consequences.

Huawei talked a good game for a few days, surprising a lot of people with their obstinacy, their chutzpah in challenging CFIUS. But in the end, perhaps with an eye on future investment attempts, they prudently accepted the panel’s recommendations. Live to fight another day.

“This was a difficult decision, however we have decided to accept the recommendation of CFIUS to withdraw our application to acquire specific assets of 3Leaf,” Huawei said in a statement issued late on Friday night in the United States.

“Huawei will remain committed to long-term investment in the United States. The significant impact and attention that this transaction has caused were not what we intended. Rather, our intention was to go through all the procedures to reveal the truth about Huawei.”

But will they live to fight another day? Huawei has a big red target on its back, and it’s hard to see CFIUS shelving its suspicions of the Chinese company, which many in the US believe has ties to the People’s Liberation Army, any time in the future. Since Huawei is a high-tech firm, virtually any acquisition it makes in the US will involve technology that can be easily portrayed as “sensitive” from a national security perspective.

I don’t think this was just bad PR, or if this would have gone differently if Huawei had been more proactive. Failure to report undoubtedly was a negative here, but arguably it would have gone the same way regardless. Huawei’s image problems in the US are endemic, stemming from the history of its establishment and compounded by a convoluted corporate structure. Is Huawei being treated unfairly? As a free trader, I would say yes. But complaining about it, as Beijing has done the past couple of days, will not change the result here.

Good luck, Huawei. I guess you’ll keep banging your head against the US wall. By my count, though, this 3Leaf deal makes three strikes against you, and that usually means . . . well, I think you know. Perhaps you’ll have more success in London.

6 responses on “Viva La Frustración: Huawei’s Continuing Problems in the Americas

  1. pug_ster

    Perhaps when next time the US companies complain that they could not fairly compete in China, they can go back to the Huawei example.

  2. Andrew

    Another excellent post. I can speak confidently about Huawei. Let me ask you this: As the 2nd largest tele-communications company in the world, why haven’t they listed yet? What are they hiding? Can you name me the “2nd largest company” in any respective global field that is like Huawei? The fact is that as a “pillar” industry, the government has a stated purpose of “owning” 50%” of any company that is given preferential access to the Chinese market, especially in a sensitive field like telecoms. Huawei certainly qualifies in that regard. So does ZTE, another market player having a hard time entering the U.S.

    That being said, in a report in the U.S. completed just a short while ago, no technology of Huawei’s has ever been found to contain a “trap door.” And the North American unit has promised to bend over backwards to ensure the safety and reliability of their telecoms equipment, even going as far as setting up a facility (in Utah, I think) to test the equipment. And I think they should be given the chance, especially if the North American unit is allowed to spin off from its parent company, list in the U.S., manufacturer equipment in the U.S, and proves that it wants to be transparent.

    As of now, however, Huawei has done a piss poor job of trying to ameliorate fears in America, and many other countries, such as India, Indonesia, and Britain. But alas, it has failed to be more transparent, disclosing only a very vague shareholder arrangement, and due to that, I agree with the CFIUS decision to deny them a greater market foothold.

    1. Stan Post author

      I think you hit the nail on the head there. There is not much evidence against Huawei, but there is enough suspicion floating around to make it very easy for CFIUS and others to stop their deals. The company is not public, its shareholding structure is odd, and its corporate structure is complicated, probably needlessly so. Add that to the military background of Ren Zhengfei and simply the fact that this is a sensitive sector, and there you go.

      I have been more critical of CFIUS on other deals, like CNOOC, than with Huawei. I would have probably gone another way if I was on the panel, but unlike with CNOOC, the Huawei decisions can not merely be chalked up to politics and protectionism. There are real questions to be dealt with.

      1. Andrew

        Agreed. However, a little known fact of the CNOOC deal that seems pretty prescient today considering all the hype surrounding it is the fact that at the time, UNOCAL owned the rights to Mountain Pass, the largest rare earth site in North America. I don’t know how large a large factor that played in the CFIUS review, but I would argue that in hindsight, denying them their assets was probably the best thing, all things considered.

        1. Hillbilly

          Andrew

          UNOCAL’s ownership of the Mountain Pass mine did play a role in the CFIUS rejection of CNOOC’s acquisition, but divestment of the mine prior to transfer of control would have beena simple matter. CNOOC was primarily rejected due to Congress recoiling at the idea of transferring oil assets to a non-market actor, which is an entirely rational descision.

    2. deldallas

      My experience analyzing the acquisition of small-to-mid-size military product companies ran by “ex”-military guys in developed countries suggests that quid-pro-quo arrangements between active military personnel and “ex”-military personnel running these “private” sector businesses are often fundamental to how these businesses make their profits (often at taxpayers’ expense, I might add). Most of the “ex”-military guys are clearly permanent members of the military “family”, to put in in mafia terms.

      Given the uncountable number of incestuous buyer-supplier relationships and creative quid-pro-quo arrangements that I think we all have seen in China, I’d easily go all-in betting that the level of sketchy military/ex-military relationships that exists in developed countries is still completely dwarfed by the level of sketchy military/ex-military relationships that exist in China.

      In addition to the questions raised in Andrew’s post, I would also question (1) which of the state banks/individuals during early-80s-China were so eager to provide the debt/equity start-up financing that would have been theoretically required to ramp-up Ren Zhengfei’s greenfield project?, (2) why would these investors have any confidence in the potential future cash generation of this start-up business? and (3) how did this start-up business grow to become a USD$27 billion revenue industry leader without anyone but a former mid-level military guy and, primarily, his humble employees financing it? The math doesn’t make sense to me — I’d love to see where the company’s cash outflows have been going.

      On a related note, I think that the slow rate of state sector reforms and democratic reforms occurring in the world’s #2 economy is encouraging the entire world towards state capitalism. I think that running a system that is driving a global trend towards state capitalism is economic brinkmanship.