Huawei: troubles getting business in the US

Huawei has become a leading supplier of telecom infrastructure equipment around the globe over the past decade.   Its formula for success?   …providing state-of-the-art products at low prices.  Despite these attractions, Huawei has been unable to make much headway in the US.  Like virtually all mainland companies, it has close connections with the Beijing government and the ruling Communist Party–in Huawei’s case, through the military.  But that relationship has little direct connection with its inability to gain traction here.

The US government opposes Huawei’s attempt to penetrate the US market for two reasons:

–It’s a form of protectionism for domestic industry.  Whoever appears to be the most threatening economic rival of the US at a given time simultaneously becomes the focus for denial of market share or market presence domestically.  It doesn’t hurt at all that this activity plays very well with the voters at home.

In 1987, for example, when Japan was the competitor most feared by Americans, Fujitsu tried to buy a controlling interest in Fairchild Semiconductor.  Although operating on American soil, Fairchild was not an American-owned company.  It was a subsidiary of the French oilfield services giant, Schlumberger.  Nevertheless, Washington opposed the sale on the grounds that foreign ownership of Fairchild was a threat to national security.  Fujitsu withdrew its offer.

In 1989, Mitsubishi Estate wanted to buy 100% of Rockefeller Center for an astronomical price (it subsequently defaulted on the mortgage loan it took out to finance the deal).  This, despite the fact that the Rockefeller Center buildings were old and needed substantial refurbishing.  In addition, the Center’s tenants were about to decamp en masse for lower rents in newer buildings elsewhere midtown Manhattan, as their long-term leases in Rockefeller Center ran out in the following couple of years.  Luckily for Mitsubishi Estate, it was saved from larger disaster by a firestorm of protest that arose in government circles about Japan “buying up America.”  This forced Mitsubishi Estate to cut back the amount it was buying–thereby allowing many Americans to participate in the subsequent financial failure as well.

Today’s economic foe is China, and Washington is dishing out the same treatment.

In 2005, China National Offshore Oil bid for the US integrated oil company, Unocal.  It’s object?  …Unocal’s extensive hydrocarbon holdings in Asia.  Again, a firestorm of protest from Washington, which forced CNOOC to drop its bid.  Unocal was ultimately acquired by Chevron for about a billion dollars less than CNOOC had offered.

Late last year, Huawei appeared to have won a multi-billion dollar portion of an infrastructure contract with Sprint.  But, according to the Wall Street Journal, the then Secretary of Commerce, Gary Locke called the CEO of Sprint.  When Dan Hesse hung up the phone, Huawei was out of the bidding.

A recent Financial Times article analyzing Huawei’s problems closes with a reference to a small rural broadband contract Huawei won from Northeast Wireless in Maine.  The FT says the win came despite a call by the FBI on the Northeast Wireless management, apparently in an attempt to pressure them not to select the Chinese equipment supplier.

So far, this sounds like standard jingoistic fare–politicians wrap themselves in the flag, but act against the country’s long-term economic interests to score points with voters at home and keep domestic corporate contributors to their campaign coffers happy.

–There’s a second reason for government opposition to Huawei that makes its case unique, however.  It’s the issue of cyber warfare.  The worry is that China may secretly embed in Huawei equipment the capability to monitor or disrupt the flow of communications through it.

We already know there have been sophisticated cyber attacks on government and corporate computer systems in the US, emanating from the military in China.  Although it’s a somewhat different issue, the Stuxnet computer worm that has attacked Iranian nuclear installations is generally believed to have been born in US and Israeli government cyberlabs.   So the idea that a government would prevail on a telecom equipment provider in its country to secretly place disruptive or monitoring capability in its products is not that far-fetched.

Although the threat may be framed in military terms–suppose China wants to invade the US?–the much more substantial worry, in my opinion, is corporate espionage through the possible undetected monitoring of corporate communications.

There’s no way to know whether Huawei is doing this now or would ever attempt to do so.  But this uncertainty seems to me to guarantee that the road to success in selling telecom infrastructure in the US for Huawei will continue to be long and hard.

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