Huawei Technology in Shenzhen, China (Photo credit: Wikipedia)
Most Americans have never heard of Huawei. Huawei is no small fry; it is a large Chinese company. Its principal business is networking and telecommunications equipment. It has overtaken Ericsson Ericsson to become the largest telecommunications equipment manufacturer in the world. It is also aggressively competing with Cisco (CSCO) in networking equipment. It employees 140,000 people and operates in 140 countries.
Huawei is new to smartphones but has made great strides. In smartphones, Huawei’s bread and butter has been providing white-label products to service providers. According to the research firm IDC, in the last quarter of 2012, Huawei was third in smartphone sales just behind Apple AAPL -1.97% (AAPL) and Samsung.
On the surface, Huawei’s interest in Nokia makes sense and it is easy to see why traders got excited. However, the report made no sense to me. In my view, both the U. S. government and the European Union will block any attempt by Huawei to purchase Nokia. Nokia has a joint venture with Siemens Siemens that operates under the name Nokia Siemens Networks (NSN). NSN is a major networking systems vendor that competes with Huawei. In addition to antitrust concerns, there will be serious security concerns.
Software in the networking systems is a prime place for spying on sensitive data and communications. The situation has recently played out in SoftBank’s proposed $20 billion acquisition of Sprint ( S). The Committee on Foreign Investments in the United States (CFIUS) approved the buyout only after major concessions. CFIUS demanded and received concessions including removal of some Chinese equipment, approval of a security director, and a veto power over Sprint’s future equipment purchases. The security director, approved by CFIUS, will be an independent member of Sprint’s board of directors and will be in charge of Sprint’s compliance with national security matters.
Sprint will have to remove some radio base stations made by Huawei and used in the network of Clearwire (CLWR). A majority of Clearwire is owned by Sprint.
Last year, the U. S. House of Representatives Permanent Select Committee on Intelligence issued a report titled, Investigative Report on the U.S. National Security Issues Posed by Chinese Telecommunications Companies Huawei and ZTE. The following is the first recommendation by this committee.
The United States should view with suspicion the continued penetration of the U.S. telecommunications market by Chinese telecommunications companies.An acquisition of BlackBerry by Huawei will be even more troublesome. Until recently, BlackBerry had a monopoly on phones for the Department of Defense (DOD). Recently, DOD has approved devices from Apple and Samsung.
- The United States Intelligence Community (IC) must remain vigilant and focused on this threat. The IC should actively seek to keep cleared private sector actors as informed of the threat as possible.
- The Committee on Foreign Investment in the United States (CFIUS) must block acquisitions, takeovers, or mergers involving Huawei and ZTE ZTE given the threat to U.S. national security interests. Legislative proposals seeking to expand CFIUS to include purchasing agreements should receive thorough consideration by relevant Congressional committees.
- U.S. government systems, particularly sensitive systems, should not include Huawei or ZTE equipment, including component parts. Similarly, government contractors – particularly those working on contracts for sensitive U.S. programs – should exclude ZTE or Huawei equipment in their systems.
There may be other arguments for buying stocks of Nokia and BlackBerry, but a potential buyout by Huawei is a pipe dream. Interestingly, Bloomberg issued a report contradicting Financial Times. LINK
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