Telecoms and the Huawei conundrum
Chinese foreign direct investment in the United States

Huawei

Article Highlights

  • Chinese telecom giant Huawei looking to enter U.S. market amid security concerns

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  • Should we fear cyber attacks from Beijing-controlled companies?

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  • Huawei should become publicly listed to gain confidence of market and U.S. government

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This paper is the first in the new AEI Economic Studies series, edited by Aparna Mathur. The aim of this series is to promote innovative academic research critical to understanding, and confronting, the challenging policy debates of today. The topics will cover a wide range of subject areas, from tax policy to trade issues and from health policy to labor markets.

Executive Summary

Telecoms and the Huawei conundrum: Chinese foreign direct investment in the United States

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The Chinese company Huawei has emerged as the second-largest telecommunications equipment company in the world. It operates in 140 countries around the globe, providing equipment, software, and services to forty-five of the world’s fifty largest telecom operators. It is moving aggressively downstream into the burgeoning smartphones market. As a recent, detailed report on the company concluded, Huawei’s “extraordinary range of product offerings supports almost every meaningful segment of telecommunications network architecture.”1

Despite its global success, Huawei has consistently been rebuffed in attempts to make large investments and land large contracts in the United States. US government officials have intervened on a number of occasions to block potential acquisitions and equipment contracts involving Huawei, citing security concerns (though without specific details). The company has vigorously contested allegations that it has ties to the Chinese military or represents a security risk in the United States. It has vowed to continue its quest to become a significant player in the US telecom market.

All of this is being played out against a background of increasing tension between Washington and Beijing over cyber attacks on US corporations and government agencies that have been traced back to sites and hackers in the People’s Republic of China (though not to the government directly). As this study was going to press, the top counterintelligence agency in the United States pointed the finger directly at China, stating, “Chinese actors are the world’s most active and persistent perpetrators of economic espionage.”2

In addition, the White House disclosed that it had commissioned a task force to evaluate the “opportunities, risks and implications” posed by foreign telecommunications companies in the US market. US officials let it be known that while no particular company or country was targeted, Huawei’s expansion in the US market was a “key impetus” for the initiative.3

At the same time, the Obama administration, faced with the continuing economic drag from the global financial crisis and economic downturn, has been eager to reaffirm America’s historic open arms policy toward foreign direct investment (FDI) as a means of enhancing renewed economic growth and prosperity. This includes the potential of large FDI inflows from China over the next decade. To underscore this commitment, Vice President Joe Biden recently urged Beijing to increase investment in the US market, saying, “We are still the single (best) bet in the world, in terms of where to invest.” Chinese investment, he continued, “means jobs. American jobs.”4 In turn, Beijing has been quick to protest America’s alleged unfair treatment of Huawei and other Chinese telecommunications companies and the “lack of transparency” in US FDI policy. It has also threatened to match purported US investment obstacles with new hurdles of its own.

This study traces Huawei’s corporate history, particularly its unsuccessful efforts to gain a foothold in the US market. It analyzes both the economic and security challenges posed by future Chinese investment in sensitive sectors, such as information technology and the broader telecommunications supply chain. The study concludes with recommendations for action by the US government, by the Chinese government, and by Huawei, to accommodate future Chinese investment and contracting in the US telecommunications sector while preserving vital US national security interests and priorities.

These recommendations include:

  • The US government should make the investment/security-vetting process (the so-called CFIUS process) more transparent and should take steps to formulate and publicize a set of guidelines that would explain the rationale behind individual investment decisions. As a number of intelligence officials from several administrations have concluded, Committee on Foreign Investment in the United States (CFIUS) officials can provide more detail on the sources of their security concerns without jeopardizing US intelligence efforts. At a minimum, the results of the White House task force initiative cited above, as they pertain to Huawei, should be made public.
  • Efforts to expand CFIUS to cover normal business contracts or joint research and corporate ventures should be resisted. If acceded to, moves to expand CFIUS, whether stemming from congressional sources or private competitors, would lead to an undesirable politicization of the process through an adverse intermingling of national security and private competitive concerns and motives. 
  • Beijing should renounce trade-investment-distorting credit subsidies that aid Chinese companies competing in overseas markets. It should agree to adhere to the guidelines and specific restrictions set out in the 1978 Organisation for Economic Co-operation and Development (OECD) arrangement on export financing and the 1991 Helsinki Package that clarified rules with regard to tied aid to developing countries.5 Pending this action, Huawei would be well advised to agree to be bound by OECD rules when accepting subsidized credit arrangements for its customers.
  • Huawei should bite the bullet and become a publicly traded company listed on a US stock exchange, most likely the NASDAQ. The company’s opaque corporate structure and its obscure decision-making process, abetted by recent governance and accounting scandals involving other Chinese companies that invest overseas, feed suspicions that it is an unreliable business partner and secretly a creature of the Chinese government. As the Economist recently stated in criticism of Huawei’s resistance thus far to public listing, “Huawei appears to want to have it both ways: remaining a Chinese company . . . while competing with publicly traded Western giants—this is unlikely to work.”6
  • Huawei should continue—and even step up—its efforts to assuage US government agencies’ security concerns. It has given global security concerns a top place in its corporate structure, and it should increase and expand programs to provide independent, continuous third-party evaluation of its equipment. Finally, though there are risks involved, the company’s recent strategy of instant and highly vocal rebuttal to negative judgments by the US government and by congressional critics and outside interest groups, will pay off in the future—assuming the in-your-face candor is consistently supported with solidly documented facts.

Notes

1. US-China Economic and Security Review Commission (USCC), “The National Security Implications of Investment and Products from the People’s Republic of China in the Telecommunications Sector,” January 2011, 34–35, www.usc.gov?REP/2011/FINALREPORT:TheNationalSecurityImplicationsofInvestmentsandProductsFromThePRCintheTelecommunicationsSector.pdf (accessed October 25, 2011).
2. “Foreign Spies Stealing US Economic Secrets in Cyberspace,” Report to Congress on Foreign Economic Collection and Industrial Espionage, Office of the National Counterintelligence Executive, October 2011, Washington, DC.
3. Siobhan Gorman, “U.S. Works to Counter Electronic Spy Risks,” Wall Street Journal, November 12, 2011.
4. Kandaswami Subramanian, “Joe Biden’s Visit to China—Analysis,” Eurasia Review, www.eurasiareview.com/24082011-joe-biden%E2%80%99s-visit-to-china-analysis (accessed November 8, 2011).
5. Organisation for Economic Co-operation and Development (OECD), The Export Credits Arrangement: 1978–2008 (Paris: OECD, 2008). See also Gary Clyde Hufbauer, Meera Fickling, and Woan Foong Wong, “Revitalizing the Export-Import Bank” (Policy Brief 11-6, Peterson Institute for International Economics, Washington, DC, May 2011).
6. “The Long March of the Invisible Mr. Ren,” Economist, June 4, 2011.

Claude Barfield is a resident scholar at AEI. His areas of study include international trade, science and technology policy, and intellectual property. He has taught at Yale University, the University of Munich, and Wabash College. He served in the Ford administration, on the staff of the Senate Government Affairs Committee, and was costaff director of President Carter’s Commission for a National Agenda for the Eighties. He received a BA from Johns Hopkins University and a PhD from Northwestern University.

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