Huawei News|Week at a Glance

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EX-BUSH OFFICIAL TO ADVISE HUAWEI\

Huawei has recruited a prominent former Bush administration official who worked on national security issues, as the Chinese telecoms equipment maker seeks to make inroads in Washington and assuage concerns that it has ties to the Chinese military.

The company has hired as an adviser John Bellinger, a partner at Arnold & Porter, who served as chief attorney at the State Department and advised the National Security Council under George W. Bush.

Huawei’s move to retain him underlines how aggressively the company is seeking to convince US defence and security officials that it should be allowed to make acquisitions in the US.

Huawei is weighing a bid for a unit of Motorola and wants to gain market share in the US, where it has failed to gain significant traction.

But according to a person familiar with the group, it is only interested in moving ahead with a bid if it can be certain that the deal would not be blocked on national security grounds by the Obama administration.

Huawei was forced to abandon a joint bid for 3 Com in 2008 after it became evident that the Bush administration would block the transaction.

James Lewis, a senior fellow at the Center for Strategic and International Studies, says Huawei continues to face a “steep wall of suspicion” within the US government. Indeed, some experts believe it could take years for the company to make inroads in the US.

Under US law, an inter-agency panel called the Committee on Foreign Investment in the US (CFIUS) may block takeovers of sensitive US assets by foreign companies on national security grounds. Technology and telecoms assets, which are considered critical infrastructure, are especially sensitive. CFIUS reviews are highly classified. The Bush administration was understood to have resisted the deal because 3 Com was a supplier to the defence department.

People familiar with Huawei’s 2008 joint bid for 3 Com, in which it partnered Bain Capital of the US, say the company had not anticipated resistance to the deal.

The decision to seek counsel from Mr Bellinger shows that the company is eager not to repeat its mistakes. It has also increased its presence in Washington by hiring lobbyists at Apco Worldwide.

The Obama administration has so far not confronted any especially controversial foreign transactions, though attorneys who work on such deals in Washington say it is only a matter of time before The White House faces a politically contentious bid by a non-US company.

Although Congress does not have a role on the CFIUS panel, it can stir up political opposition to unpopular transactions, as it did several times during the Bush administration.

In February, a Chinese buyer abandoned a bid for Firstgold, a US gold mining company based in Nevada, after it was told by the Obama administration that the deal would be blocked. The administration reportedly cited concern over Firstgold’s proximity to Nevada’s Fallon Naval Air Station.

Huawei declined to comment. Mr Bellinger declined to comment.

SUSPICION HINDERS HUAWEI’S EXPANSION

Huawei’s push to expand in the US through acquisitions and contracts with telecoms groups could come at a high cost for the Chinese equipment maker, including structural changes that are already under consideration by the company.

Huawei, which was forced to abandon a joint bid for 3Com in 2008 because of US government security reasons, is still viewed with deep scepticism by US security officials, experts say.

Fears about Chinese cyberattacks and China’s access to US infrastructure have heightened following a string of internet attacks against the US government that are believed by Washington to have stemmed from Beijing and accusations by Google that it was the victim of hacking in China.

These concerns complicate all large pursuits by the company in the US, including its tender for a major equipment contract with SprintNextel, the US telecoms group.

Motorola is considering options for its telecoms network business and Huawei is considered a potential bidder for the unit.

It has been touted, too, as a possible partner to Harbinger, the hedge fund that owns US spectrum rights and has said it wants to build a fourth generation wireless network.

However, it is far from certain whether Huawei will ever be able to convince officials charged with protecting the integrity of the US communications infrastructure that it is a reliable corporate partner.

The company declined to respond to questions by the Financial Times on how precisely it planned to persuade officials that it is trustworthy.

What is clear, say attorneys and former government officials who are well versed in the internal workings of the Committee on Foreign Investment (Cfius) – the interagency panel that has the power to block or approve foreign acquisitions of US assets – is that Huawei will have to agree to significant conditions if it is to make headway in the US.

James Lewis, a director at the Center for Strategic and International Studies in Washington, says Huawei, which is privately held, will have to consider going public on a US or Hong Kong exchange.

It will also have to look hard at a possible realignment of its executive structure if it is to seriously dent concerns about a lack of transparency and allegations that the company has retained ties with the People’s Liberation Army.

Mr Lewis says the company has already taken a few steps to appease security concerns: it created a US subsidiary in Texas that is getting involved in community programmes and has produced an annual report that is similar to one that would be filed by a public company to the Securities and Exchange Commission.

“All these pieces add up to a nice picture but whether it is enough to overcome their radioactivity, that will be hard to tell,” Mr Lewis says.

Huawei is also considering creating an advisory board or panel staffed with former senior officials, a common tactic for foreign companies working in sensitive industries in the US, Mr Lewis says.

At a minimum, as part of any deal, Huawei will have to offer Cfius assurances that companies such as Alcatel Lucent have agreed in their own dealings with the committee.

In 2007, Nokia-Siemens agreed to a slew of security requirements following a classified national security review of its merger, including procedures that dictated whether foreigners could work on US equipment and software.

Paul Marquardt, an attorney at Clearly Gottlieb who works on Cfius deals, says the most extreme arrangement is known as a “proxy agreement”, under which foreign companies own their US counterpart but do not manage it or have direct control of the company.

Mr Marquardt says, however, that given the US government’s concern with Huawei is of a technical nature, it is unclear whether such an arrangement would satisfy US concerns.

“The concern is not about Huawei learning how to make a router. It’s about Huawei having access to installed routers on the US network,” Mr Marquardt says.

China’s Huawei signs Aussie fibre deal

While New Zealand talks about buying Huawei gear, the Aussies are selling stuff to the Chinese telecommunications equipment maker

The Shenzhen-based company has just inked a down-under deal – but it’s with an Australian company, not anything to do with John Key’s hints over the weekend about a major New Zealand investment.

Under a deal announced today by New South Wales premiere Kristina Keneally, NSW company Finisar will extend its contract to supply Huawei with digital wavelength processors (DWP) – a key component for the Chinese company’s fibre optic switching gear.

A DWP helps a Huawei fibre switch respond to increasing bandwidth demands as bandwidth is used variously for voice, data, video, mobile wireless or storage services.

Ms Keneally, in Shanghai for the start of NSW Week at the World Expo, said the deal would create 95 jobs in her state.

A DWP a piece of hardware about the size of a tissue box, and has to be made by hand. One unit takes nine days to complete.

The Finisar DWP is 100% Australian designed and manufactured.

In the US, politicians have had qualms about American companies doing business with Huawei. Lawmakers blocked a $US2.2 deal that would have seen the Chinese company (in partnership with Bain Capital) buy US network hardware maker 3Com in 2008 for $US2.2 billion.

Concerns were cited about 3Com’s security technology falling into foreign hands (3Com was eventually bought by HP, for $US2.7 billion, in a deal finalised in Feburary this year).

However, in Finistar’s instance there are no obvious security implications, and Ms Keneally was an active proponent of the deal.

Finistar says it is on track to have 300 emploees by Christmas.

Huawei has around 200 staff at its Australian headquarters in Sydney. The company also sells its mobile network switching gear to Vodafone and 2degrees in New Zealand.

With Eyes on U.S. Deals, Huawei Adds Advisers

Looking for ways to expand in the U.S., Huawei Technologies Co. has hired a slate of American advisers aimed at assuaging national security concerns that have stymied the Chinese telecommunications-gear maker’s U.S. ambitions.

Huawei has to overcome suspicions about links to the Chinese government and military, since its founder and largest shareholder, Ren Zhengfei, is a former army officer. The head of the company’s U.S. operations, however, says Huawei is willing to play the long game.

“We are not in a hurry to win any significant or big project in the U.S.,” Charlie W. Chen, Huawei’s senior vice president for marketing and product management, said in an interview.

Mr. Chen said it was “totally untrue” that Huawei had ties to the Chinese government. “With time, and as more customers understand our products, this fear will go away.”

Huawei has been a finalist in bidding for large U.S. contracts, including the 4G buildouts of Verizon Wireless and AT&T Inc. But so far its victories in the U.S. have been limited to small and medium-sized companies.

Huawei is among the companies that is eyeing Motorola Inc.’s network-equipment unit, say people familiar with the matter. But these people say bidding for the unit, which supplies equipment to Verizon Wireless and Sprint Nextel Corp., may have to wait until next year. Mr. Chen wouldn’t discuss Huawei’s acquisition plans.

The Motorola unit, which mainly makes technologies for older networks, reported $366 million in profit in 2009, as sales fell 20% to $4.1 billion.

While Huawei’s U.S. sales rose 53% last year, the region represented just $319 million of the Huawei’s $21.5 billion in global revenue. The company had 750 U.S. employees spread across seven offices last year and plans to hire 500 more this year.

The Chinese company has taken steps to try to change its image in Washington, where federal regulators must approve any sale of sensitive assets to foreigners. Huawei last fall hired an American chief technical officer, Matt Bross, who held the same position at British Telecom, to help win U.S. business.

This year, it has retained law firms specializing in telecom, mergers, and in winning federal approval for sensitive international deals. So far, it has retained Sullivan & Cromwell, Skadden Arps, and Arnold & Porter, according to people familiar with the matter.

Joseph Frumkin, a partner at Sullivan & Crowell, who structured many of the deals that created the current AT&T, declined to say if Huawei was a client. But said his firm served as “enablers” for Chinese companies. “We help them get deals done.”

Huawei has already lost out on an acquisition due to security concerns. It backed out of a 2007 partnership with Bain Capital to buy the networking company 3Com Inc. while the deal stood before the Committee for Foreign Investment in the U.S., which reviews sensitive acquisitions by foreign companies. 3Com was later acquired by Hewlett-Packard Co.

More recently, Huawei bid for but failed to win assets from Nortel Networks Corp., which is being broken up in bankruptcy court. The assets were sold to Telefon A.B. LM Ericsson of Sweden.

Telecom executives question whether it’s fair to raise national security objections to Chinese suppliers. They say Huawei hasn’t been caught in a security breach and point out that commonly accepted suppliers such as Cisco Systems Inc. manufacture much of their gear in China anyway.

“There are things we can do to ensure we’re protected,” AT&T Chief Executive Randall Stephenson said in an interview last month.

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