Huawei's Acquisition Denial by US Government Could End Up Hurting US Businesses

Huawei's attempt to acquire a US business (essentially its intellectual property)was rejected by the US government, which 'requested' that the assets be returned to the previous owner. This is one in a long string of such decisions against Chinese companies. While the competitive issues are thorny, their impact is debatable both as a business issue and as a longer term strategic matter for the US. There has certainly been a lot of tit-for-tat behavior in the evolving US-China relationship. In the long run, the US has to take some risks in order to signal its openness to investment - and so that US businesses can continue to do the same in other countries.

Joff Wild explains why the implications of this decision could be counterproductive in IAM:

"Since our establishment, Huawei has respected and protected the rights of all intellectual property holders while vigorously defending our own intellectual property rights. We have applied for 49,040 patents globally and have been granted 17,765 to date. In addition to our own innovations, we buy access to other patent holders' technologies through cross-licenses. In 2010, Huawei paid western companies US$222 million in licensing fees. Of that total, US$175 million was paid to American firms. For example, over the years we have paid U.S. company Qualcomm more than US$600 million in fees related to their intellectual property. The fact that Cisco withdrew the lawsuit it filed against Huawei in 2003 regarding allegations of intellectual property rights infringement further vindicates Huawei's position in that matter and supports our position that we are only engaged in legitimate business practices. We learned from that experience that while disputes may arise in the course of business, they can be settled properly through bilateral negotiations.

So reads part of an open letter written by Ken Hu, Deputy Chairman of Huawei Technologies and Chairman of Huawei USA posted on the Chinese company's website yesterday. It comes after the recent furore of a decision by a US government body to ask Huawei to divest itself of IP it acquired from 3Leaf last May over concerns about national security. Hu ends the letter with this paragraph:

We sincerely hope that the United States government will carry out a formal investigation on any concerns it may have about Huawei. The United States is an advocate for democracy, freedom, rule of law, and human rights. The United States government has demonstrated its efficiency in management, fairness and impartiality and we have been impressed by that ever since we made our first investment in this country some 10 years ago. We have faith in the fairness and justness of the United States and we believe the results of any thorough government investigation will prove that Huawei is a normal commercial institution and nothing more.

It seems to me that Huawei has a very strong point here. On the face of it, the company looks like one that plays by the rules. If there is evidence to the contrary, the US authorities should provide it. Unless, they do, then objecting to the Huawei purchase from 3Leaf will look a lot like a political decision based on where Huawei comes from, rather than anything truly prompted by a national security concern.

Hu states: "Futurewei, Huawei's U.S. subsidiary, purchased certain assets from 3Leaf, an insolvent technology start-up located in Santa Clara, California, in May and July 2010, when 3Leaf was ceasing its operations and no other buyers for its intellectual property were forthcoming." So it's not as if there was any kind of covert deal involved here. And if the IP in question really is a threat to US national security in what is deemed to be the wrong hands, then surely that implies it is incredibly valuable; but no-one else apart from Huawei wanted it. So how does that work? And, in any case, Huawei has had access to the IP, as well as the knowledge needed to work it, for many months now. So if it is an entity helbent on undermining the US, it has all the knowledge it is going to need already. A sale now makes no difference.

It is, of course, entirely down to the US to decide who can and cannot purchase American IP that is being sold by American entities. But in doing so, if the US is not open and up-front about providing the reasons for making them, then it may find that things do not work out entirely as planned. There are plenty of US companies that are interested in investing in China and in IP owned in China. My guess is that they will now find it much harder to do so. Who's the loser then?