Pentagon meddling makes for petty policy by Stephen Glain

The National

April 15, 2008
Pentagon meddling makes for petty policy

By Stephen Glain


American mercantilism has many fathers: pandering presidential candidates, xenophobic lawmakers, nativist labour leaders – and now a Sino-phobic Pentagon.

Late last month, the Chinese telecommunications giant Huawei Technologies was forced to shelve its US$2.2 billion (Dh8.1b) shared offer for 3Com, a US computer networking firm, because of its alleged links to China's People's Liberation Army. Huawei, which does US$10bn in annual sales, competes globally with such industry heavyweights as Alcatel-Lucent and Nortel Networks and is a major supplier of advanced cell phone technology to the US. But when word came down that the Committee on foreign investment in the United States was opposed to the deal, Huawei was forced to back off.

The committee, or CFIUS, is an inter-agency body that weighs the national security implications of foreign bids for US companies. Its mandate was expanded last year in response to Congressional outrage over the purchase in 2006 by Dubai Ports World of Peninsular and Oriental Steam Co., a transaction that included the management of six US port terminals.

A politicised and primitive legislature lashed out at the deal – New York Senator Charles Schumer decried Abu Dhabi's "nexus with terrorism" – and DP World was forced to divest itself of P&O's US operations. To pre-empt similar "Trojan horse" stratagems, in August President Bush signed into law an amendment that widened CFIUS's review parameters to include any acquisition involving critical infrastructure, energy assets and technologies.

In response, an official from China's sovereign wealth fund declared Beijing would avoid any US investment that required CFIUS authorization. But it was too late for Huawei, whose bid for 3Com unravelled quietly and in defiance of analysts' expectations that it would encounter little resistance. The all-cash offer represented a 44 per cent premium to 3Com's prevailing share price and it would have given the struggling 3Com entree to China's vast telecoms market. Unlike CNOOC, the Chinese oil giant that was frustrated two years ago by another jingoist display in its bid for California-based Unocal, Huawei is a private company. Under the terms of the deal, it would have had seats on 3Com's board of directors but no management control. It would confine itself to a mere 16.5 per cent of 3Com stock and own the company in partnership with US private-equity specialist Bain Capital Partners. Finally, it was noted that US companies like Cisco Systems and Motorola do big business in China and undercutting Huawei might provoke retaliation.

Such concerns apparently mean little to the US Defense Department, a key participant in the CFIUS round and a bitter opponent to Huawei's involvement, however passive, in the 3Com sale. "Whenever the issue came up," says a China expert in Washington who regularly briefs US military officials, "the Pentagon guys in the room would hiss."

Huawei founder and chief executive Ren Zhengfei is a former major in the PLA. He refuses to give interviews and will not reveal his company's shareholding structure though he has denied it has a special relationship with the Chinese military. No doubt Ren could have helped his case with a little transparency. But it would be extravagantly disingenuous for the Pentagon to blacklist any foreign firm for its military ties. Among the companies getting rich mining China's economic boom are some of America's biggest defence contractors – including Boeing, United Technologies Co., and Raytheon – to say nothing of firms like Cisco and Motorola, which are major suppliers to the US government. Nowhere is the line between civilian and military technologies as blurred as it is in the US, and never more so than in the culture of fear that has flourished since the Sept 11 attacks.

The case of Huawei's failed bid for 3 Com should be recognised for what it is: a Pentagon manoeuvre to penalise a hugely successful company with roots in the military-industrial complex of an emerging rival for global influence. That's petty policymaking and bad economics.