China Law Blog

Hey, given the way that China's 'Anti-Monopoly Law' seems to pretty much mirror the EC's competition law, why would it even have to be a US deal in China? If it's a merger between two US companies for whom China is a big market they could block that the same way the EC Commission did GE and Honeywell - though it would have to be a borderline case anyway.

This said though, Huawei is a PLA contractor, they make communications systems and (so I've heard) guidance systems for missiles. There are most certainly defence-related concerns in this deal - unlike the P&O buyout where the defence concerns were focused on whether the buyout of a European ports company by a Dubai-based business would leave the US open to terrorism.

I should also say that such things are inevitable given China's 'Frenemy' status vis-a-vis the west. I do not think that it is within our power to change this.

This deal was rightfully trashed, more so because the State Dept and the US/China Business Council in DC made deliberate attempts to hide the deal from the DOD, CIA and NSA.

We should never do business with China, there are 150 other countries to do business with.

Bad, frenemy China.

NHYRC - That's quite a claim. Any chance you have a website link?

I don't think it's going to make that much of a difference in the grand scheme of things. CFIUS review kicks in once a company owns 10% of a company, so the thing to do is to go for a 9.99% stake.

Also the discussion about retaliation is a bit overblown. Do you think that had the Huawei deal gone through, that the anti-foreign aspects of the AML would have been pulled? Probably not. The controlling politics includes a large number of different things, and one deal is not going to make that much difference.

The thing about it is that for ever one deal that gets blocks, there are dozens of deals that go under the radar that don't. Usually when a deal makes the press you'll find someone behind it playing hardball for political reasons.

I was wondering how long it would take for you to blog this, since your name was mentioned in WSJ. I really like the last line,

"Treasury Department spokeswoman Brookly McLaughlin said the Bush administration 'welcomes investment from all over the world.'"

Blocking this deal, is a net negative to the US -- directly --. 3Com shareholders suffer, and the telecom equipment buyers will get less competition among their vendors.

Indirectly, this hurts the value of USD and US assets. It serves as another reminder to foreigners who hold USD that the print money at the end, may just be a piece of green paper. Anti-trade and protectionism, despite its popularity, will get a country poorer.

I hope China doesn't "revenge" -- that'll hurt China more than anybody else.

"welcomes investment from all over the world." I guess Chins is not part of "the world" as far as the US government is concerned.

I am with nh on this one, the Americans should tell China that "we don't want nothing to do with you dirt cheap commies". Kick Chinese companies out of the US. Send those toys back. Better yet, say no to Chinese money that has been funding the black hole known as the deficit.

Don't be a hypocrite. Send Chinese money, along with all things Chinese back to China!

From the Wisconsin Project - published in the Wall Street Journal - 2001

During the Clinton administration, the U.S. Commerce Department allowed Huawei to buy high-performance computers worth $685,700 from Digital Equipment Corporation, $300,000 from IBM, $71,000 from Hewlett Packard and $38,200 from Sun Microsystems. In addition, Huawei got $500,000 worth of telecommunication equipment from Qualcomm.

Still other American firms are transferring technology to Huawei through joint operations. Last year, Lucent Technologies agreed to set up a new joint research laboratory with Huawei "as a window for technical exchange" in microelectronics. AT&T signed a series of contracts to "optimize" Huawei's products so that, according to a Huawei vice president, Huawei can "become a serious global player." And IBM agreed to provide switches, chips and processing technology. According to a Huawei spokesman, "collaborating with IBM will enable Huawei to . . . quickly deliver high-end telecommunications to our customers across the world." Does IBM know that one of these customers may be Saddam Hussein?

As a result of deals like these, Huawei's sales rocketed to $1.5 billion in 1999, to $2.65 billion in 2000, and are projected to reach $5 billion in 2001. These are extraordinary heights for a company that began in 1988 as a $1,000 start-up. Real growth did not begin until the mid-1990s, when American help started rolling in. Texas Instruments started its assistance in 1994 and by 1997 had set up laboratories to help Huawei train engineers and develop digital signal processing technologies. Also in 1997, Motorola and Huawei set up a joint laboratory to develop communication systems.

This sudden flood of help was unleashed by the Clinton administration, which decided in 1994 to remove requirements for prior government approval of the export of fiber optic, switching and telecommunication transmission equipment. The first President Bush had resisted pressure from AT&T, Lucent and US West to decontrol fiber optics, but Clinton freed up the technology over the objection of the National Security Agency, which argued that the widespread use of fiber optics would cripple its eavesdropping ability.

http://www.washingtontimes.com/apps/pbcs.dll/article?AID=/20071130/NATION/111300095/1001

I suppose one could argue that it was the US which was retaliating in this deal, and not China. In late 2006, China's State Assets Supervision and Administration Commission outlined several industries in which China would maintain "absolute state control" - among them, telecom. That is to say, even if it wanted to, 3Com wouldn't have been allowed to take a similar controlling stake in Hauwei. The Chinese government makes a whole lot of noise when this sort of thing goes down, but I'm guessing that they didn't expect the deal to go through in the first place, and would have been surprised if it had. They understand the objections.

The "aboslute state control" policy was outlined in China Daily, December 12, 2006.

@pfeffer:

"Kick Chinese companies out of the US. Send those toys back. Better yet, say no to Chinese money that has been funding the black hole known as the deficit.

Don't be a hypocrite. Send Chinese money, along with all things Chinese back to China! "

China needs to give us money to spend on their junk, they are as trapped as we are. Other than that send all Chinese made stuff back to China.

China is not part of the world, it is part of the dark underverse.

Adam:: In late 2006, China's State Assets Supervision and Administration Commission outlined several industries in which China would maintain "absolute state control" - among them, telecom.

Absolute state control in this context means that the states will own a majority and in some cases much higher than a majority of shares in certain sectors. That circular was actually very good news for foreign companies, because it meant that anything not on the list was fair game.

Adam: That is to say, even if it wanted to, 3Com wouldn't have been allowed to take a similar controlling stake in Hauwei.

The actual deal would have had Huawei take a minority stake of 16.5% with an option to go to 21.5% and would not allow Huawei to have any management input over 3com. My guess is that the deal will still go through, with the obvious thing to do being for Huawei to get a 9% share of 3com and then invest the rest directly in Bain Capital. This may allow it to avoid CFIUS review.

Also, something similar in which a foreign company would want a 16.5% minority stake in a Chinese telecommunications company would be likely to be approved. WTO requires that China allow various amounts of foreign investment in certain sectors (for example 49% in fax and paging services).

Adam, who started this whole thing, back and forth retaliation? I thought it was the US who took a swipe at China by rejecting the Unocal bid? No?

China's acquisitions are targeted purely at strategic acquisitions, not profit making entities, and no foreign government should be allowed to have a voting share of a US company, period. It is a threat to national security.

Twofish - I don't disagree with anything that you write. My point, merely, was the China applies the same sort of national security concerns to evaluating foreign stakes in its own companies. And I stand by me original statement: there's no way that 3Com would be allowed to take a 21.5% stake in Huawei, much less have a voting position on the board.

Pfefer - Don't be clever. The Unocal debacle took place in 2005. Are you under the impression that - prior to that proposed deal - CNOOC, say, would have been allowed to sell off rights to a large number of off-shore oil fields (in North America or elsewhere) to a US oil company? Really?