Don't Offend the Chinese, America's Real Owners

Yeah! I am warming up to these corporate types in China rather quickly with this latest spat over US national security concerns (i.e., protectionism). Whenever there is a cause for concern that national security interests are being compromised by foreign investment, the US government calls on the Committee on Foreign Investment in the US (CFIUS) to investigate. Our good man Ben Muse has more than you'll ever need to know about the CFIUS.

Anyway, back to the case in question. Back in September 2007, US private equity firm Bain Capital and Chinese telecommunications gear manufacturer Huawei mounted a $2.2B bid for US firm 3Com. However, this proposed purchase met with opposition over high technology with potential security implications being forked over to the Chinese. You know, those folks who are often caught sending spies over to steal US tech secrets. The ever-so-conservative Washington Times had the following to say about the impending deal back in October of 2007:

Treasury's committee needs to take a careful look at this merger, because what is already known about the deal is deeply troubling. The firm in question, Huawei Technologies, has been linked to illegal high-tech exports to Saddam Hussein's regime and the supply of telecommunications equipment to Taliban-ruled Afghanistan. Huawei wants to join with 3Com, which provides the Pentagon and the Army with intrusion-detection equipment to keep hackers out. The deal follows a July computer attack on the Pentagon that U.S. intelligence officials say involved Chinese military hackers who were found breaking into (among other things) a system close to Defense Secretary Robert Gates.

Huawei, founded by a Chinese military officer in 1988, got its start building military communications networks. "Huawei is up to its eyeballs with the Chinese military," a Pentagon official told Bill Gertz of The Washington Times. A second Pentagon official said the deal is taking place at a time when the Pentagon has mounted an aggressive effort to stop computer intrusions from Chinese hackers and spies: "And now we are proposing to sell the PLA [the People's Liberation Army, as the Chinese military is called] a key to our front door. This is a very dangerous trend."

Nouriel Roubini once made the point that, given America's free-spending and savings-free ways, it is inevitable that bigger and bigger chunks of the US will have to be sold off to fund an addiction to McMansions, SUVs, and flat screen TVs. What is galling to me is that so much of a stink is being made over a relatively small $363 million stake by the Chinese firm. Here is the punch line from the Financial Times:

The Chinese company participating in the planned buy-out of a US telecoms equipment maker has angrily rounded on US politicians who claim the deal could endanger US national security.

Xu Zhijun, chief marketing officer at Huawei Technologies, told the Financial Times that the concerns expressed by some US lawmakers were “bullshit”.

He added there was no need to change the terms of the $2.2bn deal, under which Bain Capital, the US private equity firm, is seeking to buy 83.5 per cent of 3Com, the US network equipment maker, with Huawei taking the remaining 16.5 per cent.

The deal has sparked concerns in the US because 3Com supplies intrusion prevention technology to the US defence department, designed to protect the Pentagon against cyber attack. The Pentagon believes that hackers in China conducted a massive cyber attack on its systems last year.

Thaddeus McCotter, chairman of the Republican policy committee in the House of Representatives, last month urged US authorities to deny Huawei any part in the 3Com deal, describing the existing buy-out proposal as a “stealth assault on America’s national security”.

Asked about the concerns that the deal could endanger US national security, Mr Xu said through an interpreter: “That would be bullshit.” Pressed to clarify his remarks further, Mr Xu added: “Because we only just take 16.5 per cent.”

When Asked what message he had for US lawmakers who voiced concerns about the deal, Mr Xu said Cisco, the leading US network equipment maker, supplied products to Chinese telecoms companies: “Cisco’s equipment is everywhere in China.

“If the US government is concerned about Huawei, if some of the lawmakers are concerned about Huawei, Cisco is everywhere within China. Who should be more concerned?”

The Committee on Foreign Investment in the United States, which can block sensitive inward investment, is due to complete its scrutiny of the deal before the end of the month.

Mr Xu stressed that Huawei would be a minority shareholder at 3Com, with no final decision making powers, even if it exercised an option to raise its stake to 21.5 per cent.

He also insisted the Chinese government had no influence over Huawei, adding Beijing was not a shareholder. He described Huawei as a “private enterprise” that was owned by its 20,000 employees.

The People’s Liberation Army is one of Huawei’s customers, and Mr Xu confirmed that Ren Zhengfei, Huawei’s founder and chief executive, was a former PLA officer.

Mr Xu described the rationale behind Huawei’s role in the 3Com deal as a “business investment” from which it hoped to get “investment returns”.

As Roubini suggests, the only way to avoid furriners buying ever larger chunks of America is to get US finances in order. With $170 billion giveaway packages to further fund the US jihad on fiscal sanity (and whose proceeds probably end up in China anyway), nobody is counting on that to happen soon. US deficits from here to Chongqing will only see to it that more and more of America is sold off. Enough with this protectionist nonsense. This is free trade, pal: if the US wants more borrowed time, it had better be prepared to give up this "national security" jive talking. The real owners of the US are in the PRC. Deal with it.