TELECOMS: US-Huawei Standoff Set For Thaw?
Bottom line: The new Nokia-Alcatel merger, combined with a continued low-key lobbying campaign by Huawei could ultimately convince Washington to ease its ban on Chinese telecoms equipment within the next year.
A couple of new reports are casting a spotlight on the troubled relationship between Washington and leading Chinese telecoms equipment maker Huawei, and raising the intriguing potential for a much-needed compromise that might end the impasse between the pair. The impasse is really quite one-sided, with Washington banning the sale of all Chinese telecoms equipment in the US due to concerns about the potential for spying. But this kind of policy seems a bit broad, especially amid an accelerating sector consolidation that is leaving wireless carriers with fewer and fewer networking equipment suppliers to choose from.
Industry watchers will instantly recognize that I’m referring specifically to the blockbuster merger announced earlier this month that will bring together 2 of the world’s 3 largest non-Chinese suppliers, Nokia (Helsinki: NOK1V) and Alcatel-Lucent (Paris: ALUA). If that marriage is consummated, it would leave US telcos with basically only 2 choices, the new Nokia company or global sector leader Ericsson (Stockholm: ERICb), for most of their networking equipment purchases.
At the same time, another headline is spotlighting Huawei’s own campaign that focuses on a low-key but steady campaign aimed at convincing Washington that it’s an independent private company and not a spying arm of Beijing. To that end, the company’s CEO has just given an interview where he criticizes Beijing for its recent moves to apply onerous restrictions on foreign high-tech companies that sell to China over national security concerns.
Let’s begin with the Nokia-Alcatel merger news, which is actually more than a week old but hasn’t really been discussed in terms of what it might mean for Chinese equipment sellers like Huawei and crosstown rival ZTE (HKEx: 763; NYSE: 000063) in the US. The $16.6 billion deal would bring together 2 of the world’s last major non-Chinese equipment makers, leaving the global industry with the trio of the newly merged company, alongside Ericsson and Huawei.
The deal has already received the blessing of the French government, which is one of Alcatel-Lucent’s main shareholders, and therefore seems likely to get regulatory approval from the European Union. Washington might see reason to veto the deal on antitrust grounds, though it could also feel pressure from Europe to give the green light.
Europe would probably argue that 3 major companies is enough to guarantee a competitive global landscape, which seems legitimate. But of course US customers will only really have 2 choices due to the Huawei ban, which could put Washington in an awkward position that might force it to re-think the blanket prohibition.
The second headline in my Huawei round-up has CEO Eric Xu criticizing his own government for taking steps that many say could ultimately prohibit foreign technology companies from selling to government organizations and most banks. Xu’s argument is quite simple and logical, stating that China will only undermine its own security by locking out foreign products that are usually far more sophisticated and therefore secure than their Chinese counterparts. (English article)
This kind of interview is exactly what Huawei needs to do more to show that it’s not a lackey of Beijing and will make decisions based on its own best interests. I personally believe that Huawei’s products aren’t riddled with back-doors installed for Beijing spying. But I also think that Beijing could theoretically pressure Huawei to try and include such features in the future, due to the historically close relationship between the Chinese government and businesses that were all state-owned in the past.
The bottom line is that the Nokia-Alcatel merger will put heavy pressure on Washington to re-think its ban on Chinese rivals, and I’m sure the big US telcos will all lobby for a much-needed policy change. At the end of the day a good compromise would be to let Huawei and ZTE sell to private US network operators, while still banning them from government work, which is what Australia has done. Such a middle road could satisfy everyone, and I wouldn’t be surprised to see changes along those lines in the next year.
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