February 20, 2011 8:40 pm

Huawei U-turn on US deal saves blushes

Huawei’s unexpected decision to capitulate to US demands to unwind a $2m patent deal has spared the Chinese telecommunications equipment maker from a potentially devastating judgment from President Barack Obama on the threat the company posed to US security.

Huawei revealed on Friday night that it would comply with the recommendations of a secretive US government panel that reviews foreign transactions, known as Cfius, and divest patents it acquired from 3Leaf, a small US company, last May.

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It was a reversal from the company’s position less than a week earlier, when it declared that it was seeking a final ruling on the deal from Mr Obama, who has the sole legal authority to issue such decisions on foreign deals under US law.

But the incident has damaged the company’s reputation and global ambitions by revealing the scepticism with which US government officials view Huawei’s expansion plans. These came to light in 2008 when a planned acquisition of 3Com, a US router and switch maker, was scuppered for similar reasons. The Chinese group has since spent millions trying to improve the relationship.

Analysts and attorneys unanimously agreed that Mr Obama would have sided with his national security advisers in the case and forced Huawei to abandon the transaction.

Huawei officials declined to comment on why the company changed its mind but independent observers said it may have realised just how damaging a declaration by Mr Obama would have been to the company’s business both in the US and internationally.

Huawei could be close to clinching a deal to create a mobile network for the London Underground before the 2012 Olympics.

Huawei on Sunday insisted that the situation ultimately had a positive outcome because the company has, under the terms of a classified deal with the US government, established an “ongoing and forward-looking interaction” with the US. “That really is a positive thing,” said William Plummer, vice-president of external affairs.

But in Washington, the assessment was less rosy. The latest Huawei incident has revived concerns about the group on Capitol Hill, drawing lawmakers’ attention to what intelligence officials call a “supply chain” problem in which key components of sensitive communications equipment are all manufactured outside the US.

Nova Daly, a former Cfius official who is now a consultant at Wiley Rein, added: “Huawei made the right decision to pull this back from the brink but their actions have been unnecessarily damaging.

“US and Chinese companies must do their part to help build stronger and more trusting investment decisions.”

Additional reporting by Kathrin Hille in Beijing

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