Huawei's 3Com Deal Flops

Posted by: Bruce Einhorn on February 21, 2008

This isn’t exactly a shocker: Huawei has suffered a major setback* in its bid to buy a stake in 3Com. The Chinese telecom-equipment company has been trying for months to be the junior partner in a deal led by Bain Capital to take over 3Com in a proposed $2.2 billion deal. (I wrote about why Huawei would be interested in 3Com here.)

It didn’t take long for opposition to the deal to build in the U.S., though, as lawmakers in Washington griped about the security implications of a Chinese company allegedly tied to the People’s Liberation Army (a charge that Huawei has consistently denied) gaining access to a second-tier American company. (Here’s a link to something I wrote about that opposition back in October.) And now the companies are withdrawing their application to the Committee on Foreign Investment in the U.S.*

No doubt many Chinese (and friends of China) will see this setback for Huawei as another sign of a protectionist, anti-China agenda in the U.S. But hold the indignation for a moment. Huawei has largely itself to blame for this flop. One reason people worry about Huawei is because its founder and CEO, Ren Zhengfei, is a former PLA officer. But rather than allay concerns that he’s somehow still connected to the military, Ren has stayed in the background. While Huawei often makes other executives available for interviews, that openness ends with the CEO. (Trust me, I’ve tried – many, many times – to get an interview. Nothing.) When the boss won’t talk, that doesn’t exactly inspire confidence among people already inclined to distrust the company.

Compare Huawei’s case with that of another Chinese tech company that made a big move in the U.S.: Lenovo. China’s top computer maker bought the PC division of IBM in 2005, and while some people grumbled about security implications, the deal went through. In part, that’s was because Lenovo is a public company and isn’t as mysterious as the privately-held Huawei. And Lenovo’s top executives – especially chairman Yang Yuanqing – are not at all shy about speaking to reporters and telling their story. That reassured would-be skeptics that the company had nothing to hide.

Will Huawei learn a lesson from this flop and adopt a more open PR policy? I hope so, but I doubt it.

* Update: Note that originally I wrote that Huawei had “called off” its bid and the companies were “throwing in the towel.” But, as you can see from comment below from the 3Com spokesman, the company says that Huawei and Bain Capital have not abandoned the bid but have withdrawn their application to the Committee on Foreign Investment in the United States. The spokesman adds that companies will continue to try to figure out a way to make the deal work, but don’t hold your breath.

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Reader Comments

john

February 21, 2008 09:51 AM

Chinese should not be naive to believe that U.S. will be comfortable with China's peaceful rise. U.S. will try whatever it can to prevent or delay China's rise to a bigger power. This really has nothing to do with China being communist. It is all about geo-politics. Recent media hype of Chinese quality, food and security are all such effort. Even with all these sentiments, China still reached 260 billion trade surplus in 2007. U.S. protectionism will become worse. China should realize that China has to rely on themselves to become more innovative and creative.

Steven

February 21, 2008 02:05 PM

Any US high-tech or big companies do not have connections with US military?

Use the same reason, I doubt Boeing, M$, Cisco, MOT, .... any US companies can do business in other countries.

Huawei is owned by its employees. Ren only has 5% of the company.

Don't use dual standards.

Steven

February 21, 2008 02:21 PM

Huawei would only own very small share of 3Com if it was sold.

I doubt Huawei aimed at any technology 3Com has. The total value of 3Com is only US$2.2 billion (now even less after the deal is gone). But it bought Huawei-3Com Jv in China at US$1.8 billion. Huawei was the tech supplier of that JV. When the 18-month grace period pass (maybe passed), Huawei's similar products will drive out 3COM from China's market easily. You can keep watch the play.

Huawei is blocked out of US market by political reasons. Huawei has not maken any big hit in US even it has been making big deals in Europe and other other world. It has products and its products are competitive. Huawei wants s small share of 3Com so that it enter US narket easier.

The big companies behind this kind of anti-Huawei (or even anti-China) propagandas are Cisco and several others. Cisco is really getting nervous about Huawei's rapid growing. Huawei's contrat sales in 2007 reached US$16 billion and will be US$25 billion in 2008. Can this stop Huawei? Almost impossible.

Kevin Flanagan

February 21, 2008 02:52 PM

This article contains a significant inaccuracy. The statement that Huawei Technologies has "called off its bid to buy a stake in 3Com" is incorrect. The news release we issued on Feb. 20, clearly states that the only action taken has been a voluntary withdrawal by Bain Capital Partners, Huawei and 3Com of the filing the parties had made to the Committee on Foreign Investment in the United States. CFIUS granted that request. The bid for 3Com by Bain Capital and Huawei has not been withdrawn. The parties, as the news release stated, are continuing to work closely to "construct alternatives that would address CFIUS' concerns." That is a far different situation than what this article portrays.

-- Kevin Flanagan, Director of Public Relations, 3Com Corporation

Vick

February 21, 2008 02:54 PM

Don't trust the Chinese government or communists. They are very patient and building up there power. They will be worse to the world then the 1940s Germans.

ipfreak

February 21, 2008 05:45 PM

In terms of technologies, Huawei is way ahead of 3com. The intention of Huawei bid for 3com was to use it as a vehicle to access us market.

But 99.99% of those sitting on the capital hill are as dumb as they can be in terms of technologies.

zboy

February 22, 2008 12:18 AM

Yeah Vick...China is SO scary! Please! The world is more afraid of the United States and Bush than they are of China. What country is the most hated in the world...it's not China thats for sure.

Taotaobujue

February 22, 2008 04:18 AM

i don't believe US lawmakers are truly protecting computer/network security of the US government by rejecting Huawei. That is just an excuse to keep Chinese companies out of US and Cisco might have played a role. You know US senators are always associated business interest.


For US, it seems China should remain the low-tech manufacturing base, supplying the necessity for American people.

The security concern is absurd. If it prevails, companies like Microsoft, Dell, Motorola should be kicked out of China where the nationalism, usually sparked by the protectionist sentiment in China, is strong.


Andy

February 22, 2008 06:32 AM

I hope the Chinese will learn their lessons not to try to invest in US. They should look at other market that truly live up to free trade practices such as Britain. Hopefully the Chinese government will also learn the lesson to review every US investment in China. If there is ex US military personnels in the companies, then those companies should be banned in China.

Downs

February 22, 2008 10:18 AM


Bruce Einhorn's comment makes me laugh. But I don't blame him. Obviously he has completely lost touch with today's American politics. Did he really think that this deal would possibly go through if Huawei did not make any mistake to get itself "largely to blame for" ? He needs to think again. From day one I didn't see for a second any chance that this deal was to succeed considering what America is like today.

The far-reaching implication is that there won't certainly be any deal of this kind for many years to come between China and the the US, either in China or in the US.


BWreader

February 23, 2008 12:39 AM

If Huawei want this deal bad enough, then maybe Ren himself should visit capital hill to defend/pitch for it. His exposure might help the deal.

Theresa

February 23, 2008 01:38 AM

The author holds a very partial views towards Huawei.The Predident of Huawei just tends to keep a low profile because of his own personality, but not because he wants to hide something. And he was a former PLA officer doesn't mean he is still tied to the army. This is very dumb. And I am sure Floor Two is a narrow-minded guy, you never walk out of your small world and look at the vast other parts of the world, aren't you?

Edmund

February 23, 2008 02:00 AM

This is black mailing. Just because Bruce Einhorn could not get an interview with the CEO, he wrote an article accuse him to be not open.

Way to go, Mr. Einhorn controls the pen. The CEO of Haiwei controls Haiwei, but he does not get to hold a pen to bad mouth Mr. Einhorn.

Not granting you an interview and not be open is like apples and oranges. Stop abusing your media power!

Saul

February 23, 2008 05:06 AM

"Huawei has largely itself to blame for this flop. One reason people worry about Huawei is because its founder and CEO, Ren Zhengfei, is a former PLA officer."

It is extremely common for US business leaders and senior executives to have previous military experience. How often are US businesses then required to prove to foreign governments that they are not in fact US spies before they are allowed to invest or do business in foreign countries? Such countries would no doubt be labeled paranoid and protectionist if they do that.

But when the US does exactly that to China, a wholly different set of standard applies.

James

February 23, 2008 11:22 AM

If China is becoming a country, it is as democratic as US, as open as US, and as powerful as US, US will be comfortable with it? I do not think so. Do not always blame China as a communist country. In fact, it is more capitalistic in market than US in some way. You will always feel afraid if you have a powerful neighbor even if they are very friendly. It is human nature.

David

February 23, 2008 08:16 PM

Huawei is a winner. Here is why: In 2007, out of 3COM's $1.3 billion revenue, H3C, which was the former JV of Huawei and 3COM contributed half of it and all the gross profit comes from H3C. For H3C, all technologies (R&D) and people were from Huawei while 3COM provided the capital. In 2006, Huawei acquired Bay network, which is a domestic competitor of H3C. Then Huawei sold all shares of H3C to 3COM. Now, 3COM will face tough competition from Huawei's Bay network's products. H3C's employees, 99% previous Huawei employees, can turn back to Huawei anytime as the market share of H3C is destined to fall... Without H3C, 3COM has no future...
Huawei is then a winner by all means: sold H3C and will gain most of H3C's market in China...

bigtisas

February 24, 2008 01:46 AM

Vick, which drug are you taking? Show some facts otherwise it's just your bias on China.

I am not surprise about the result from 3com deal. US gov didn't let Chinese company to buy Maytag several years ago and Maytag has no security technology at all. This is totally protectionism. I'll suggest China to kick McDonald out from China.

Saul

February 24, 2008 01:46 AM

Vick wrote "Don't trust the Chinese government or communists. They are very patient and building up there power. They will be worse to the world then the 1940s Germans."

The above statement contributes nothing useful to debate on the underlying issue yet says a lot about the xenophobic attitude of the US as a nation. Thanks so much Vick, for not having compared the Chinese to the 1270s Mongols and calling them the "Yellow Peril" yet.

Steve

February 24, 2008 09:26 PM

Check out this article on Huawei
http://www.redherring.com/Home/15549

The author(s) have actually done their homework.

Steven

February 24, 2008 10:20 PM

This kind of news come one after another. I am pretty sure it has huge impact on Chinese sentiment toward US who always use free market or trade to break others' market. It will hatch or enhance the negative attitute to US companies such as CISCO or some financial institutes since we can think in the same way.

This story also reflects the fragile safety feelings among US people and its government even US is still so strong economically and militarily. Chinese are more confident. Chinese telecom service companies buy a lot of equipements from US companies even Chinese companies can make.

This story also tell the world that US propaganda machines torture American's views towards the outside.

Andy

February 25, 2008 12:34 AM

Huawei shouldn't really bother itself with a market that is deep in recession and debts. Look at other emerging markets and other developed markets that really live up to free trade.

Even if Huawei has business ties with Chinese government and military, so what? It IS a Chinese company, you know? What's wrong with doing business with your own government? Did China reject boeing because it has provided military planes to US government AND to Taiwan?

steven

February 25, 2008 11:28 AM

I would not blame Vick and the same kind of US people. They have been misled by American media and journalists, such as Bruce Einhorn for long time. These kind of articles are the all they can access in their "free news". It is really very difficult for US people to have a fair view toward outside.

As David said, about half of 3Com's revenue and all of its profit come from Huawei-3Com (H3C)JV in China that is now owned by 3Com. All the technology of H3C came from Huawei.

Huawei bought Habour Networks, a new sucessful startup by previous Huawei employees. The Habour has the similar products as H3C. 18 months after Huawei sold its shares in H3C, Huawei can sold its products according to the agreement between 3Com and Huawei. Huawei can easily kill 3Com's business in China. There are no such technology advantages from 3Com at all. and Huawei has no interest in its technology

But 3Com has a good advantage in US market: its sale channel. That need time to build. Huawei has been looking at US market for a while.

Another important thing is that: Huawei only wants to buy around 20% of 3Com shares, others will be controlled by another US company. Huawei would have no way to control sold 3Com even the deal was made.

Casylius

February 25, 2008 08:12 PM

Thank gods that we still have people in the government that will not sell out everything. China is taking over virtually all low-end US manufactured industries - plastic, textile, toys, shoes, etc. Once they take over the high tech industries by copying and stealing high-tech IPs, everyone such as Bigtisas can move to China to flip hambugers for McChina (Since they may already buy out McDonald too). Bias on China. No way, it is just the future in waiting.

Paul

February 28, 2008 11:35 PM

Americans are particularly paranoid when it comes to the Chinese (CNOOC, Huawei, etc) and Arab (Dubai Ports) investments. So much so that simple concepts of fair play and reciprocity are just thrown out of the window in the name of national security. Yet Americans like to preach globalization and lecture others on the importance of opening markets and talk as if victimized when they are blocked out of foreign markets. I wonder how many Americans actually realize their own hypocrisy and double standards.

Katie Leung

February 29, 2008 04:32 PM

@ Casylius


OK let's get something clear here.

3com is a dying company, that is why it is selling itself.

Huawei is a very strong growing company, not even CISCO can cope with Huawei's growth. Huawei is grabbing marketshare everywhere (and yes this is NOT an exaggeration, go and check the news), Huawei's total revenue of 2007 was $16 billions


Huawei stands at 4th in term of numbers of patents in 2007 in the world after matsushita (panasonic), Philips and Siemens.

Thus I would like to ask you, what does 3Com have left for Huawei to steal ?

jcage

March 3, 2008 06:08 PM

Huawei has not giving up on 3Com.
If the deal worked out, I won't hold my breath to expect Bruce to publish and apology for his careless reporting!
Let's see if BW censorship let this article to be posted!
http://www.telecomasia.net/article.php?type=article&id_article=7432
Bain, Huawei to try again for 3Com

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Mar 03, 2008
ChinaWire

Two weeks after withdrawing their bid for 3Com, Bain Capital and Huawei are believed to be preparing a second tilt at the US networking firm.

The two companies are considering a new application to the Committee on Foreign Investment in the US (Cfius) within several weeks, Netease reported. The pair called off the $2.2 billion takeover on February 20 after Cfius made it clear it would not approve their application because of security fears.

Under the new proposal, Huawei would still take a 16.5% stake and have no direct management control over 3Com. But the two companies would commit to selling off security firm Tipping Point, which provides network security services for the US Pentagon, if their application is approved.

The two companies are aiming to give Cfius no reason to block their application on political grounds, Netease reported.

Fueling the speculation about a renewed bid, 3Com last week said it would postpone until March 7 a shareholders' meeting originally scheduled for February 29 to vote on the takeover proposal.

grr

March 21, 2008 08:11 PM

Some of these comments are downright funny. Ok, USA blocked this investment. How many companies in china is ANY none chinese company allowed to buy at more than 50%? NOT A ONE. How easy is it for none asian companies to sell in China? They pretty much have to have some form of the manufacturing there to go there. Even walmart does not import anything from outside of China. Nearly all that is sold there IS from China. It is required of them.

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BusinessWeek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies. Eye on Asia’s bloggers include Asia regional editor Bruce Einhorn, Tokyo reporter Ian Rowley, Korea bureau chief Moon Ihlwan, Asia News Editor and China Bureau Chief. Dexter Roberts, and Hong Kong-based Asia correspondent Frederik Balfour.

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