HUAWEI THREATS HAUNT SPRINT DEAL
Security, competition concerns spur calls for increased scrutiny
Last year, Huawei WASHINGTON Technologies Co. and wireless carrier SoftBank Group Corp. jointly demonstrated advanced 5G technology by pitting a human against a robotic arm in a game of air hockey in Japan.
The presentation also illustrated the close ties between the companies that are emerging as an issue in T-Mobile US Inc.’s proposed purchase of SoftBank’s Sprint Corp. SoftBank’s network relies on Huawei technology. Critics of the deal say the arrest in Canada of a top Huawei executive shows the Chinese company isn’t to be trusted, and regulators should step up scrutiny of the US$26.5-billion merger’s national security implications. SoftBank, based in Tokyo, would own part of the merged company — carrying its business associations into the board room — including links to Huawei, suspected by U.S. officials of enabling Chinese espionage.
“I’m opposed to the influence of Huawei sitting around the table,” Mike Rogers, former chairman of the U.S. House Intelligence Committee, said in an interview. “I would just be very, very cautious to give them that much influence over an American carrier.” A “mitigation plan” for SoftBank might resolve qualms, he said. He didn’t offer details and added, “Not dealing with that is wrong. We know this is a problem.”
U.S. providers are racing to develop 5G wireless networks that offer dramatically higher speeds — 10 or even 100 times faster than current service — to underpin the so-called internet of things, enabling autonomous vehicles, remote surgery and other services. The mobile industry has cast the effort as a “race to 5G” against competitors including China and South Korea. The administration of U.S. President Donald Trump has offered support, and he has ordered a national spectrum policy to ensure U.S. leadership in advanced wireless communication. Robert McDowell, a Cooley LLP partner who represents T-Mobile, said the Huawei executive’s arrest isn’t making the deal review any more difficult than it already has been.
“The deal does not face a tougher road. The facts have not changed,” McDowell added. “There’s an incredible amount of government scrutiny of anything that smells like Huawei equipment within American borders, and that’s just simply not going to happen.” SoftBank will have a passive role in the new company, McDowell said. He pointed out that calls from the U.S. may reach Huawei equipment in many countries now. “Are we insisting that France or Ireland divest all Huawei equipment? Where does this end?” McDowell said. David Tovar, a spokesman for Overland Park, Kansas-based Sprint did not respond to requests for comment. American officials appear to be focused on potential threats from Huawei gear, said Carri Bennet, general counsel for the Rural Wireless Association, which represents U.S. mobile carriers with fewer than 100,000 subscribers. The trade group has Huawei as a member and opposes the T-Mobile deal, saying that the merger threatens to raise costs for small carriers.
“This could blow up the whole T-Mobile/Sprint merger,” Bennet said in an interview. “It’s not just a national security issue. It plays into the whole race-to-5G, and how do you keep Huawei from getting ahead of others.” Trump could block the deal if U.S. officials find risks to national security. T-Mobile parent Deutsche Telekom AG, based in Bonn, will own 42 per cent of the new company compared with SoftBank’s 27 per cent. SoftBank, Deutsche Telekom and T-Mobile all count Huawei among their suppliers, according to data compiled by Bloomberg.
The transaction requires approval from the Justice Department’s Antitrust Division, the Federal Communications Commission and the Committee on Foreign Investment in the U.S., or Cfius, which reviews acquisitions of American businesses by foreign buyers for risks to national security.
Under Trump, the panel has toughened scrutiny of Chinese investment in the U.S., scuttling at least a dozen deals over security risks. Even non-Chinese buyers are being examined for business relationships with China, according to lawyers who work on crossborder transactions.
The administration’s concerns about Huawei were underscored earlier this year when it blocked Broadcom Inc.’s hostile takeover attempt of Qualcomm Inc. The U.S. said Broadcom would underinvest in the chipmaker, giving Huawei an edge in 5G technology. Then on Dec. 1, Huawei chief financial officer Meng Wanzhou was arrested in Vancouver over potential violations of American sanctions on Iran.
The sanctions case against Meng will likely draw Cfius’s attention as part of the panel’s review of the Sprint deal, according to Brian Fleming, a lawyer at Miller & Chevalier in Washington who previously worked on Cfius reviews at the Justice Department. When examining foreign buyers, Cfius investigates ties to entities that have violated U.S. sanctions, he said. “If they have any connection or any sort of exposure to Huawei, at this stage in the game I would imagine that that is a conversation point that would be happening within the committee,” Fleming said.
Earlier this year, Trump signed legislation giving Cfius, which is led by Treasury Secretary Steven Mnuchin, broader powers to review foreign investment in American technology and infrastructure. The heightened security reviews come as the Trump administration wages a trade war against China and looks to ensure the U.S. maintains its technological edge over the country.
SoftBank and Deutsche Telekom have previously undergone Cfius reviews. In its 2013 acquisition of Sprint, SoftBank agreed to remove “certain equipment” in a unit that used parts sold by Huawei. T-Mobile chief financial officer J. Braxton Carter told investors last month that the company has had “very heavy meetings” with the committee.
The companies have said they expect the Cfius review will result in a new security agreement for the combined company. Deutsche Telekom in an emailed statement Thursday said it uses Huawei technology but “takes the global discussion about the security of network elements from Chinese manufacturers very seriously” and was re-evaluating its procurement strategy. Huawei’s travails show signs of widening. France, which has safeguards in place for critical parts of its telecom networks, is considering adding items to its “high-alert” list that tacitly targets Huawei. Bloomberg News spoke with 15 people with knowledge of French President Emmanuel Macron’s push for significantly tighter regulation.
France’s largest telecommunications operator, Orange, won’t use Huawei equipment in its 5G network in the country because of “a call to prudence by French authorities,” chief executive Stephane Richard said Thursday in a radio interview.
The company is now facing bans in the U.S., Japan, Australia, New Zealand and Germany. SoftBank conducted a 5G trial of self-driving trucks using Huawei equipment earlier this year, said Takatoshi Mori, a spokesman for the Japanese carrier. Mori declined to comment on whether Huawei would be considered as a 5G vendor, or on a Nikkei report that SoftBank will remove Huawei and other Chinese equipment from its existing 4G base stations over growing security concerns. SoftBank and Deutsche Telekom have used Huawei equipment to help Japan and Germany leapfrog into commercial 5G before the U.S., Bennet’s Rural Wireless Association said in a filing to the FCC. Another deal opponent, the Communications Workers of America union, told the agency it’s “imperative” to examine SoftBank and Sprint’s ties to Chinese gear makers including Huawei. “This is something that has to be seriously looked at and addressed,” Debbie Goldman, research and telecommunications policy director with the union, said in an interview.
The union on Thursday joined with Dish Network Corp. and other opponents including the policy groups Common Cause and Public Knowledge to assert the deal will bring higher prices and less competition, while failing to hasten the advent of 5G networks.
The deal, proposed in April, would combine the third- and fourth-largest U.S. wireless providers, creating a new challenger to mobile leaders AT&T Inc. and Verizon Communications Inc. TMobile chief executive officer John Legere in June told lawmakers the merger would lower prices and give the combined company an advantage in the race to deliver 5G.
It’s not just a national security issue. It plays into the whole race-to5G, and how do you keep Huawei from getting ahead of others.