Jack Ellis

A report released yesterday by the US House of Representatives Permanent Select Committee on Intelligence has recommended that Chinese telecoms companies Huawei and ZTE should be shut out of the US market. The report suggests that mergers and acquisitions in the US involving the two should be blocked, while the government and US companies should avoid buying equipment from them. The Chinese Foreign Ministry has insisted that Huawei and ZTE operate according to “market economy rules” and has asked the US Congress to “set aside prejudices”.

The House Intelligence Committee’s findings – apparently the result of a 12 month investigation –come just a few days after the Wall Street Journal reported that Huawei has been exploring the possibility of publicly listing its stock in the United States. Chinese companies that have gone abroad to float in the past have generally received a disappointing response. National security concerns aside, however, all the signs suggest that Huawei has the potential to buck that trend.

According to Reuters, it is the world’s second largest vendor of routers, switches and other telecoms hardware, just behind Sweden’s Ericsson. In addition, the company sits in sixth place in the global mobile handset market (for the sake of comparison, ZTE is the world’s fifth largest telecoms infrastructure company by sales, but takes fourth place globally in handsets). The Wall Street Journal estimates that around 70% of Huawei’s business is outside of China, with sales in the United States totalling $1.3 billion last year; and that the company held 57.2 billion yuan ($9.1 billion) in cash at the end of 2011. Extensive cash reserves, a formidable market share and an undeniably international outlook clearly indicate a company that has potential for public listing on one of the world’s major stock exchanges.

Huawei’s pursuit of a focused patenting strategy is something else which could be attractive to investors in a hypothetical IPO. Research conducted by Article One Partners indicates that the company holds a significant share of the LTE patents expected to be fundamental to the next generation of smartphone technology – patents that, as well as granting freedom to operate, could have substantial monetisation potential. As another sign of its global focus, Huawei made the third-highest number of PCT applications in 2011 (while compatriot ZTE made the most). Ownership of key US patents would give the company a level of leverage in the American market that would make it hard to ignore, whatever its trading situation. In this context, it is worth remembering that one of the goals of China’s national patent strategy is the acquisition of core patents in “key fields of emerging industries and in key technological fields of traditional industries”.

Beyond the opportunity to raise funds, perhaps Huawei hopes that a New York IPO would help to soften US attitudes towards it, enabling it to penetrate farther into Western markets. However, it seems that such a move would do little to allay the concerns of US congressmen. ZTE was floated in Shenzhen in 1997 and again in Hong Kong in 2004. But the accountability and transparency that is supposed to come with a public listing has not spared the company from being listed alongside Huawei in the House Intelligence Committee report.

Yesterday, Huawei denied that it had sought consultation on the possibility of a foreign IPO. IAM has previously reported on the reputation problems that Huawei – and Chinese companies more generally – suffer from and have struggled to shake off. For Chinese businesses to make the next step and become truly global, they must be able to operate freely in foreign markets. And to go that extra mile, it makes sense that they should be considering IPOs outside of China. Suspicions, well-founded or otherwise, about shadowy links to the Chinese political and military establishments and alleged involvement in industrial espionage and trade secret theft are holding them back.

However, the United States’ determination to protect against IP infringement may be a two-edged sword. China’s economy depends on exports and, increasingly, on investment abroad. But it is important to remember that China is also a key growth market for US businesses. If the US government does take action to exclude Huawei, ZTE and other Chinese companies, then the Chinese government will surely consider doing the same to US companies. This is a presidential election year in the United States, while China is also in the midst of a leadership change. Politicians in each of the superpowers will be keen to take a strong stance on the perceived economic injustices perpetrated by the other. A trade war with intangible assets as the central theme could be just around the corner – if it hasn’t begun already.