Huawei relinquishes 3Leaf assets
Company asks for explanation for decision to revoke purchase from US government
Huawei was recently forced to revoke its acquisition of virtualisation assets (intellectual property and staff) belonging to 3Leaf Systems after pressure from the US government. According to an open letter written by Huawei's deputy chairman of Huawei Technologies, Chairman of Huawei USA, Ken Hu, the US has been concerned about Huawei's relationship with the Chinese government.
The acquisition was worth $2m and was completed on May 31st 2010, but Huawei did not file the purchase with the Committee on Foreign Investment in the United States (CFIUS), which reviews deal for possible national security implications, until November.
CFIUS suggested that Huawei voluntarily divest the assets, but Huawei said that it would wait until an official decision from the White House. The company has now done a u-turn and is getting rid of all 3Leaf assets and has released an open letter from Hu.
The full letter follows below:
We would like to provide the basic facts behind the recent 3Leaf matter that has been the subject of much attention and discussion about Huawei. These facts will not only help understand the real situation behind the proposed acquisition, but also Huawei's position on this matter. They will also clarify some long-standing and untrue rumors and allegations regarding Huawei.
Futurewei, Huawei's US subsidiary, purchased certain assets from 3Leaf, an insolvent technology start-up located in Santa Clara, California, in May and July 2010, when 3Leaf was ceasing its operations and no other buyers for its intellectual property were forthcoming. Huawei submitted a timely request to the Bureau of Industry and Security at the Department of Commerce in advance of completing the purchase in May and the Department of Commerce certified that no license was required to export the 3Leaf technology. After learning that CFIUS was interested in the 3Leaf transaction, Huawei submitted draft and formal voluntary filings to initiate a CFIUS review of the transaction in November 2010.
On February 11th, 2011, CFIUS formally notified Huawei that it recommended that Huawei withdraw its notice under terms dictated by CFIUS. We originally decided to decline the offer with an intention to go through all of the procedures to reveal the truth about Huawei. However, the significant impact and attention that this transaction has caused were not what we intended, and on February 18th, we decided to accept the recommendation of CFIUS to withdraw our application to acquire specific assets of 3Leaf.
The United States of America is a great country and one for which Huawei has always had the utmost respect. The values of democracy, freedom, rule of law and human rights in the US are the very values that we at Huawei respect, advocate, and live by. As a company, we are learning much from our close links with the American people. In his inauguration speech, President Obama said, "On this day, we gather because we have chosen hope over fear, unity of purpose over conflict and discord. On this day, we come to proclaim an end to the petty grievances and false promises, the recriminations and worn-out dogmas that for far too long have strangled our politics." We share that vision, and it is the foundation on which we have sought to build our cooperation with American firms as we have invested and grown our business in the United States over the past decade.
Huawei Technologies, founded in 1987 in Shenzhen, China, is a private company owned entirely by its employees. We are currently the second largest telecommunications equipment provider in the world.
Huawei is committed to being a long-term investor in the United States where we already have over 1,000 US employees. In 2010, we purchased products and services from American companies totaling some $6.1 billion. Our investment in research and development activities in the United States has grown by an average of 66% per annum and it reached $62 million in 2010. We have long been offering innovative products and services to our customers in the United States and we have always been a responsible investor, employer, taxpayer and corporate citizen.
Unfortunately, over the past 10 years, as we have been investing in the United States, we have encountered a number of misperceptions that some hold about Huawei. These include unfounded and unproven claims of "close connections with the Chinese military", "disputes over intellectual property rights", "allegations of financial support from the Chinese government", and "threats to the national security of the United States".
These falsehoods have had a significant and negative impact on our business activity and, as such, they must be addressed as part of our effort to correct the record.
First, the allegation of military ties rests on nothing but the fact that Huawei's founder and CEO, Ren Zhengfei, once served in the People's Liberation Army. Born on October 25th, 1944 into a rural family where both parents were schoolteachers, Ren spent his primary and middle school years in a remote mountainous town in Guizhou Province, and studied at Chongqing Institute of Civil Engineering and Architecture, where he graduated in 1963. He was employed in civil engineering until 1974 when he joined the military's Engineering Corps as a soldier tasked with building the then French-imported Liao Yang Chemical Fiber Factory. From there, Ren was promoted to Technician, Engineer and Deputy Director, a deputy-regimental-chief-equivalent professional role that had no military rank. Because of his outstanding performance, Ren was invited to the National Science Conference in 1978 and the National Congress of the Communist Party of China in 1982.
After retiring from the army in 1983, when China's central government disbanded the entire Engineering Corps, Ren became dissatisfied with his job at the logistics service base of the Shenzhen South Sea Oil Corporation and decided to establish Huawei with $2,500 in capital in 1987. He became the President of Huawei in 1988 and has held the title ever since.
It is a matter of fact that Ren is just one of the many CEOs around the world who have served in the military, and it is also a matter of fact that Huawei has only offered telecommunications equipment that is in line with civil standards. It is also factual to say that no one has ever offered any evidence that Huawei has been involved in any military technologies at any time.
The second issue is about intellectual property rights. Since our establishment, Huawei has respected and protected the rights of all intellectual property holders while vigorously defending our own intellectual property rights. We have applied for 49,040 patents globally and have been granted 17,765 to date. In addition to our own innovations, we buy access to other patent holders' technologies through cross-licenses. In 2010, Huawei paid western companies $222 million in licensing fees. Of that total, $175 million was paid to American firms. For example, over the years we have paid US company Qualcomm more than $600 million in fees related to their intellectual property. The fact that Cisco withdrew the lawsuit it filed against Huawei in 2003 regarding allegations of intellectual property rights infringement further vindicates Huawei's position in that matter and supports our position that we are only engaged in legitimate business practices. We learned from that experience that while disputes may arise in the course of business, they can be settled properly through bilateral negotiations.
With respect to the claim that Huawei receives financial support from the Chinese government, the truth is that we operate like any other private corporation. Our company is financed through capital from our shareholders and through normal commercial loans. In addition, Huawei is headquartered in the Shenzhen Special Economic Zone, so our company has always grown within a market economy.
Like many other companies that operate in China, Huawei receives tax incentives provided by the Chinese government to high-tech enterprises and support for some of our research and development initiatives. This is similar to tax incentives offered by American government agencies to US companies. In 2010, Huawei received a total of $89.75 million of financial support from the Chinese government for our research and development activities. All of this is consistent with financial support that is provided to normal businesses in China and in many other countries, including the United States.
The credit lines made available through Huawei by China's commercial banks are actually designated for Huawei's customers, not Huawei. As an intermediary, Huawei recommends loans to our customers and, once taken, our customers are responsible for paying the principle and interest directly to those banks. It is important to note that these types of loans only represented about 9% of Huawei's annual income in 2010, a level that is similar to our industry peers. In 2004, the China Development Bank agreed to offer a $10 billion buyer's credit line to our customers and the amount was subsequently increased to $30 billion in 2009. As of today, $10 billion has been loaned to our customers from the China Development Bank.
The allegation that Huawei somehow poses a threat to the national security of the United States has centered on a mistaken belief that our company can use our technology to steal confidential information in the United States or launch network attacks on entities in the US at a specific time. There is no evidence that Huawei has violated any security rules. Not only that, in the United States we hire independent third-party security companies, such as EWA, to audit our products in order to certify the safety and reliability of the products at the source code level. In addition, Huawei has established a "trusted delivery" model to protect the security of networks we supply.
If the United States government has any real concerns of this nature about Huawei we would like to clearly understand those concerns, and whether they relate to the past or future development of our company .We believe we can work closely with the United States government to address any concerns and we will certainly comply with any additional security requirements. We also remain open to any investigation deemed necessary by American authorities and we will continue to cooperate transparently with all government agencies.
As a privately-owned civil communications equipment provider, we were the first company to establish an end-to-end network security system globally. We have been actively tackling challenges of network security through partnerships with network security regulators throughout the world. We believe that security problems will become more and more significant for everyone in our industry as the amount of data continues to grow rapidly. We are committed to working together with governments in all countries to take all necessary measures to protect information security.
Former American president Abraham Lincoln once said; "Character is like a tree and reputation like its shadow". In recent years, misperceptions and rumors have been the shadow of Huawei, affecting Huawei's reputation and, we believe, the United States government's judgment of Huawei. We sincerely hope that the United States government will address this issue by carrying out a formal investigation of any doubts it may have about Huawei in an effort to reach a clear and accurate conclusion.
The American telecommunications market is the largest in the world and Huawei has been striving to demonstrate our capabilities with a view to becoming a key contributor in this important market. However, unfounded accusations have jeopardised our business activities, with many false claims driven by competitive interests, which we understand because competition can be difficult. Huawei's world-leading wireless broadband technologies can bring American telecom operators, as well as the general public, more advanced technologies and higher network speeds at a lower price. With the structure of wireless base stations becoming simpler, they do not pose any threat to national security, just as mobile phones do not pose risks to national security. While we can commit to not selling any products that concern American operators, we sincerely request guidance from the United States government on the scope of such restricted products and the duration of the related restrictions, as certain technologies that may seem crucial today will lose their leadership and sophistication over time. A full and permanent restriction is way too costly and unfair to any company.
We sincerely hope that the United States government will carry out a formal investigation on any concerns it may have about Huawei. The United States is an advocate for democracy, freedom, rule of law, and human rights. The United States government has demonstrated its efficiency in management, fairness and impartiality and we have been impressed by that ever since we made our first investment in this country some 10 years ago. We have faith in the fairness and justness of the United States and we believe the results of any thorough government investigation will prove that Huawei is a normal commercial institution and nothing more.