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Huawei Faces a Serious Threat From U.S. Probe Into Exports to North Korea

The Davos World Economic Forum 2015The Davos World Economic Forum 2015
Ren Zhengfei, president of Huawei Technologies , speaking during the 2015 World Economic Forum in Davos, Switzerland.Photograph by Jason Alden — Bloomberg/Getty Images

A U.S. Commerce Department subpoena looking into Huawei’s sales in U.S.-sanctioned countries like North Korea poses a serious threat to China’s most successful tech company.

In the subpoena sent to Huawei, the Commerce Department is demanding information about the company’s exports to Cuba, Iran, North Korea, Sudan, and Syria, in order to determine whether Huawei broke U.S. sanctions, the New York Times reported yesterday. The news comes three months after U.S. officials punished another Chinese IT giant, ZTE (ZTCOY), for violating sanctions to Iran.

Huawei declined to comment on the news, but a company spokesman said, in a prepared statement, “Huawei is committed to complying with the applicable laws and regulations in the markets where Huawei operates and export control measures promulgated by the international community.”

A Chinese Technology Whale

If ZTE was a big fish, Huawei is a whale.

Huawei is China’s most global tech company, a telecommunications giant selling $60 billion a year in servers, switches, and increasingly smartphones across Europe, Africa, and the Middle East. Almost 60% of sales come from outside China.

The subpoena is potentially momentous because Huawei’s business is so reliant on U.S. suppliers, who could be restricted from selling to Huawei if the company is found to have violated U.S. sanctions. (Huawei hasn’t been accused of wrongdoing, and the New York Times makes clear the subpoena does not indicate a criminal investigation.)

Huawei spent $7 billion on American components in 2014, a third of its total component spending, for services, switches and other equipment. Its past suppliers have included U.S. firms ADI, Broadcom, Dell, Hewlett-Packard, IBM, Microsoft, Oracle, and Qualcomm. Without U.S. suppliers, its manufacturing is in jeopardy.

Huawei must be concerned. The U.S. government has for years warily eyed Huawei and its supposed ties to the Chinese military—ties grounded in Huawei’s founder Ren Zhengfei’s history serving in China’s People’s Liberation Army. In 2012, the U.S. House Intelligence Committee labeled the company a security threat. Huawei denied the committee’s assertion, but it remains effectively blocked from signing large U.S. telecom contracts.

 

ZTE’s case earlier this year could provide a roadmap of how the U.S. proceeds should it find Huawei in violation of sanctions. The Commerce Department initially restricted ZTE from purchasing American components without a special license before lifting the restrictions a couple weeks later. As part of the agreement to lift restrictions, it was reported, three senior ZTE executives including the CEO were replaced.

Depending what the U.S. discovers, Huawei could find itself in a similarly vulnerable position in what is serious news for China’s most ambitiously global company.