Chinese Private Enterprises: Business Partners or Security Risks ...

This week, the U.S. House of Representatives? Permanent Committee on Intelligence published a report on the activities of two Chinese telecommunications companies ? Huawei Technologies Company and ZTE.? The report generated widespread media coverage given its conclusions that the two posed a potential threat to U.S. national security.? This will have significant implications for companies that do business with China while also counting the U.S. government as a customer.

In investigating Huawei and ZTE, the Committee contended that both companies failed to counter criticisms that they engaged in industrial espionage and other threatening behaviour on China?s behalf. ?In light of such perceived risks, the Committee recommended that U.S. companies should consider working with alternate partners on projects.? Within a day of the report?s publication, Cisco Systems reportedly ended a seven-year partnership with ZTE.? It is not unreasonable to expect that other companies may take similar action in the coming weeks and months and that considerable political or media pressure could be brought to bear on those that do not do so of their own volition.

Companies and investors will recognise that there are risks inherent in doing business with national governments or state-owned enterprises.? Close relationships between multinational companies and foreign governments have generated controversy in the past.? Actions taken by a government that lead to widespread criticism in the international community can result in guilt by association for the foreign investors that do business with them.? What is remarkable about this report, however, is that it focuses on engagement with privately-held companies that have long been seen as examples of China?s economic transformation.? Moreover, Huawei requested the investigation itself in the hopes that the findings would exonerate it in the eyes of the U.S. political establishment.

In countries such as China, the distinction between state and private enterprise is often opaque. The Intelligence Committee crticised both companies? lack of disclosure about relationships with China?s government and its Communist Party.? Huawei and ZTE countered that they were already subject to securities law disclosure requirements and that further disclosures were restricted by China?s national security laws.? It is difficult to see how foreign businesses seeking to partner with entities such as these would secure any greater level of disclosure in their own private due diligence.

On the other hand, much of the critical detail underlying allegations against Huawei and ZTE is contained in a classified annex to the report that was not published.? Critics of the report contend that this allows the potential risks posed to be over-inflated for political purposes.? However, that still does not provide a solution for U.S. companies that are trying to determine the balance between the benefits of working with firms such as these and protecting their domestic revenues and reputation.?

This problem is not likely to disappear any time soon as the public-private relationship in China will remain complex and the issue of China?s intentions toward the U.S. will remain the subject of considerable bipartisan political concern.? This matter, however, is of importance not only to U.S. companies but to those from other jurisdictions that seek to participate in the U.S. government?s substantial procurement programs.? So long as political attention continues to focus on the activities not only of Chinese state-owned enterprises but of private Chinese companies as well, business will need to strike a delicate balance between taking advantage of opportunities presented by Chinese growth while not falling afoul of its political undertones in the west.

Source: http://globaltorchlight.com/?p=2365

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