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The Noise Around Huawei’s Top Exec Arrest: Why is the Chinese Technology Company Under Duress

Professor of Financial Economics and Part-time Value Investor, Transfin.
Dec 13, 2018 8:11 AM 3 min read

Meng Wanzhou, top executive at Chinese tech company Huawei, and daughter of the founder and CEO was arrested last week in Vancouver, Canada.


It is widely believed that the arrest was made on directions from the United States. While Meng is accused of helping Huawei circumvent US sanctions on Iran by positioning a Huawei subsidiary as a separate company,  the arrest still has a political undertone which makes it somewhat murky and fairly layered.


[Listen in from 12:09 onwards to understand what the noise is all about.]


It is believed that Meng was on the board of a Hong Kong-based company called Skycom, which allegedly did business with Iran between 2009 and 2014. US banks worked with Huawei at this time, so Iran sanctions were violated indirectly, and in that context, it is alleged that Meng committed fraud against these banks. It is further believed that Skycom was an unofficial subsidiary of Huawei which perhaps strengthen the allegation.


The key central political nuance to the controversy is that US intelligence alleges that Huawei has questionable ties with the Chinese government and that its equipment could contain “backdoors" for use by government spies. 


Despite being largely unproven, it has prompted the US in taking a series of steps banning the equipment from US markets including government officials and even private companies. US concerns are further exacerbated by a new Chinese law which requires domestic firms to assist the government when asked to do so. 


Huawei is the world's largest supplier of telecom network equipment and second-biggest maker of smartphones with reported revenues of c.$92 billion last year


The company was founded in 1987 by former Chinese military officer Ren Zhengfei. Unlike other big Chinese technology firms, Huawei has meaningful overseas presences and is somewhat of a market leader in several countries across Europe, Asia and Africa. There have been ‘price-cutting’ and ‘copy-cat’ type strategic narratives associated with Huawei and lawsuits by companies such as Cisco and Motorola further substantiate this viewpoint. However, heightened R&D spend in recent times has somewhat improved their overall originality profile. Huawei is at the cutting-edge of 5G technology and the use of this technology in international markets is being viewed quite cautiously. For perspective, Australia and New Zealand have banned Huawei from building 5G networks.


US-Sino relationships could see heightened complication at the back of this arrest, especially with ongoing trade tensions. This is further exacerbated by the fact that semiconductor technology is increasingly finding itself in the spotlight. 


While largely unsubstantiated, there is a narrative that the arrest is part of a larger plan by the United States to put trade pressure on China and use the arrest as some sort of leverage. In recent times, semiconductor industry has seen a sharp uptick in the attention it generates and as such has firmly found itself in the spotlight. With Chinese chip makers gaining substantial ground in terms of research and innovation, there are political considerations at play here. Perhaps, US and China, both see chipmaking as a key strategic levers in a world wherein semiconductor technology is increasingly becoming central to defence and military systems and in the evolving artificial intelligence ecosystem.   


In the latest update, Meng was released on $10m bail; She will remain in Vancouver while extradition proceedings unfold.


The $10m bail consists of  $7 million in cash and a $3-million surety made up of property from four associates. She will remain in Vancouver, where she owns two homes, while she awaits extradition proceedings.


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