Huawei, 3-Com: The year the rat began to swallow the Python
For those of you interested in state capitalism, I have been following Huawei’s interest in 3-Com. Today, that story hit the Washington Post.
Because 3-Com makes hacker resistent hardware for the U.S. military, the sale of 3-COM to Huawei and Bain Entreprises has raised security concerns in the halls of Congress. While others will raise these legitimate concerns, I am interested in another aspect of this buy-out: the spread of state-capitalism.
For starters, note that a two American global investment firms have interest in this sale. The first is clearly Bain Capital; the second is Goldman Sachs, sole advisor to 3-Com.
Huawei and 3-Com have been closely connected for some time. 3-Com was attracted to Huawei because of its access to significant cash, its dedicated labor force, and its six-to-one advantage in terms of labor cost, all elements that have attracted companies to China. In fact, only a year ago, 3-Com’s CEO talked of acquiring its “junior” partner. How things do change. Who is swallowing whom here?
What is Huawei? On the surface it seems to be a privately run 16-year old company, owned by one of the wealthiest men in China. But everything may not be as it seems. Consider the following from China Economic Quarterly and appearing also in Financial Times, an article probing the relationship between Chinese corporations and China itself:
A third level of state influence is visible in Huawei, a maker of telecoms network equipment. Huawei is ostensibly privately-owned, although many of its shares are owned by the local state telecoms authorities to which it has sold equipment. It enjoys a US$10bn low-interest credit line from the China Development Bank, whose mission is to make concessional loans in support of state policy goals. Huawei’s ties to China’s military have long been the subject of speculation. For the most part, Huawei seems to act independently. Yet, so much about the firm’s parentage is obscure that one can never be entirely sure.
The complexity and murkiness of state-corporate relations in China lends a foundation of legitimacy to the political outcry over Chinese takeovers of foreign firms. At one level, this outcry is silly. It could never really hurt developed countries to sell off mid-sized energy companies and floundering appliance makers to Chinese buyers willing to pay rich prices. There is almost certainly an element of racism in protesting sales to Chinese state firms, when similar sales to French state firms would pass unnoticed.
But at a deeper level, these objections reflect a simple truth. It is almost impossible to ascertain the extent to which a Chinese state firms is an autonomous actor or an agent of state policy. The Chinese state is controlled by a secretive and authoritarian organisation whose aims are neither clear nor open to scrutiny and debate. When you sell to a Chinese state firm, you ultimately have no idea who you are really selling to. This creates a fair case for raising your asking price, or deciding to sell to a more trustworthy buyer.
The racism issue does not interest me, nor do I wish to address the security issue. Others, I am sure, will do both. What I find of interest is the way globalization is proceeding.
In the past, global companies, with the help of the World Bank and the IMF, have entered third-world companies, burdened with debt. When the loan was made, one of the conditions was that these countries had to sell their floundering–and sometimes not so floundering, state owned corporations. Often an ancillliary condition was that the country devalue its currency, which meant pegging it to the dollar. (Do you hear the echo here?) Additionally. many of these countries were brutally dictatorial, Chile under Pinochet, for example. (More echoes?)The reach and power of multinationals was enhanced through the IMF.
Additionally, the WTO set the rules for globalization that did not put any restrictions on how a country used or abused its labor force, an additional plum for multinationals.
(As an aside, it is no wonder that the IMF now languishes, relegated to being almost a reportorial institution. Third world countries have learned their lesson. Again, it is no wonder that WTO negotiations have stalled. Again, third world countries who care about their people are learning the lesson.)
But along comes China, a repressive dictatorial regime, with more than one-fifth of the world’s population, a huge, hardworking, labor force with absolutely no protection, centrally controlled. What more could a multinational ask for? Really? Privatization has never blinked before dictatorial regimes; in fact, they rather enjoy them. China was to be the ultimate plum.
But deeper than issues of control, what about state-sponsored capitalism? What happens when a country has a gigantic, poor, hard-working labor force and is willing to put that labor force at the disposal of multinationals? Who will eat whom in the end? I suspect that neo-conservative, now gushing over China as the next gigantic prize, will soon learn that China is more than it can swallow. The marriage of 3-Com and Huawei was no accident. China wants to control the internet.
3-Com, lured by cheap labor and which, only a year ago, thought it would buy-out Huawei and thereby control the Chinese and world market, may now be swallowed. Who’s next?
Thank you Goldman and Bain for making all this possible. Thanks also to our redoubtable Secretary of State, Henry Paulsen. Thanks also to all those economists who so love free markets and deregulation–free for corporation but shackling to labor–that they have made all this possible.