Arrest of Huawei’s Sabrina Meng Wanzhou signals trouble for US tech companies doing business with China

  • US federal prosecutors will ‘want to know whether [suppliers] knew or had reason to know these violations occurred’, an analyst said
  • Fears grow that tensions between the US and China will make a trade deal more difficult to achieve
PUBLISHED : Friday, 07 December, 2018, 12:46am
UPDATED : Wednesday, 12 December, 2018, 8:55pm

The arrest of Huawei Technologies’ finance chief Sabrina Meng Wanzhou has exposed new risks facing US technology companies doing business with China and stoked fears of a prolonged US-China trade war.

Meng, the daughter of founder Ren Zhengfei of Huawei, the second largest smartphone maker in the world after Samsung, was arrested on Saturday by police in Vancouver, Canada, at the request of the US government on suspicion of violating US sanctions against Iran.

The arrest of Meng, who is also known as Cathy Meng, is the latest move by the Trump administration to crack down on large Chinese technology companies after a ban on another Chinese telecommunications equipment maker, ZTE, earlier this year.

It also sends a strong message that US tech companies that have business with China might face more headwinds.

“You can see a gradual progression from the ZTE sanctions case … which shows that [Washington is] taking violations of US sanctions incredibly seriously,” said Alma Angotti, the managing director of Navigant Consulting and an anti-money laundering expert.

Earlier this year, the US banned ZTE from buying any American components for seven years after it violated US sanctions by selling products to Iran and North Korea. Washington cited national security concerns.

The US government’s aggressive pursuit of suspected financial violations by the likes of ZTE and Huawei heightens the risks for US companies, said Angotti, a former lawyer for the US Treasury Department’s financial crimes enforcement network, also known as FinCEN.

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There is a chance that the US Justice Department will “want to know whether [US suppliers] knew or had reason to know these violations occurred, or did they have controls in place to prevent misuse of US-origin goods in a way that violates US sanctions,” she said.

“It’s a very large risk,” Angotti added.

Meanwhile, disruptions at Chinese telecoms companies weigh heavily on US tech companies because the supply chain is highly interconnected.

“The impact is tremendous because all of the supply chain runs through China,” said Stacy Rasgon, an analyst at the asset management firm AllianceBernstein. “Even though it’s impossible to quantify the indirect impact, it’s clear that the market doesn’t like uncertainties.”

The Dow Jones Industrial Average dropped as much as 760 points, or 3 per cent, on Thursday morning. Major US technology companies that buy or sell components to the Chinese smartphone giant, including Intel and Texas Instruments, sank in early trading on concerns that disruptions in Huawei’s business could have a significant impact on their supply chain.

Stocks later trimmed their losses, with the Dow closing down by 79 points, or 0.3 per cent.

The Huawei arrest took place on the same day that US President Donald Trump and Chinese President Xi Jinping met after the G20 summit in Buenos Aires to negotiate trade issues.

Trump’s national security adviser, John Bolton, who was present at the Xi-Trump dinner on Saturday, said in an interview with National Public Radio on Thursday that he had advance knowledge of Meng’s arrest.

Said Rasgon: “This feels like a sizeable escalation to the current spate of disputes. Meng was apparently arrested on Saturday in the middle of the trade talks. It sort of feels like a slap in the face.”

A congressional report in July branded Huawei and ZTE as being among the Chinese “nefarious actors” infiltrating American intelligence bodies and critical infrastructure through information technology systems and components.

“It’s a matter of national security to them, so they’re not playing around,” Angotti said.

This summer, Congress passed a law that gave greater powers to the Committee of Foreign Investment in the US (CFIUS), an inter-agency body that reviews foreign investments in the US for national security concerns. While the law didn't mention China, it was clear that it was the target.

The US administration and lawmakers have repeatedly singled out China, fearing its aggressive acquisition of cutting-edge US technologies could pose a security threat.

In November, then-Attorney General Jeff Sessions announced the Justice Department’s “China Initiative”, established to investigate and prosecute Chinese companies for suspected trade secret theft, economic espionage and related violations.

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As the trade dispute escalated in the second half of the year, with the countries slapping tariffs on billions of dollars worth of each other’s goods, the Trump-Xi dinner in Argentina was highly anticipated. But the minor goodwill that resulted has quickly vanished, and investors are not convinced that a deal will be reached any time soon.

It is unclear exactly what, if anything, was agreed to on Saturday in Buenos Aires.

After Meng’s arrest, “we wonder if the tone from China, which was generally polite coming out of the dinner, will worsen,” the AllianceBernstein analyst said. “It seems like it must.”