By Matthew DaltonWe’ve been closely following a trade dispute between Option N.V. and Huawei Technologies Co., because it shows how the global expansion plans of Chinese firms are being threatened by complaints that the Chinese government unfairly subsidizes its exporters.
These disputes usually end in tariffs being placed on Chinese firms. But in this case Huawei and Option last week announced a “cooperation agreement.” Under it, Option, a small Belgian wireless-technology company, would drop three trade complaints filed with the European Commission claiming that Huawei and ZTE Corp., the two main Chinese telecommunications equipment makers, have been able to flood the European Union market with cheap modems due to massive subsidies they receive from the Chinese government.
What the companies didn’t mention is that the dispute was about to yield fruit for Option: Two days earlier, the European Commission, the EU’s executive arm, had circulated a confidential document proposing to place steep duties on wireless modems shipped from China.
The document, obtained by Real Time Brussels, proposes duties of €32.95 for each of the first 10.7 million modems shipped from China and €59.10 for each modem after that. Those are enormous tariffs for a product that typically costs €20-30.
The duties would have lasted for 200 days - enough time for the commission to complete investigations the two other trade complaints brought by Option and impose duties that could last up to five years.
That may explain why Huawei gave Option such a good deal: Huawei agreed to pay €8 million for M4S, an Option subsidiary that’s developing next-generation mobile broadband technology, and up to €33 million over the next 18 months to license some of Option’s software technology.
To put that in perspective, €41 million roughly equaled Option’s market capitalization the day before the deal was announced.
“In the spirit of the future collaboration,” Option said it would drop the three trade complaints it had filed with the commission.
So, Huawei agreed to pay nearly enough to buy Option (judged by its share price) without receiving its main assets, including its headquarters in Leuven, Belgium, a factory in China and a factory in Cork, Ireland.
Unless you consider that these trade complaints may have been among Option’s most valuable assets, at least from Huawei’s perspective. For Huawei, the value of stopping Option’s complaints extends far beyond the market for wireless modems. European labor unions are growing increasingly concerned about Huawei’s penetration of the European market for network infrastructure equipment, which dwarfs the market for wireless modems. If the commission imposes tariffs on one kind of Huawei product, others could be next.