Infra-Tech – When the buying gets tough…

Redberry, Red Flag Linux… These are just a few Chinese technology companies operating under the radar. Most of them limit their operations to the domestic market. When they venture abroad, they do so via direct sales or subsidiaries. Seldom do they go on merger and acquisitions (M&A) buying sprees, for when they do so in the USA or in Europe, it usually raises (red) flags in the capitals.

In fact, it looks like there is a red line that Chinese technology companies are not allowed to cross. Latest in case is Huawei’s attempt to buy 3Com, a struggling US company, because of fears that «China» will find it easier to spy on other countries while better encrypting its own communications! Despite having the US government as a customer, 3Com’s products fall within the infra-technology category: they are neither high-tech military stuff nor low-tech for that matter (3Com supplies the Pentagon with intrusion prevention technologies). To be fair, Chinese companies are not alone: recent deals involving the transfer of network technology to non-US entities, including Alcatel and Nokia, raised scrutiny.

While the 3Com case reminds us of the ridiculous accusations leveled against a couple exporting x386-based computers to China on the ground that the processor could be used to power a missile, it should not distract us from the core question: when does a Chinese company’s strategic technology investment become a national security risk?

Ironically, the question will probably be solved by the market. What will happen when private equity firms, backed by Chinese funds start to acquire US technology companies?