What does national security have to do with the Lenovo-Motorola deal?

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Marc Perton
January 30th, 2014
In this article: column, google, lenovo, motorola
What does national security have to do with the Lenovo-Motorola deal?

Lenovo's planned acquisition of Motorola's mobile phone business will likely be reviewed by the Committee on Foreign Investment in the US (CFIUS), the government agency that makes sure foreign investments don't impact national security. Though the deal will inevitably be heavily scrutinized, few experts expect the agency to scuttle it. That doesn't, however, mean Lenovo's deal will be rubber stamped.

When Lenovo bought IBM's PC division in 2005, members of Congress openly fretted that the Chinese company would use its new asset to spy on American rivals – and the US government. One concern: IBM was (and still is) a major supplier of computers to the government. "Why would the US government be reliant on a Chinese company whose major shareholder is the Chinese government?" Rep. Don Manzullo told The Wall Street Journal. "That in itself sends a chill up and down the spines of members of Congress."

Similar issues have been raised over Lenovo's plans to buy part of IBM's server division. However, as with IBM's ThinkPads before them, the company's x86 servers are already being made in China. "If you worry about penetration via your low-end server, you're going to have to figure out a way to monitor all servers, not just say kick the Chinese company out and we'll be safe," says Professor Theodore Moran, a senior fellow at the Peterson Institute for International Economics.

Moran says there are three specific issues the CFIUS looks at, and none of them seem likely to affect the prospect that Lenovo will be able to go ahead with the Motorola deal. The first, having to do with allowing a foreign company or government to manipulate supply, doesn't apply, he says, because Motorola "represents a very small part of the market." The CFIUS also checks to make sure no sensitive or advanced technology is being leaked. "They're not even top-of-the-line cellphones," says Moran. Finally, there's the risk of the technology being used to allow foreign companies or governments to infiltrate US government or military systems via backdoors or spyware, something Moran also sees as a minimal risk, given Motorola's small market share.

In gaining approval for both the IBM server deal and the Motorola acquisition, Lenovo also has history on its side. Earlier fears that Lenovo might pose a threat have gone unrealized. After nearly a decade as the owner of the most venerable brand in the PC business, the company has become a staple of corporate purchasing managers, building on IBM's long history in enterprise sales. "It doesn't give them a free pass, but it weighs in their favor," says Jason Waite, an international trade and regulatory attorney with Alston & Bird in Washington, DC. "How could it not?"

That doesn't mean it's smooth sailing for all deals involving Chinese companies. Today, although China and the US are more interdependent than ever, mistrust between the two nations remains high, and it extends in both directions. The NSA's global spying operation has allegedly included Chinese computers among its targets, while the US accuses China of cyber-attacks on American computers. According to a new report, the number of investments reviewed by the CFIUS has grown in recent years, and in 2012 Chinese companies topped the list of deals reviewed by the agency; that same year, one deal resulted in a rare Presidential ban, after the CFIUS recommended rejecting the purchase by a Chinese firm of a wind farm located near a military facility.

Lenovo itself reportedly lost a bid to buy BlackBerry last year, after the Canadian government vetoed it based on national security concerns. However, Motorola, despite having a long history of supplying telecommunications technology to the US government and military, doesn't have the kind of ties to Washington that BlackBerry does to Ottawa, and doesn't enjoy the same kind of ubiquity among government users that BlackBerry once had. "It could be helpful that Motorola isn't in widespread use in government," says Waite.

Government pressure has also forced some Chinese companies to scale back their US ambitions. Huawei dropped at least two planned deals amid charges the company was a threat to national security because its networking gear could be used to spy on the US government and feed that info back to its masters in China. ZTE has faced similar accusations. Both companies have denied the charges. "You can get so much anti-Chinese bad press that a deal gets withdrawn," says Moran, who serves on Huawei's International Advisory Council. "Huawei didn't do a good job" projecting an image of transparency in its congressional testimony, according to Waite. Even if Congress holds hearings on the Motorola deal, Lenovo is likely to fare better, he says. "Lenovo has been there before. They're not going to make that mistake."

In the end, most experts see the deal gaining approval -- though it may face some bumps along the way. "I'm not saying some congressman won't stand up tomorrow and say something nasty," says Moran. "But I don't see a regulatory problem here." Adds Waite: "If Congress is going to hold hearings on Smithfield, I won't be surprised to see them take on the sale of an iconic brand like Motorola." That deal, in which a Chinese company sought to acquire pork processor Smithfield Foods for almost $5 billion, was later approved by the CFIUS.

(AP Photo/LM Otero)

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