Huawei in hotter water; company asks its U.S. suppliers to break the law

Locked out of its U.S. supply chain on which it spent $11 billion last year, Huawei has relied on stockpiles of components it built up in anticipation of such a ban. And while the lack of the Google Play services version of Android and Google's core Android apps is more problematic for the manufacturer's global sales, it appears that inside China the bloom is off the rose. State-run media and social media are attacking China's darling for making bogus accusations against a former employee that left him jailed for 251 days; the company never apologized.

Now, according to U.S. Commerce Secretary Wilbur Ross, who spoke with Reuters, Huawei is trying to get its U.S. suppliers to break the law by asking them to move their operations offshore. Back in May, Ross' department placed the company on the entity list for security reasons. As a result, the manufacturer is not allowed to purchase U.S. software or components. While some still believe that Huawei will be used as a bargaining chip by U.S. negotiators working on a new trade agreement with China, the firm is considered a national security threat in the states. That's because a law in China allows the reigning government to demand that Huawei spy on its behalf. As a result, American lawmakers fear that the firm's phones and networking equipment contain backdoors designed to send information to Beijing. Huawei has always denied these allegations which date back to at least 2012.

Ross said today that Huawei has "been openly advocating companies to move their production offshore to get around the fact that we put Huawei on the list. Anybody who does move the product out specifically to avoid the sanction... that’s a violation of U.S. law. So here you have Huawei encouraging American suppliers to violate the law." Last week, we told you that the Trump administration is seeking to tighten the screws on Huawei by enforcing the Direct Product Rule. Under this rule, foreign-made products with U.S.-origin software or technology would still be subject to the ban. And under the de minimis rule, foreign-made products consisting of at least 25% U.S.-origin content by value are subject to U.S. export controls. The Commerce Department is reportedly thinking about lowering the threshold to less than 25%; this would have the effect of allowing the U.S. to block components made outside of the states from reaching Huawei. Ross said that Huawei asking its U.S. suppliers to move offshore "has flagged an issue we’ve been starting to deal with. Whether 25% is forever and all time the right ratio, that’s something to be resolved."

Yesterday, Huawei filed a lawsuit against the FCC in the Fifth Circuit Court of Appeals in New Orleans. The company is looking to stop the regulatory agency from blocking the use of money from the Universal Service Fund (USF) for the purchase of networking equipment from Huawei. The FCC recently voted 5-0 to block such purchases using USF money. The USF is managed by the FCC and is funded by consumers when they pay their phone bills. The money is supposed to go to those in rural or low-income areas who normally would not be able to access or afford a phone line or an internet connection. And the FCC is reportedly planning a vote that would force carriers to remove any Huawei gear used on their 2G, 3G, and 4G networks. This could harm rural carriers, many of which purchased Huawei's lower-priced gear. Huawei is the world leader in networking equipment with a 28% market share.

Huawei's argument is pretty much straight-forward. The company states that it never received due process from the U.S. and claims that the FCC's decision to block USF funds from purchasing Huawei's equipment is political. Today,  Huawei attorney Song Liuping told the media, "Banning a company like Huawei, just because we started in China -- this does not solve cybersecurity challenges. Huawei also submitted 21 rounds of detailed comments, explaining how the order will harm people and businesses in remote areas. The FCC ignored them all."