Gapping up
In reaction to strong earnings/guidance:
- FOLD +4.3% (guidance update), BKE +1.2% (Sep comps), HRL +0.4% (guidance update)
M&A news:
- RARX +104.3% (to be acquired by UCB for $48/share in cash)
Other news:
- BBBY +22.2% (appoints Mark Tritton as President and Chief Executive Officer)
- PUMP +6.5% (announces substantial completion of fact finding for its previously disclosed internal review; also announces CFO transition and Executive Chairman appointment and provides operational update)
- PRNB +0.7% (positive preliminary data from its Phase 2 pemphigus, open-label, trial)
Analyst comments:
- PUMP +6.5% (upgraded to Overweight from Neutral at Piper Jaffray)
- PSTG +5.4% (upgraded to Buy from Neutral at Goldman)
- QRVO +3.7% (upgraded to Outperform from Market Perform at Cowen)
- FCX +2.7% (upgraded to Buy from Neutral at UBS)
- SWKS +2% (upgraded to Outperform from Market Perform at Cowen)
How BlueMountain fell over the hedge fund cliff
Back in the good old days (pre-crisis) hedge funds were the wizards of financial markets, basking in their golden years of high risk, high return endeavours.
It would’ve been unfathomable to think back then that the old masters of the universe would have to cut down fees to lure investors or that they’d be passed up for much cheaper passively managed funds, or indeed that some of the industry’s biggest names would fall by the wayside.
Some managers have seen no way out of the slump other than to throw in the towel. Highfields Capital Management and Criterion Capital Management closed within a week of each other last year. And they’re just the largest examples. There have been plenty of smaller managers that have exited the business.
Add to that list BlueMountain Capital, the old haunt of Jes Staley (pictured below), where the Barclays chief executive spent two years as a managing partner.
BlueMountain announced on Monday that it’s hanging up its hedge fund hat and saying sayonara to one of its co-founders.
The firm has decided to close its flagship hedge fund and return money to investors as it undergoes somewhat of an identity crisis. At the same time, Stephen Siderow, the former McKinsey consultant who launched the firm with ex-JPMorgan Chase managing director Andrew Feldstein (pictured below), is moving on to new pastures.
BlueMountain has been struggling with an odd affliction for a hedge fund: Too much money and too much diversification.
When the firm launched in 2003 with $300m, it was a specialised credit shop. Investors liked BlueMountain because it was niche and the firm drew in plenty of client money, swelling its coffers to up to $18bn.
But any fund manager can tell you that getting investors to commit money is just half the battle. There’s also the question of where to put it to work.
BlueMountain decided to step out of its comfort zone and diversify into a variety of other sectors, adding new strategies like volatility trading, equities, insurance linked securities and so on.
Diversification, like cash, is not a bad thing in the asset management world. In fact, it’s a very good thing. But you can have too much of both if you’re not careful.
Ultimately, you can easily end up having fingers in too many pies.
There’s a lot of cash circling the hedge fund world and investors are on the hunt for yield. But when almost every asset class is overvalued, sometimes it’s good to just sit on the cash or not take it all. There are plenty of big-name hedge funds that have done just that.
Rubio wants ByteDance to face the music
Washington’s relations with Beijing are on a bad footing this week.
Senator Marco Rubio has chimed into the economic conflict between the two nations with a request of his own: He wants the Committee on Foreign Investment in the US (Cfius) to review TikTok, the popular Chinese video app owned by ByteDance, which acquired Musical.ly in 2017.
Rubio wants Cfius to review the transaction, saying the company is being used by China “to censor content and silence open discussion”.
The senator’s call followed suggestions that TikTok has been censoring content at the Chinese government’s request. He alluded to a report by The Guardian published last month that said TikTok is advancing Chinese foreign policy by censoring content on sensitive topics like Tiananmen Square and Tibetan independence.
Cfius has not commented on Rubio’s request but it wouldn’t be the first time the inter-agency committee could use its retroactive powers to review a deal. Earlier this year Cfius forced the Chinese company Beijing Kunlun Tech to sell dating app Grindr, in which it had acquired a majority stake in 2016 on national security concerns.
Early premarket gappers
- Gapping up:
- RARX +106.6%, BBBY +22.5%, PUMP +1.9%, HRL +0.8%, S +0.7%
- Gapping down:
- PCG -36.2%, HEXO -13%, PHG -8.2%, ADTN -3.8%, SPLK -1%, VKTX -0.9%, COST -0.5%
ECB’s Draghi ignored in-house advice on decision to restart QE
Officials’ opinion brushed aside in unusual split over bond-buying programme
The European Central Bank decided to restart its bond-buying programme last month over the objections of its own officials, a further sign of how the move has reopened divisions within the institution.
The bank’s monetary policy committee, on which technocrats from the ECB and the 19 eurozone national central banks sit, advised against resuming its bond purchases in a letter sent to Mario Draghi and other members of its governing council days before their decision, according to three members of the council.
The leaking of the confidential contents of the committee’s letter comes as opponents to Mr Draghi’s loose monetary policy fight a rearguard action to put pressure on Christine Lagarde for her to change course after she takes over at the ECB on November 1.
It is one of the few occasions that the committee’s advice has not been followed in the eight years since Mr Draghi became president, a council member said. However, the committee’s opinion is not binding and has been ignored at least four times in as many years by the council, which is free to decide otherwise, an ECB official said. The ECB declined to comment.
The committee itself was split on restarting the bond purchases, which are known as quantitative easing (QE), after a nine-month hiatus in the €2.6tn programme. But a majority argued against it because the main reason for going ahead was to lower long-term interest rates and these had already fallen to record lows, the council members said.
Their views echo criticism made by governing council members who have spoken out publicly against the decision to restart QE since last month’s meeting, including the heads of the French and Dutch central banks.
The ECB has endured a bruising backlash since it announced plans to start buying €20bn of bonds a month from November. The move was part of a package of monetary-easing measures that included cutting interest rates further into negative territory and strengthening its guidance on how long the policies would last.
While the decision to cut interest rates to a record low of minus 0.5 per cent has grabbed headlines and been criticised by commercial bankers — such as the head of Deutsche Bank — it was widely supported within the governing council and the committee, where most opposition was over restarting bond purchases.
The heads of the German, French, Dutch, Slovenian and Estonian central banks — together representing more than half of the eurozone population and GDP — said they were opposed to the QE decision at last month’s meeting. Mr Draghi said after the meeting, however, that there was such a “clear majority” in favour of the package that they did not need to vote.
Before each monetary policy meeting of the governing council, several ECB committees prepare the ground by debating the options available and presenting the arguments in letters that are distributed to council members a few days before they gather.
Other committees at the central bank also expressed reservations about restarting QE. The legal committee pointed out that it could be harder for the ECB to defend itself against accusations that it was breaching EU rules forbidding monetary financing of governments if it was forced to raise the self-imposed limits on bond purchases.
More detail on the debate within the governing council could come when the ECB publishes its account of last month’s meeting on Thursday.
Senior ECB officials have been appealing for internal critics to tone down their disapproval. “There are 25 of us [on the governing council] and, for sure, there are sometimes different views, but when a decision is taken by a clear majority, it is important to defend it,” ECB vice-president Luis de Guindos told Market News on Wednesday. “It would be much better if we tried to reduce the level of surrounding noise.”
Fridman/LetterOne: for the love of Mike
A drawn-out court case could damp investor appetite for the Russian’s energy business
Oligarchs launched a land grab for assets previously owned by the state in the early years of post-Soviet Russia. Elbows and business practices were sharp. Mikhail Fridman emerged as one of Russia’s richest men. He has maintained links to Russia while overseeing growing investments in Europe. Now he faces questions in a Spanish court over alleged tactics reminiscent of Russia’s “wild east”.
It is an unwelcome distraction for the billionaire who has been carving out a new life running his investment fund LetterOne from London. He hopes to nail down his place in Europe’s business elite by floating a big energy business in Frankfurt next year. A drawn-out court case could damp the appetite of public investors to back the deal.
The business has a mooted value of €20bn, though an implied earnings multiple in line with oil majors looks optimistic. The company was formed through the merger of Mr Fridman’s upstream energy business DEA with BASF’s Wintershall energy division.
This put to bed a 2015 spat with British authorities by giving Mr Fridman a share of ownership in Wintershall’s UK assets. DEA was forced to sell its UK North Sea assets over fears Mr Fridman would be included in US sanctions. Even the presence of John Browne, a City grandee and former BP executive, as executive chairman of Mr Fridman’s energy division could not mollify the authorities. But sanctions never materialised.
Mr Fridman’s latest controversy concerns Zed World Wide. Spanish prosecutors are accusing Mr Fridman of illegally using his influence to choke off revenues to the mobile business so he could buy it on the cheap. Mr Fridman maintains his innocence, saying the claims are false and lack credibility.
Such tactics are hardly the exclusive domain of Russian businessmen, anyway. Some high-toned Brits and Americans have been accused of it too. But the allegations are amplified by Mr Fridman’s colourful back story. London has long been a place for wealthy foreigners to reinvent themselves. Mr Fridman and his business partners are the latest to make that attempt.
Uber’s UK VAT liability confirmed
Earlier this week Uber London Ltd filed its full accounts up until December 2018 at Companies House.
The big news wasn’t that the division made a relatively meagre profit of £5.1m. (The profit is hardly indicative of anything due to the group’s structural complexity.)
It was Note 13 which recounted the following about Uber London’s contingent liabilities:
The most newsworthy part was arguably this one: “the Uber Group is involved in an ongoing dialog with HMRC, which is seeking to classify the Uber Group as a transportation provider. Being classified as a transportation provider would result in a VAT (20%) on Gross Bookings or on the service fee that the Company charges Drivers, both retroactively and prospectively.”
Uber London’s accounts do not provide any indication of the total sum being recorded as a contingent liability at Uber London’s parent, the Uber Group.
But various sources tell us the bill could be as large as £1bn, or more. These are not small sums.
But the statement is striking for other reasons too.
First, Uber says it’s in an “ongoing dialog” with HMRC which hints at a negotiation taking place to potentially lower Uber’s liability. But that’s a big no no for HMRC. The tax authorities are not supposed to cut deals with corporations on unpaid back taxes, not least because of the scale of public outrage associated with legacy sweetheart deals, which prompted far-ranging internal policy reviews.
HMRC told FT Alphaville that on an ongoing basis it investigates about half of the UK’s large businesses at any one time. As part of that process companies are man-marked with HMRC officers whose job it is to speak to the financial people at the organisation. So it could be that Uber is treating this sort of relationship as a dialogue.
But a source tells Alphaville the view at Uber seems to be that the company sees itself as in negotiations with HMRC, with a view to settling the case before the all-important outcome of its UK Supreme Court appeal regarding its employer status is determined.
The other issue is the nature of the exposure and HMRC’s overall responsibility to capture its full extent.
It’s worth noting Alphaville first alerted readers to Uber’s potential VAT tax exposure in December 2016. At that time it was well known that the tax exposure in question was contingent on Uber successfully defending a tribunal case regarding the employment status of the company’s drivers. A loss would see the company’s drivers classified as employees not contractors, which would incur costly employer liabilities upon Uber, among them a VAT liability.
This is a big deal because the threshold for UK businesses having to pay VAT at the time was a turnover of more than £81K (it’s now £85k).
Since Uber drivers mostly earn much less than that, most do not incur VAT liabilities. If Uber is deemed an employer, however, those revenues would then be deemed Uber’s rather than drivers’ — more than surpassing the VAT threshold and thus exposing the company to potentially huge VAT liabilities from then on.
But the ruling would also reveal how much tax revenue the state will have missed out on over the years because of Uber’s potentially incorrect insistence it is not an employer.
The problem for HMRC is that there is a statute of limitation that ensures the tax authority cannot claim unpaid sums beyond the past four years.
This poses a bit of a quandary for the revenue services. What is a tax authority to do if it suspects a company may be hugely underpaying tax liabilities because of an incorrect employer classification, but cannot claim those sums until a final court ruling about that classification is determined.
One course of action according to Jolyon Maugham QC, who fronts the Good Law project — a non-profit that seeks to support progressive law change in a way that reduces public distrust of the establishment — is for the tax authority to engage in something called a protective assessment as soon as possible. This would allow HMRC to protect its position by flagging that an effective inquiry has begun, in turn allowing it to seek back-taxes from four years before that point even as more time passes.
In Mr Maugham’s opinion it would be a failure of governance at HMRC for the authority not to have issued such an assessment as soon as it was made aware of the issues at stake, irrespective of the pending nature of the all important employer status appeal.
When Mr Maugham made this view known to HMRC back in March in a letter before action, however, the authority’s view seemed to be that it would need to wait until the case was determined to do so. And so, in bid to get to the bottom of the legalities of the situation, the Good Law Project announced on May 29 of this year that it would be suing HMRC via judicial review for failing “to stem losses due to Uber’s tax dodging.”
It is Mr Maugham’s contention that up to £1.1bn of tax is at stake. You can read Mr Maugham’s witness statement, which offers more details on how that figure is arrived at, here.
But there’s another issue in play. As an interested party in the action, Uber has a right to legally represent its interests in the case if it wishes. One of those interests is that the case does not inadvertently expose its private tax affairs to the general public given that in the UK, all tax affairs are deemed private and confidential, including the issue of whether protective assessments have been initiated.
Uber has made it known to Mr Maugham that it will be engaging in the case to ensure any privileged information revealed by the process stays private and confidential and subject to an order that it is “protected from onward disclosure to third parties”.
A hearing on the matter is due on November 6 at the High Court.
Of course, the fact that Uber London since filed a company account noting that a dialogue with HMRC over a VAT liability is ongoing implies some sort of protective assessment may already have been initiated. So to some extent the cat is already out of the bag.
Commenting on the case, Mr. Maugham told FT Alphaville:
It has taken three years for us to force HMRC to collect tax from Uber. Many hundreds of millions of pounds will have been lost because of its inaction. We will now turn our attention to ensuring that other big transport suppliers — such as Addison Lee — comply with the law. And to those, like Amazon, operating arrangements that seem to us to be similar in character.
In response Uber’s spokeswoman said:
We can't comment on any discussions with HMRC but we will always fulfil the tax obligations in any country in which we operate.
Finally, HMRC told Alphaville:
We don’t comment on identifiable businesses. HMRC will always make sure that every business, no matter its size, pays all the taxes due under UK law and we don’t settle for less.
One thing’s for sure. It’s a tax case that could have a huge bearing on Uber’s profit-and-loss at some point, with equally important implications for Uber’s operations in Europe, which also bear similar VAT exposure.
We wait and watch.
Donald Trump defends US diplomat’s wife over fatal UK car crash
Driving on the wrong side of the road ‘can happen’, US president says
Donald Trump has appeared to defend a US diplomat’s wife who is being investigated by the UK police following a road accident in England that left a British teenager dead, saying driving on the wrong side of the road “can happen”.
The US president suggested that he would not cede to British demands, including from prime minister Boris Johnson, that Anna Sacoolas, who has left the UK, should return for further questioning.
“A terrible accident occurred,” Mr Trump said in a White House briefing on Ms Sacoolas, who left Britain after initially co-operating with UK police in their inquiries into the death of 19-year-old Harry Dunn in Northamptonshire in August.
“The woman was driving on the wrong side of the road ― and that can happen!” Mr Trump said. “Those are the opposite roads, it happens.”
Mr Dunn was killed while riding his motorcycle and police officers believe this followed a collision with a vehicle leaving an air force base that was driving on the wrong side of the road.
When first questioned about the incident, Ms Sacoolas had told officers she would stay in Britain, according to Northamptonshire police. The diplomat’s wife then decided to leave.
At Wednesday’s briefing, the US president said that “two wonderful parents have lost their son”. “We’re going to speak to her very shortly and see if we can do something where they meet,” he said of the woman and the victim’s parents. “We’re going to speak to her and see what we can come up with so that there can be some healing.”
A briefing note held by Mr Trump, and captured on camera by a Washington Post photographer, stated that “the spouse of the US government employee will not return to the United Kingdom”.
This came despite a direct request from Mr Johnson on Wednesday for the White House to facilitate Ms Sacoolas’ return to the UK.
“Mr Johnson asked Mr Trump to reconsider the US position so the individual involved can return to the UK, co-operate with police and allow Harry’s family to receive justice,” a Downing Street spokeswoman said in a readout of a call between the two leaders.
The diplomatic ruckus comes at a sensitive time for Mr Johnson, who is seeking to build closer relations with Washington in the hope of closer trade ties with the US after Brexit.
Dominic Raab, foreign secretary, has also held talks about Ms Sacoolas with his US counterpart Mike Pompeo and US ambassador to London Woody Johnson.
On Thursday morning, Harry Dunn’s mother Charlotte Charles told Sky News that she was “just disgusted” that Mr Trump was not doing more to help the family find out more about what had happened to their son.
“He must know exactly where she is,” Ms Charles told Sky. “He must know where she, the kids, the husband are — whether they are being hidden or they’ve just run away — one way or another he must know exactly where they are.
“I would obviously urge him to still put her on the plane to come back, face our justice system here, face us, talk to us, everything we have been saying for the past five days.”
Trump Opens Door to Cooperate With House Impeachment Probe
Biden, campaigning in New Hampshire, joins other Democrats in calling for impeachment
WASHINGTON—President Trump said he would participate in the House impeachment probe if the investigation was authorized by a House vote and if Democrats commit to following rules he views as fair, a sign of potential cooperation a day after the White House said the inquiry was unconstitutional.
Asked if he would participate in the proceedings if the House voted and followed the same rules as when Congress has previously charged sitting presidents with wrongdoing, Mr. Trump said, “Yes, if the rules are fair.”
“If Republicans get a fair shake,” he said.
Mr. Trump’s remarks Wednesday in the West Wing added a caveat to the White House’s eight-page letter a day earlier that described the president’s broader refusal to cooperate with the investigation, citing the lack of a vote authorizing the probe amid other purported shortcomings. The letter followed a decision from the White House to block testimony of a key witness in the investigation.
The comments marked the first time the president outlined specific conditions for his participation, putting pressure on House Speaker Nancy Pelosi (D., Calif.) to respond as the two leaders battle over how to proceed over an impeachment inquiry that stems from the Republican president’s dealings with Ukraine.
Democrats are investigating Mr. Trump’s effort to have Ukraine probe former Vice President Joe Biden, who is seeking the Democratic presidential nomination, and other election-related matters. Mr. Biden called Wednesday for Mr. Trump to be impeached, joining nearly all of his fellow Democratic candidates.
The House inquiry focuses on Mr. Trump’s efforts to press the president of Ukraine on the subject in a July 25 phone call. The call, and the events leading up to it, were the focus of a whistleblower complaint by an officer of the Central Intelligence Agency who alleged that Mr. Trump abused his power by targeting political rivals.
Mr. Trump has denied any wrongdoing related to Ukraine and called the impeachment effort a “kangaroo court.”
The president hired former Republican Rep. Trey Gowdy to represent him, bolstering his legal team’s ranks. Mr. Gowdy, who had been a prosecutor in South Carolina, retired from the House in January.
In the two weeks since Mrs. Pelosi announced the House had officially begun impeachment proceedings, Republicans have criticized her for skipping a House-wide vote to authorize an impeachment inquiry, breaking with precedent. Before Congress went on its recess, Rep. Kevin McCarthy of California, the chamber’s Republican leader, had forced a vote on the matter that went down in defeat when Democrats voted to table his resolution.
Mrs. Pelosi has rejected demands for a formal House vote, saying it isn’t required for the investigation.
There is some support among Democrats for a vote to begin an inquiry. Rep. John Garamendi (D., Calif.) said Tuesday on CNN that the House should formally open impeachment proceedings with a vote, to put the full weight of the House behind the effort.
During the Nixon and Clinton impeachment inquiries, the House adopted impeachment procedures that allowed the president’s attorneys to attend all impeachment-related sessions, review all the evidence and cross-examine any witnesses.
Mr. Trump and his Republican allies have been arguing that they ought to get the same consideration in the probe being conducted by the House under Mrs. Pelosi. So far much of that investigation has been conducted in closed session without Mr. Trump’s attorneys present. Aides have said the hearings behind closed doors are to allow witnesses to discuss classified material, which is common practice.
Democratic leadership aides said Wednesday the president’s comments don’t give them confidence that he would comply and pointed to the White House’s letter from Tuesday. Democratic leaders have said that White House obstruction could be considered an impeachable offense and have noted that the administration has failed to cooperate with a variety of congressional probes.
Mr. Trump said Wednesday that no White House officials had ever expressed concern about his handling of the July 25 call. The whistleblower has said that at least one White House official was alarmed by Mr. Trump’s behavior on the call and that the transcript of the conversation was moved to a secret server in a breach of protocol.
The president said Wednesday he didn’t know why the transcript, which he has since declassified, was given additional security. “I assume it was for leaks,” he said.
Democrats have become increasingly unified around impeachment, with most House lawmakers and presidential candidates backing the inquiry.
A vote on impeachment would force Democratic lawmakers to take a clear side as the president runs for re-election. Of the 235 Democrats in the 433-member House, fewer than 10 haven’t come out in support of the impeachment inquiry. There are 31 House Democratic lawmakers defending districts that Mr. Trump won in 2016. To take back the majority, House Republicans must net 19 seats.
Mr. Biden, who was in New Hampshire Wednesday, said Mr. Trump had obstructed justice by refusing to comply with congressional inquiries and had committed impeachable acts in plain sight.
“In full view of the world and the American people, Donald Trump has violated his oath of office, betrayed this nation and committed impeachable acts,” Mr. Biden said. “To preserve our constitution, our democracy, our basic integrity, he should be impeached.”
Mr. Trump, in a tweet, called Mr. Biden’s comments pathetic and wrote: “I did nothing wrong.” Later, he attributed Mr. Biden’s decision to come out in favor of impeachment to his standing in national polls, where he is now neck and neck with a surging Sen. Elizabeth Warren (D., Mass.).
“You know he didn’t say that until right now, and he sees what’s happening to him,” Mr. Trump said. “I guess he’s no longer the front-runner.”
Before Wednesday’s address, Mr. Biden had faced calls within his party to offer a more confrontational approach to Mr. Trump as House Democrats seek to build momentum toward impeachment.
House Democrats on Wednesday sent a letter to Fiona Hill, the former senior director for European and Russian affairs on the National Security Council, asking her to appear Monday for a deposition in relation to the impeachment inquiry, a person familiar with the matter said. It couldn’t be determined if Ms. Hill, who didn’t immediately respond to a request for comment, would attend.
When fintech goes (disastrously) wrong
We at Alphaville have a reputation for being, let’s say, a bit wary when it comes to financial innovation. Some might call our particular brand of wariness Luddism, but we prefer to think of it as healthy scepticism (with a dash of FUD-peddling thrown in now and again for good measure).
You might even have seen this cartoon, from webcomic Cyanide and Happiness (we can neither confirm nor deny whether this accurately reflects the hiring process at AV Towers):
So you probably think that, when it comes to our personal lives, all of us are pretty strongly averse to anything carrying even the merest hint of fintech.
But you’d be wrong. Yes, there are those among us (who shan’t be named) who are never without at least £50 in cash in our wallets, and who wouldn’t be seen dead hailing anything other than a cash-accepting black cab. But some of us are actually regular users of all kinds of fintech apps and services (though that does not mean we think the providers of these services have viable business models).
But sometimes our embrace of the digital era comes back to bite us in the proverbial. Because as we have pointed out before, with new innovation comes -- pretty much always -- new problems.
And it is with that in mind that you should read our foray into the world of personal finance. Over on the main FT today you can read a blow-by-blow (FREE TO READ!) account of how one of us ended up being labelled a criminal because of our penchant for using Apple Pay to pay for basically everything.
An excerpt, to whet your appetites:
It all started one October afternoon last year, when a bus inspector asked to see my £1.50 ticket. I had tapped into the bus with my iPhone using Apple Pay, but alas, in the five minutes since I’d boarded, my phone had run out of juice, so I had no means of proving that I had paid.
The inspector took my details and I didn’t think much more about it. Until December 28, that is, when, as I set out towards celebration number 103 of the Christmas season, I noticed a rather serious-looking letter addressed to me lying on the hall rug.
Upon opening it, I discovered I had been charged with failing to produce a valid ticket on a Transport for London service — and that I had 21 days to plead either “guilty or not guilty”. TfL said it had sent a letter ahead of this, but I never received it. This all felt a bit much for a time of year when the most stressful thing I normally face is working out if I can fit in a fifth mince pie, or whether it’s best to leave it at four.
Thankfully, The National Association of Mansplainers is holding its AGM in the comments section, and is helpfully telling us how this unfortunate series of events could have been avoided.
Huawei’s dominance in 5G should be challenged
Supporting EU competitors may offer economic and security benefits
Few technologies are as important to future growth as 5G communications, the enabler of smart cities and the interconnected internet of things. That makes the increasing dominance of a single Chinese company, Huawei, all the more sensitive. The US and EU are right to look at ways to counter it.
Huawei’s growing clout — one study found it supplied 28 per cent of global telecoms equipment in the past four quarters — reflects its combination of increasing technological prowess, decent-quality equipment and low prices. But the company, though apparently privately owned, has achieved global scale in part through Chinese state support, including cheap finance.
The US has taken the lead in warning of the company’s potential risk to cyber security. China has a history of cyber attacks and, despite Huawei’s insistence that it would never allow itself to be used this way, could potentially use laws obliging Chinese companies to co-operate with security services to gain access to businesses’ data.
The US has arguably been throwing its weight around too much in trying to dissuade western allies from using Huawei equipment in 5G networks. But an EU security assessment warned on Wednesday that unspecified non-EU businesses bidding to build next-generation communications systems could be “subject to interference” if they are linked to their country’s government. The report could be invoked by EU states when considering future business with companies such as Huawei.
As the Financial Times reported this week, US officials are looking at other ways to counter Huawei’s ascendancy. One idea — attempting to turn a US company into a 5G champion — is far-fetched. Federal government and corporate decisions since the 1990s have already ceded the US lead in this area. Trying to reverse that would be costly and time-consuming. Washington would be better off following the model of Darpa, the government agency which explores emerging military technologies. Rather than beef up specific companies, it should invest in research that could bear fruit in the form of future innovations.
Proposals to provide US support to boost Europe’s 5G aspirations have more merit. One of Huawei’s advantages has been generous financing arrangements made possible through Chinese state bank support. US officials are toying with funnelling credit to Nokia and Ericsson, the next biggest 5G companies, to help them compete.
The EU also has a role to play here by trying to create the best conditions for its 5G players to thrive. EU officials including the incoming European Commission vice-president Margrethe Vestager, will need to strike a careful balance. As competition commissioner, Ms Vestager made a name by policing the dominance of US technology giants. She rightly blocked a merger between train manufacturers Siemens and Alstom in February, arguing it was wrong to reduce intra-EU competition to combat a hypothetical threat from a Chinese rival.
The challenge from Huawei in 5G, by contrast, is real and pressing. As Ms Vestager assumes the additional responsibility of “making Europe fit for the digital age”, she should consider whether having a single company dominating the EU’s future is healthy.
Western governments should aspire to open, competitive markets. Yet in China they face a superpower rival that does not share this belief. The open market imperative seems to conflict with the need to preserve competition and innovation. A degree of dirigisme to support western 5G technology is preferable to the alternative: a future in which the only choice is Huawei.