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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Broadcom Limited       SG9999014823


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How Cellphone Chips Became a National-Security Concern

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03/07/2018 | 02:42pm EDT

By Stu Woo and Drew FitzGerald

The U.S. made clear this week that containing China's growing clout in wireless technology is now a national-security priority. Telecommunications-industry leaders say such fears are justified -- but question whether the government's extraordinary intervention in a corporate takeover battle that doesn't even involve a Chinese company will make a difference.

The Committee on Foreign Investment in the U.S., a panel that reviews foreign takeovers on national-security grounds, laid out this week a number of reasons why it was probing Broadcom Ltd.'s $117 billion hostile bid for rival chip maker Qualcomm Inc. It said an overarching goal was to ensure the U.S. -- not China -- remains the world's innovation hub and No. 1 destination for top engineers.

Many wireless executives and security experts don't consider Broadcom's takeover an immediate U.S. threat. But they believe the American government has legitimate long-term fears.

"These are not things that have immediate consequences in the next six months or year, but the government is looking five years, 10 years down the road," said Brian Fleming of law firm Miller & Chevalier, who as a former Justice Department counsel reviewed CFIUS transactions for the U.S. The thinking is "if we don't act now, we're going to have a serious problem."

Those worries are rooted in how modern communication works. Cellular-tower radios, internet routers and related electronics use increasingly complex hardware and software, with millions of lines of code. Hackers can potentially control the equipment through intentional or inadvertent security flaws, such as the recently disclosed "Meltdown" and "Spectre" flaws that could have affected most of the world's computer chips.

Those were unintentional weaknesses, overlooked by manufacturers for years. But the difficulty finding them underscores the vulnerability of the world's software and hardware to sabotage.

"Unless you have tight supply chains, you can insert insecurity at the base of every device," said Guillermo Christensen, a former Central Intelligence Agency officer and a lawyer specializing in CFIUS issues for law firm Brown Rudnick.

Qualcomm is one of the few American leaders in developing standards and patents for 5G, the next generation of wireless technology that should be fast enough to enable self-driving cars and other innovations. The CFIUS letter said a weakened Qualcomm could strengthen Chinese rivals, specifically Huawei Technologies Co., the world's top cellular-equipment maker and a leading smartphone brand.

One of Huawei's smaller American telecom-equipment rivals said U.S. government attention on foreign takeovers was a no-brainer as chip makers, electronics manufacturers and software companies become more intertwined.

"I do think a careful CFIUS review of what's going on in the telecommunications space is sorely needed," said Tom Stanton, chief executive of Adtran Inc., which sells electronics to cable and internet providers. "Communications infrastructure is a very important strategic asset that we need to protect."

Washington has taken unusual steps to hinder Huawei's business in the U.S., concerned that Beijing could force the company to exploit its understanding of the equipment to spy or disable telecom networks.

Huawei says it is an employee-owned company and that no government has ever asked it to spy on or sabotage another country.

Many European wireless carriers, including British-based Vodafone Group PLC, praise Huawei's equipment, saying it is often cheaper and more advanced that those of its competitors. That is another big worry for Washington.

Some Congress members worry that in a decade or two, Huawei and China's ZTE Corp. might become so dominant that American carriers such as AT&T Inc. will have no choice but to use Chinese equipment for at least some of their needs.

In its letter detailing reasons for the intervention, CFIUS didn't focus on Broadcom's Singapore headquarters. Rather, it was concerned that what it called Broadcom's "private equity" style management might starve San Diego-based Qualcomm's research-and-development budget in favor of short-term profitability.

Addressing those concerns, Broadcom said Wednesday that it would maintain Qualcomm's research-and-development resources in 5G and "commit to making the U.S. the global leader" in the field. It also pledged to create a new $1.5 billion fund "to train and educate the next generation of engineers in the U.S." Broadcom CEO Hock Tan has said the company spends liberally on research and development, but targets R&D more carefully than other companies do to avoid wasting money on speculative projects that don't yield profits.

Broadcom has also emphasized its Malaysian-born chief executive, Mr. Tan, and most of its board and senior management team are American. "It's barely a foreign company now, but politics and logic aren't often friends," said Stacy Rasgon, a Bernstein Research analyst. "I'm just not convinced that Qualcomm's going to slash and burn the 5G roadmap and leave it open to Huawei" if Broadcom buys it.

Write to Stu Woo at Stu.Woo@wsj.com and Drew FitzGerald at andrew.fitzgerald@wsj.com

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HUB CO., LTD. 0.00%End-of-day quote.0.00%
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MEMBERS CO., LTD. 0.56% 1797 End-of-day quote.-21.08%
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QUALCOMM, INC. 1.11% 111.92 Delayed Quote.25.46%
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TEAM, INC. -7.23% 6.03 Delayed Quote.-62.24%
WILL GROUP, INC. 2.75% 935 End-of-day quote.-25.32%
WORLD CO., LTD. -0.48% 1453 End-of-day quote.-46.01%
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Hock E. Tan President, Chief Executive Officer & Director
Henry Samueli Chairman
Boon Chye Ooi Senior Vice President-Global Operations
Thomas Harry Krause Chief Financial Officer
Andy Nallappan Chief Information Officer & Vice President
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