Hon Hai Won't Use Huawei Gear in Mobile Network

Plan Dropped After Taiwanese Authorities Raise Security Concerns

Hon Hai Precision Industry has dropped its plan to use Huawei Technologies gear in a mobile network it is building. Reuters

Hon Hai Precision Industry Co. 2317.TW -1.45% has dropped its plan to use Huawei Technologies Co.'s gear in a mobile network it is building, after Taiwanese regulators raised security concerns about equipment from mainland China.

The controversy over whether to use Chinese-made equipment in Hon Hai's telecom networks highlights the political tensions between mainland China and Taiwan. China still sees Taiwan as a renegade province and hopes to reclaim it one day, even though both sides have governed their territories separately for 65 years. Taipei has also said that there are increasing cybersecurity threats posed by China.

The decision to avoid using Huawei's equipment will likely have little impact on the Shenzhen-based supplier's overall revenue, given that Taiwan is a small telecom market. Still, it comes at a time when Huawei continues to face security questions in some other countries such as the U.S.

Huawei declined to comment.

Apple Inc. AAPL +0.17% supplier Hon Hai, also known by the trade name Foxconn, has been expanding into new areas as margins are low in its core contract manufacturing business. Its unit that provides telecom services, Ambit Microsystems Corp., recently won a fourth-generation mobile license from the Taiwanese government, but it couldn't start building the network because the regulator withheld a key approval, stipulating that Hon Hai agree not to procure base stations from Huawei, citing security concerns.

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Taiwan's telecom regulator, the National Communications Commission, has said it won't allow Chinese-made equipment into the island's communication network, while Hon Hai Chairman Terry Gou said he won't pay taxes and would move the company's headquarters out of Taiwan if regulatory approval to build the network isn't granted.

According to local media, Hon Hai planned to buy around 30% of its base-station equipment from Huawei. Hon Hai didn't comment on how much Huawei equipment it was planning to use.

After trading barbs with the NCC openly in recent months, Hon Hai finally gave in this week, saying it has agreed to exclude equipment made by Chinese suppliers and made changes to its proposal to the NCC. Based on the revised proposal, the NCC said it has approved Ambit and another telecom operator, Asia Pacific Telecom Co.3682.TW +0.28% , to start building a broadband network on the island. Ambit and Asia Pacific Telecom are in the process of merging into a single company, and Hon Hai will be its biggest shareholder.

Lawmakers in the U.S. and Australia have also expressed concerns about Chinese telecommunication equipment, saying it could pose threats to national security. Huawei has repeatedly denied such allegations.

In 2012, a U.S. congressional report recommended that U.S. telecom carriers avoid using equipment from Chinese suppliers Huawei and ZTE, saying their gear could be used by Beijing to spy on Americans. Huawei fired back, saying that the report was a political exercise aimed at attacking China.

The U.S. has also pressed allies such as South Korea to avoid using Chinese-made equipment in certain parts of communication networks. Seoul decided to make changes to its project so that sensitive government communications wouldn't pass through Huawei equipment.