Huawei: Giant China Telcom Moves Into US Market

26 January 2011.

Last spring, an executive from a Chinese telecommunications equipment company made an intriguing job offer to a Silicon Valley software engineer.

The Chinese company, Huawei Technologies, wanted to get into the booming market for Internet-based computing,

and it had just moved its United States research headquarters here to capture some of the best local talent.

“How many engineers would you like for your team? Several hundred? That’s not a problem,”

26 January 2011.

Last spring, an executive from a Chinese telecommunications equipment company made an intriguing job offer to a Silicon Valley software engineer.

The Chinese company, Huawei Technologies, wanted to get into the booming market for Internet-based computing,

and it had just moved its United States research headquarters here to capture some of the best local talent.

“How many engineers would you like for your team? Several hundred? That’s not a problem,”

the recruiter said, according to the engineer.

When the software manager turned down the offer, the Chinese executive was undeterred

and asked for the name of the engineer working under him.

The exchange underscores Huawei’s bold entrance onto the world’s technology stage.

In the span of a decade, it has gone from imitating others’ products

to taking on international rivals with its own innovative computing and communications gear.

Huawei is one of many Chinese companies that are pushing into more sophisticated and lucrative businesses.

Indeed, some analysts believe its spectacular rise is a model for other Chinese companies seeking to compete internationally.

And its American drive is even more significant because it is China’s first truly home-grown multinational corporation.

Huawei is now the world’s second-largest telecom equipment supplier behind Ericsson of Sweden,

and with Chinese government backing, it has sewn up major deals in Asia, Africa and Latin America.

In Europe, Huawei has outmaneuvered Ericsson to supply equipment to big carriers.

Industry analysts say Huawei, based in Shenzhen, has quickly matured into a fierce competitor

in one of the most important and hotly contested technology arenas:

sophisticated equipment that enhances the delivery of voice and video over the Internet and through wireless devices.

They say Huawei is gaining, in part, because of heavy spending on research and development.

Chinese companies are generally weak in R.&D.,

but Huawei has 17 research centers around the world,

including Dallas, Moscow, Bangalore, India, & most recently, Silicon Valley’s Santa Clara.

Indeed, of the company’s 96,000 employees,

nearly half are engaged in research and development.

In May, Huawei opened a stunning $340 million research center in Shanghai

that it says will eventually house 8,000 engineers.

But Huawei has largely been locked out of the United States — until now.

Because security concerns make telecommunications a particularly delicate industry in this country,

even the hint of a Huawei presence has generated strong reaction in Washington.

Some in Congress and the national security establishment fear Huawei’s close ties to the Chinese military might allow China to tamper with American communications gear.

The company has repeatedly been linked to the People’s Liberation Army of China,

partly due to the fact it was founded by Ren Zhengfei —

a former soldier who worked for 10 years in China’s Army Engineering Corps —

as a reseller of telecommunications equipment in 1988.

Mr. Ren, now 66, rarely grants interviews.

But according to a biography published in China, he insists on military-style efficiency

and a “wolf spirit” mentality that encourages the sales force to relentlessly attack competitors.

Last fall, several Congressmen wrote a letter to Julius Genachowski, chairman of the Federal Communications Commission,

raising the specter that an equipment sale might permit the Chinese government to manipulate parts of the communications network,

making it possible to disrupt or intercept phone calls and Internet messages.

Anticipating these hurdles, Huawei has hired a remarkable array of Washington lobbyists, lawyers, consultants and public relations firms to help it win business in the United States.

It has also helped create Amerilink Telecom, an American distributor of Huawei products whose high-powered board includes

• former Representative Richard A. Gephardt,
• the former World Bank president James D. Wolfensohn,
• and the one-time chief executive of Nortel Networks, William A. Owens.

Amerilink executives say they are primarily interested in helping Huawei overcome objections that its entry into the American market could jeopardize national security.

“We take the accusations very seriously,” said Kevin Packingham, who recently left Sprint to become chief executive of Amerilink.

“But regardless of the accusations, we have a model in place that ensures the security” of the network should Huawei win American contracts, he said.

The effort is beginning to pay off.

Last fall, for example, the American Internet communications firm Clearwire

began testing a system based on Huawei’s 4G, or fourth-generation, network technology.

Still, Huawei has struggled to break into the United States market,

largely because of the security concerns,

and accusations of intellectual property theft and corporate espionage.

Over the last decade, it has been sued in the United States by two of its major allies / competitors, Cisco Systems and Motorola,

who claimed that it stole software designs and infringed on patents.

But Cisco settled its suit with Huawei soon after filing it.

And although Motorola, with whom Huawei has had an alliance since 2000,

alleged that

• a group of Chinese-born Motorola engineers developed contacts with Huawei’s founder,
• and then, between about 2003 and 2007, conspired to steal technology from Motorola,
• for which they used a dummy corporation set up outside the company,

just this week, Huawei filed suit against Motorola 

to block it from selling one of its business units to Nokia Siemens Networks.

Huawei wants the deal to exclude any equipment based on widely used GSM and UMTS technology standards

because of fears it would transfer Huawei proprietary information to Nokia Siemens.

In addition, the deal with Motorola would push Nokia-Siemens ahead of Huawei in the global network equipment market.

The reservations about Huawei extend outside the US as well.

In Europe, some competitors are now complaining about so-called subsidies that Huawei receives from the Chinese government.

And in India, there are worries that Huawei networks could pose security risks.

Huawei denies it has ties to the Chinese military and disputes accusations of intellectual property theft.

Ross Gan, a company spokesman, says that Huawei is employee-owned and that it has grown by developing its own technology.

“We’re an innovative company driven by the business needs of customers,” he said.

Most significantly, in a statement, the company added:

“Huawei has never researched, developed, manufactured or sold technologies or products for military purposes in any country.”

Analysts also note Chinese companies have been willing to buy telecom equipment from American makers like Motorola,

apparently setting aside any concerns the Chinese might have about American espionage.

Obviously, Huawei’s drive to become multinational has not been entirely smooth.

“It was a huge challenge for the company,” said Geoff Arnold, a veteran Silicon Valley software designer

who spent several years helping the company develop a cloud computing product.

“The bean counters in Shenzhen didn’t have a clue about how to operate outside of China,” Arnold said.

“Huawei has great difficulty understanding what is happening outside of China and adapting their business practices.”

In 2008, for example, worries about national security and China’s weak protection of intellectual property

forced Huawei to drop its $2.2 billion joint bid with the American firm Bain Capital to acquire 3Com, the American networking company.

Huawei also failed in other bids this year to acquire the wireless network division of Motorola

as well as 2Wire, an American maker of broadband Internet software, according to people familiar with those deals.

Those bids collapsed, analysts say, because both Motorola and 2Wire were told that Washington was likely to block any deals.

Still, Peter J. Williamson, a professor of business at Cambridge University, said that

while some continued to be bothered by Huawei’s origins,

its technological and commercial prowess makes it increasingly hard to ignore the achievement.

“The hardest market to crack is the U.S.,” he said.

“But they’ve cracked Europe,” he told the New York Times.

“And if they can work with Vodafone, one of the biggest carriers in the world, they can work with anyone.”

 

David Caploe PhD

Editor-in-Chief

EconomyWatch.com

President / acalaha.com