Huawei, the world's second-largest supplier of telecom and Internet gear, has little trouble garnering business around the globe. The Chinese company has customers in 130 countries, sells equipment to 45 of the world's top 50 telcos, and brought in $27 billion in revenue in 2010 -- enough to rank No. 352 on Fortune's Global 500 list. With sales on pace to grow another 10% this year, it's likely that Huawei (pronounced "HWAH-way") will soon race past Sweden's Ericsson and take over as the globe's No. 1 manufacturer of communications equipment.
Yet success in the world's biggest telecom market, the U.S., has been hard to come by. Despite bidding again and again since it first entered America a decade ago, the company has yet to win a single big contract from the top-tier U.S. carriers, AT&T (T), Sprint (S), T-Mobile, and Verizon (VZ).
There are some good reasons for that. U.S. telecom companies have long relationships with home-grown suppliers like Lucent (now part of France's Alcatel), Motorola (MMI), and Cisco (CSCO). It's also true that for many years Huawei's gear just wasn't that good -- fine for emerging markets, perhaps, but not for the 24/7 service and reliability required by U.S. networks. Today, however, Huawei is building some of the best, most innovative, and fastest equipment in the industry. Quality is no longer an issue. Uber tech investment banker Frank Quattrone recently cited Huawei as one of the industry's new leaders in remarks to a conference crowd.
But Huawei is facing resistance that goes beyond pure competition with its peers. Several members of Congress, joined by Gary Locke, the U.S. Commerce Secretary soon headed to Beijing as the next U.S. ambassador, have lobbied hard against Huawei. Meanwhile, U.S. regulators have blocked it from three acquisitions, and earlier this year forced it to unravel its purchase of a defunct California cloud-computing company called 3Leaf.
What's behind the groundswell of public and private opposition? In a word, fear.
As one of the first Chinese companies to emerge as a global powerhouse, Huawei contends that it's a punching bag, a victim of worries about an ascendant China and growing concerns about cybersecurity and intellectual-property theft. This concern is deepened by American anxieties caused by the Great Recession and the accompanying mood of U.S. declinism. For politicians, hitting out at an increasingly assertive China taking on new prominence in the world -- and at Huawei as its proxy -- is an easy way to score political points. Another factor is protectionism by entrenched players that fear having their margins pinched, as happened in Europe when Huawei entered the market there.
Particularly vexing for Huawei is the suggestion that the company could be used to spy on behalf of the government in Beijing. Unverified assertions that the company is "linked" to the Chinese military appear regularly in news articles. The charges are largely based on the fact that Huawei's media-shy founder and CEO, Ren Zhengfei, once served in the People's Liberation Army as a telecom technician, and that the company (like AT&T, Sprint, and Verizon in the U.S.) is a military and government contractor in its home country. "The context of all this is, China is very active in espionage, as are we," says James Lewis of the Center for Strategic and International Studies (CSIS) in Washington, D.C. At a minimum, says Lewis, Huawei has an image problem in cyber circles. "The national security community in the U.S. is united in its opposition to Huawei," he says.
Certainly there are very real security concerns to consider -- a fact that virtually everyone in the cybersecurity world is quick to state and that Huawei itself concedes. In a world in which hacking is proliferating, no company or government agency wants to risk giving potential enemies the means to access its network by buying vulnerable equipment. But is the security risk really greater if the network's parts were sold by a Chinese company? Huawei argues that it's a multinational just like GE (GE) or IBM (IBM), and is only as vulnerable to intrusion as any other private corporation. It also points out that most equipment made by its main competitors -- Ericsson, Alcatel-Lucent, and Nokia Siemens -- is manufactured in China. What's to stop Chinese spies from infiltrating those operations?
Despite those barriers, Huawei shows no sign of giving up on its efforts to win over U.S. customers. To build relationships with carriers and develop products for the U.S. market, it has hired a slew of executives from Western companies such as Cisco (CSCO), Ericsson, Intel (INTC), Nortel, and Sun. Matt Bross, Huawei's global chief technology officer and the first Westerner to reach Huawei's c-suite, joined from British Telecom. To work on its image in Washington, it engaged the lobbying firm of former Defense Secretary William Cohen. And in February, Huawei published an open letter inviting anyone, including the U.S. government, to investigate its business practices.
Rather than jump through hoop after hoop, wouldn't it be easier for Huawei just to retreat and be happy with its impressive growth everywhere outside America? Perhaps. But U.S. companies spend some $30 billion a year on telecom equipment, a figure that is set to rise as an industrywide network upgrade to 4G technology continues. If Huawei can convert its doubters, there are huge profits to be made in America. Give up? No way.
Huawei's man in Washington
William Plummer, Huawei's trim and very polished government-relations point man, is an avid runner. Since he joined the company last year, the 47-year-old father of eight, who spent 12 years in a similar role at Nokia, has had ample opportunity to demonstrate his endurance. Plummer has been meeting with virtually anyone in government willing to listen to Huawei's side of the story (bolstered by a 17-slide PowerPoint pitch). He's also developed a mantra that encapsulates his message: "Huawei is Huawei, not the Chinese government."
This past March, just after regulators forced Huawei to unravel its 3Leaf acquisition, Plummer met with a half-dozen stern-faced members of a congressional committee focused on national security. Recounting the episode, Plummer gets visibly agitated as he recalls how the staffers suggested that Huawei was beholden to the wishes of Beijing. "Well, no," Plummer says he told them, emphasizing that Huawei is not a state-owned enterprise. "This year GE sold 150 locomotives to Pakistan. Following that logic, if the U.S. went to war with Pakistan, then GE would derail the trains? That's just silliness. That's not how a multinational company would want to risk its future."
Huawei's rise from startup to international powerhouse happened remarkably fast. Ren, the founder and CEO, served for 10 years in China's equivalent of the Army Corps of Engineers. In 1983 the corps was disbanded, and he was let go as part of a mass demobilization. The company says Ren founded Huawei in 1987 with $2,500 in savings plus funds collected from family members. (Ren almost never gives interviews and would not comment for this article.)
Huawei argues that it has no ties to the Chinese government. As Plummer likes to point out, the company is headquartered in Shenzhen, across the border from Hong Kong and far from Beijing. Huawei derives just 36% of its revenue inside China. The government has never taken any ownership stake, says Huawei, and the company is 100% employee-owned; Ren holds 1.42%. Huawei says it cannot launch a public stock offering because of Chinese rules that prevent companies with large employee ownership from going public. An IPO would also make much of the company's top management instant billionaires, points out Shang-Jin Wei, who chairs Chinese Business and Economy studies at Columbia Business School in New York. Those executives would likely leave, lopping decades of experience and expertise off the top of the company.
Huawei is often mentioned as having links with the People's Liberation Army (PLA). But Plummer says that it's a case of mistaken identity. He points to another Chinese company with a similar name which was in fact headed by a PLA officer and may have sold optical communications gear to Iraq under Saddam Hussein. The mix-up, Plummer says, erroneously became part of a Wall Street Journal Asia article in 2001, then was referenced in a 2006 Rand Report -- and has been falsely repeated ever since. "There was some confusion there," says Plummer. "Huawei has never delivered any military technologies at any time."
But the assertion of a complete separation between the Chinese government and private Chinese companies is not terribly convincing to the cybersecurity community, according to Adam Segal, a China expert and senior fellow for counterterrorism and national security at the Council on Foreign Relations. Beijing last year forced all government suppliers to turn over their encryption codes. Beijing also dangles the threat of corruption investigations to keep companies in line, even executing executives convicted of graft. "Private companies in China are always wondering what the government is going to want next," Segal says.
To alleviate security concerns, Huawei has volunteered to reveal its source code -- as it has done with success in countries such as India and the U.K. -- and allow ongoing monitoring through a company called Electronic Warfare Associates (EWA). The company has top security clearance with defense and intelligence agencies and therefore can stay abreast of all known cyber risks, says John Lindquist, president and CEO of EWA's infrastructure technologies group. Any Huawei customer can take advantage of EWA's vetting as part of a "trusted delivery" purchase of Huawei equipment. Still, Lindquist concedes, "nothing is 100% fail-safe." While security experts say the real vulnerabilities come not when the equipment is delivered but perhaps six months later when a patch or update is required, Lindquist says ongoing monitoring looks in on patches after the fact. "I'm very confident we'll find anything that's there," he says.
