http://www.washingtonpost.com/wp-dyn/content/article/2010/10/07/AR2010100707210.html?wpisrc=nl_pmtech

History of telecom company illustrates lack of strategic trust between U.S., China

By John Pomfret
Washington Post Staff Writer
Friday, October 8, 2010; 12:33 AM

SHENZHEN, CHINA - Late last year, as AT&T was preparing to buy hundreds of millions of dollars of equipment for its next-generation phone system, one of its senior executives received a call from the National Security Agency.

The subject was AT&T's desire to give a burgeoning Chinese telecommunications firm a contract to supply some of the equipment. The message from the NSA - the nation's electronic spying agency - was simple: If AT&T wanted to continue its lucrative business with the U.S. government, it had better select a supplier other than Huawei, said several people with knowledge of the call. In February, AT&T announced that it would buy the equipment it needed from Swedish-owned Ericsson and Paris-based Alcatel-Lucent.

The NSA called AT&T because of fears that China's intelligence agencies could insert digital trapdoors into Huawei's technology that would serve as secret listening posts in the U.S. communications network, said the sources, who spoke on the condition of anonymity to maintain their relationship with the companies. Huawei, the NSA and AT&T declined to discuss the agency's intervention in the deal.

Huawei's experience illuminates the hole at the center of the United States' relations with China: the absence of strategic trust. Although President Obama has said the United States welcomes China's rise, significant parts of the U.S. government view China as a threat to national security.

The trust gap is a major obstacle for China and its companies as they seek to enter more sensitive parts of the global economy. But if the aborted AT&T deal was a setback for Huawei, the history of the company and its founder demonstrates a determination to prevail.

Huawei sells equipment, software and services to 35 of the world's 40 biggest telecom companies. It supplies one-third of the telecommunications equipment used in China. It is the leading vendor of such equipment in the developing world and number two in Europe. The sun never sets on Huawei's empire, which stretches from South Africa to Sweden, Bangalore to Brisbane, Vancouver to Vanuatu.

Still, U.S. senators are lobbying against another potential big Huawei sale. Sprint Nextel is considering making Huawei's equipment the backbone of its next-generation mobile and wireless technology. If the deal goes through, U.S. officials said, they are concerned that other major carriers will choose Huawei as well.

Sen. Jon Kyl (R-Ariz.) and seven other senators are accusing the company of links to the People's Liberation Army and Iran's Revolutionary Guards Corps. In an Aug. 18 letter, they wrote: "Huawei's position as a supplier of Sprint Nextel could create substantial risk for U.S. companies and possibly undermine U.S. national security."

Why pick on Huawei?


In the past six months, Huawei has hired lobbyists, consultants and a public relations firm in Washington. Its executives have announced a program to have independent companies check Huawei's software and equipment for potential national security problems. On Capitol Hill, Huawei's backers have charged that much of the criticism of Huawei is protectionism. Most telecommunications equipment, they say, is manufactured in China, so why pick on Huawei?

To counter suspicions that the PLA controls part of the company, Huawei last year released shareholding information for the first time, reporting that its 60,000 employees held 98.58 percent of the shares. Founder and chief executive Ren Zhengfei holds the remaining 1.42 percent. A conservative valuation of his shares would put their value at about $1 billion.

"In the past, one of our shortcomings was that we weren't transparent enough," Guo Ping, the company's chief of strategy, said in an interview at the company's chrome-and-glass campus in Shenzhen. "We understand that in America we need to increase our transparency, to show people who is Huawei, what is Huawei."

Ren is the man driving Huawei's growth. A 64-year-old former PLA technician, Ren founded Huawei in the 1980s and began selling telephone equipment. In the cities, the big Chinese state-owned companies wouldn't touch Ren's wares. But in rural areas, Huawei's cheap, easy-to-use products were popular. Ren hewed to a military strategy of Mao Zedong: Surround the cities with the countryside.

"Rats were chewing through the wires, and the electricity didn't always work," said Ken Hu, a senior executive who was one of a team of engineers who traveled to every one of China's 2,800 counties to market Huawei's products. "We had to devise systems that would deal with that. It was a challenge."

Although Huawei is technically a private firm, it has long benefited from an intimate relationship with the Chinese state. Small-time telephone companies that wanted to buy Huawei's equipment didn't always have the money to pay. So the state-run China Construction Bank loaned the companies the money, said a Shenzhen-based consultant who negotiated the deal. It is unclear whether the local companies repaid the loans, said the consultant, who insisted on anonymity out of fear that he would lose business. "China Construction took the hit, but Huawei boomed."

'Keep cool'


Huawei's growth paralleled the herky-jerky rise of many Chinese firms. To achieve smoother expansion, Ren set aside his Mao and looked to America. In a visit to the United States in 1997, Ren spent weeks interviewing the corporate titans on the secrets of their success. Guo, the Huawei strategist, said Ren traveled by bus, lugging a briefcase full of cash because Chinese then had no credit cards.

Ren declined to be interviewed for this article.

Ren established a close relationship with IBM, which for more than a decade has helped him reshape Huawei's corporate culture and streamline its innovation processes. Huawei has grown into one of the most profitable telecommunications company in the world; last year Huawei's revenue hit $22 billion, with profits at $2.7 billion.

In 2000, Huawei broke into the overseas market by expanding into developing countries. The state-owned China Development Bank has provided Huawei with a $40 billion line of credit to help finance its sales.

Huawei's first Western deal was in the Netherlands in 2001. Its breakthrough product was a wireless station that could run several communications technologies, such as GSM or CDMA, more efficiently than its competitors' units. Upgrades could be achieved not by replacing the hardware but by switching the software - a huge savings for its customers.

Competitors have long questioned how Huawei obtained its technology. Cisco sued Huawei in 2003, accusing it of stealing software. Cisco said it had discovered computer code in Huawei's products that contained secret personal data inserted by the author of the code - a Cisco software developer. In July, Motorola sued Huawei, accusing it of helping to establish a dummy corporation that allowed corrupt Motorola engineers to funnel trade secrets to Huawei. Huawei has denied all of the charges in both cases but settled its case with Cisco by agreeing to stop selling the specific product named in the suit.

Ren has also been dogged by accusations that Huawei would ultimately serve the interests of the Chinese Communist Party, not its customers or the market. Ren's aides reject such charges, but the founder's writings suggest a more complex picture. Although Ren professes affection for the United States, he has also called for the dissolution of NATO and says he thinks the United States is engaged in "tricks aimed at undermining China's international environment in order to contain it."

Although he has told American interlocutors that Huawei wants to function purely as a multinational, he has written that "Huawei's international marketing policy follows our country's foreign policy line" - implying a level of coordination with government that most multinationals would never acknowledge.

In an essay in which he urges his staff not to cooperate with the media, he writes: "Our workers need to unswervingly keep cool, listen to [the party], follow [the party], and don't utter anything that they shouldn't."

Big players


Huawei began its operations in the United States in 2001. Charlie Chen, chief of the North America section, recalls that he "could barely tell the difference between a hamburger and a sandwich, not to mention a bagel." It took Chen six months to hire his first American employee.

Almost a decade later, there's a buzz of excitement around the firm's headquarters in Plano, Tex.

Jerry Prestinario, vice president in charge of delivery and service, joined Huawei in 2007 after 35 years at Lucent. "I spent the last five years of my career downsizing," he said. "Now I'm doing several interviews a week. It feels great to be part of a company that it is growing."

Within Huawei there is a debate about how to convince American executives and the U.S. government that its equipment can be trusted. Earlier this year, Huawei hired Matt Bross, who as chief technology officer of British Telecom supported the purchase of Huawei equipment. Bross, a onetime Missouri farm boy who pushed the Huawei deal over the opposition of British intelligence, has thrown himself into devising a system to calm nerves in Washington and beyond.

"It's basically lifting your skirt and letting them peek," Bross said. "It should be something our whole industry adopts, not just us."

In the spring, Huawei sought advice from a Washington firm led by former Defense secretary William Cohen. The Cohen Group laid out an aggressive program under which Huawei would build a wall around its U.S. operations, set up a purely American board and create a completely American company that would no longer be controlled by its parent in China.

In researching Huawei, executives at the Cohen Group discovered that the U.S. government had little idea of the extent of Huawei's business in the United States. American telecommunications firms are not obligated to inform the government of their purchases of foreign-manufactured equipment.

Although Huawei has just 2 percent of the U.S. telecommunications market, it is working with many big players. It is involved with Comcast on a project to provide voice calls through cable lines and is in talks with Verizon. Huawei has supplied the equipment for wireless service in Seattle and Chicago and will soon do so in San Francisco. Last year it sold $400 million worth of equipment in the United States. This year it expects to double its sales. In the United States, Huawei operates three R&D centers and eight other service centers and employs more than 1,000 people.

Competitive edge


In July, another adviser emerged with a less onerous plan. William Owens, a former vice chairman of the Joint Chiefs of Staff, offered to set up an American company to help Huawei sell its wares in the United States without requiring any changes to Huawei's American management. The company would check Huawei's equipment for bugs and install and service the equipment.

Owens and Ren also had a history; when Owens was the chief executive of Nortel in 2004, Ren was interested in buying the firm.

"We are close to [Huawei]," Owens said. "We've talked to them about what we think is necessary to establish the confidence to get into the American market."

The Cohen Group walked away from the deal, convinced that the U.S. government would not be satisfied that Owens's firm could ensure the security of Huawei's equipment.

Underestimate Ren at your peril, Ren's competitors say. Indeed, in his writings, Ren exhibits the fiercely competitive edge that has propelled Huawei into the world's top ranks. He waxes philosophical about his firm's prospects in the United States.

"China-U.S. relations will continually have twists and turns," he writes, "but that shouldn't stop us from learning from the American spirit of innovation so that we can become richer and more powerful ever faster."