Behind Huawei's bamboo curtain

Huawei’s transparency drive signals intent to replicate MEA success in developed markets

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Behind Huawei's bamboo curtain Huawei is China's largest network vendor.
By  Daniel Shane Published  April 26, 2011

On the face of it, Huawei's proposed $2 million acquisition of 3Leaf Systems earlier this year seemed innocuous enough.

The planet's second largest networking vendor's decision to spend a meagre amount of cash, in tech M&A terms anyway, on an illiquid California-based virtualisation start-up, would in normal circumstances have been no great shakes. Instead, the deal was tossed out upon scrutiny by US regulators on security grounds.

That incident marked the latest in a series of frustrations that Shenzhen, China-based Huawei, which sells to both enterprises and telcos, has suffered while trying to forge a path into the US market.

In 2008, the company tried to buy out US-based network systems provider 3Com for $2.2 billion, at which point the Committee on Foreign Investment in the US stepped in and put the brakes on, clearing a path for Hewlett-Packard to swoop. At the time, 3Com provided security technology to parts of the US government.

Its troubles in the US come in contrast to its successes in the Middle East and Africa, which include a recent LTE network deal with UAE telco Etisalat, in addition to agreements with Qatari operator Qtel and Pakistani telco uFone.

After being thwarted on 3Leaf, in February 2011, Huawei took the unorthodox step of inviting a US audit, via an open letter published on its corporate website. "The allegation that Huawei somehow poses a threat to the national security of the US has centered on a mistaken belief that our company can use our technology to steal confidential information... or launch network attacks," deputy chairman Ken Hu wrote at the time. "We sincerely hope that the US government will carry out a formal investigation on any concerns it may have about Huawei."

That investigation has so far not materialised, but Huawei has ploughed ahead with its transparency offensive, this month publishing a set of financial figures for full-year 2010. They show a 24.2% growth in revenue to CNY185.2 billion ($28.4 billion), alongside a 30% rise in net income to CNY23.8 billion ($3.6 billion). The results contained previously undisclosed company information regarding Huawei, a privately owned company, and were independently audited by Dutch accounting giant KPMG.

Some of the details in the financial release focused on the background of founder and CEO, Ren Zhengfei, a character from which some US anxiety stems. For one, Ren is a former officer in China's People's Liberation Army (although Huawei says this is nothing out of the ordinary, observing that many prominent CEOs have military backgrounds). What could also be interpreted as odd, though, is that Ren has seldom appeared in public or in front of the media.

Another big point of contention is Huawei's ownership structure. The company's official line is that it is wholly owned by its employees, but beyond this few details are forthcoming. The previously undisclosed fact that chairwoman Sun Yafang apparently worked for China's Ministry of State Security, will do little to banish US unease.

Some of the criticism flung at Huawei in the US has been spectacularly lurid, however. In early 2011, US law makers wrote to Commerce Secretary Gary Locke accusing the vendor of having ties with the Taliban and Iran's Revolutionary Guard. Huawei refutes all such allegations.

The US is not the only market that Huawei has put the willies up. In 2010, India's telecommunications regulator banned imports of both Huawei's and fellow Chinese vendor ZTE's networking technology, also on grounds of national security, reasoning that it could contain spying equipment.

There may of course be ulterior motives to US reluctance in the form of economic protectionism. That market has several of its own incumbents in this area, such as Cisco and Juniper Networks. 

Huawei, it seems, could have the scale and resources to provide a robust alternative to both.

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