Monday, October 25, 2010

China Telecom Giant Makes Push for U.S. Market

October 25, 2010

China Telecom Giant Makes Push for U.S. Market

New York Times

SANTA CLARA, Calif. — This 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. But Huawei has largely been locked out of the United States — until now.

Sprint Nextel, the nation’s third-largest wireless carrier, is preparing to make a decision on buying $3 billion in advanced wireless equipment, and Huawei is considered to be a front-runner for the deal.

Huawei is one of many Chinese companies that are pushing into more sophisticated and lucrative businesses. But security concerns make telecommunications a particularly delicate industry in this country, and even the hint of a Huawei deal with Sprint has generated worries in Washington.

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

Last week, Senator Joseph I. Lieberman, independent of Connecticut, and three other members of Congress 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. This fall, the American Internet communications firm Clearwire will begin testing a system based on Huawei’s 4G, or fourth-generation, network technology.

The Sprint contract would be Huawei’s largest American deal by far. A Sprint spokesman, Scott Sloat, declined to discuss any potential deal. Sprint bought its last round of network equipment from Motorola, Nortel Networks and Lucent, now part of Alcatel-Lucent.

Huawei’s American drive is significant because it is China’s first truly home-grown multinational corporation. And some analysts say they believe its spectacular rise will serve as a model for other Chinese companies seeking to compete internationally.

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.

Despite those successes, 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.

The company has repeatedly been linked to the People’s Liberation Army of China. And over the last decade, Huawei has been sued in the United States by two of its major competitors, Cisco Systems and Motorola, over accusations that it stole software designs and infringed on patents.

Cisco settled its suit with Huawei soon after filing it. But in court documents filed in a lawsuit last summer, Motorola claimed 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 by way of a dummy corporation they had set up outside the company.

The national security issue has been bubbling up for some time. In a letter in August, a group of Republican senators wrote to the heads of four federal agencies asking questions about the risks of Huawei’s entering a deal with Sprint, whose customers include the United States military and law enforcement agencies.

The senators, who are seeking a stringent government review of Huawei, said they were troubled by the company’s history, including evidence it had supplied communications equipment to Iran and Iraq during Saddam Hussein’s regime, possibly in violation of United Nations sanctions.

“We are concerned,” the senators wrote, “that Huawei’s position as a supplier of Sprint Nextel could create substantial risk for U.S. corporations and possibly undermine U.S. national security.”

The reservations about Huawei extend to other countries. 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. In a statement, the company added: “Huawei has never researched, developed, manufactured or sold technologies or products for military purposes in any country.”

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 in Dallas, Moscow and Bangalore, India, and most recently in 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.

Huawei’s rush 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,” Mr. Arnold said. “Huawei has great difficulty understanding what is happening outside of China and adapting their business practices.”

Ren Zhengfei, a former soldier who worked for 10 years in China’s Army Engineering Corps, founded Huawei 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.

In 2008, 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.

Analysts note that Chinese companies have been willing to buy telecommunications equipment from American makers like Motorola, apparently setting aside any concerns about American espionage.

Peter J. Williamson, a professor of business at Cambridge University, said that while some continued to be bothered by Huawei’s origins, its technological prowess was increasingly hard to ignore.

“The hardest market to crack is the U.S.,” he said. “But they’ve cracked Europe. And if they can work with Vodafone, one of the biggest carriers in the world, they can work with anyone.”

John Markoff reported from Santa Clara, Calif., and David Barboza from Shanghai. Bao Beibei contributed research from Shanghai.

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