Telecom Firm in China Sets Sights on U.S. Market

Rand Corp. says Huawei has
Rand Corp. says Huawei has "deep ties" with the Chinese military, but the firm denies state affiliation. (By Jonathan Drake -- Bloomberg News)
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By Ariana Eunjung Cha
Washington Post Foreign Service
Sunday, January 6, 2008

SHENZHEN, China -- From a fortress-like corporate campus in this southern city, retired army officer Ren Zhengfei is building one of China's most successful experiments in capitalism. A mammoth operation with 70,000 employees and strong backing from the state, Huawei Technologies brags that its goal is to dominate telecommunications equipment markets all over the world.

Its current focus: America.

Three months ago, Huawei teamed up with Bain Capital Partners in a $2.2 billion takeover bid for U.S. networking pioneer 3Com Corp., a Marlborough, Mass., company that makes systems to protect against computer hackers.

Huawei would take an initial stake of 16.5 percent and be allowed to purchase up to 21.5 percent. Bain Capital, a Boston-based private-equity firm, said in a statement that Huawei wouldn't have any operational control over 3Com, which "will be firmly controlled by an American firm."

But the specter of foreign access to U.S. telecommunications and networking infrastructure has raised hackles in Congress. Lawmakers previously objected to Cnooc, China's biggest offshore oil producer, which unsuccessfully attempted to purchase Unocal for $18.5 billion in 2005. Foreign ownership concerns also derailed Chinese appliance-maker Haier Group's attempt to purchase Maytag for $1.3 billion.

Fueling lawmakers' unease about the Huawei deal is that no one knows exactly who owns it. Technically, Huawei is a private venture, not state-owned. But the company won't reveal information about its shareholders except to say it's "100 percent employee-owned," with its chief executive owning 1 percent.

"There is an opaqueness in the relationships between Huawei and many of these Chinese government entities. You'll never know what has gone back between them," said Rep. Thaddeus McCotter (R-Mich.), chairman of the House Republican Policy Committee, who has called on the Bush administration to block the deal.

Research organization Rand Corp. said that Huawei has "deep ties" with the Chinese military. It is not only a customer of Huawei's, Rand said in an analysis prepared for the U.S. government, but also was a "political patron and research and development partner."

Huawei officials, in a written response to questions, dispute those assertions. "The Chinese government does not own or control any part of Huawei or give the company preferential treatment," Huawei said. "Neither the Chinese government, the People's Liberation Army, nor any business organization hold any stakes in Huawei." The company said that contracts with the Chinese government represent a small fraction -- 0.5 percent of total contract sales in 2007 -- of Huawei's business.

Xing Houyuan, dean of the Beijing-based Overseas Investment Research Center, which is under China's Ministry of Commerce, said efforts to block the deal amount to discrimination, an attempt by the United States to protect key industries like telecommunications.

"The so-called national security protections are only aimed at nationally owned or nationally controlled companies of certain countries like China," Xing said.

Huawei -- which specializes in switches and routers, the devices that direct traffic over the Internet -- is the closest thing China has to a national champion and the flashpoint in the debate over whether China can innovate and not just copy. The world's third-largest vendor of most types of telecom equipment, according to research firm Ovum, it is one of a handful of companies that are key to the Chinese government's "go global" policy to promote Chinese brands and transform the nation's image from a cheap manufacturing base for things like toys and socks to an R&D powerhouse.

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