Telecom Firm in China Sets Sights on U.S. Market
Ownership, Tactics Raise Security Issues

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.

Founded in 1987, the Huawei of today is in many ways a reflection of its elusive founder, Ren. He started the company with less than $7,000; by 2000, Ren was estimated to be China's third-richest man, with a personal fortune of about $500 million, according to Forbes magazine. These days, Ren's black Mercedes-Benz is a familiar sight on Huawei's numerous campuses, but he rarely speaks to employees except through the company's newsletters.

In his writings, Ren, 63, who remains chairman of Huawei, speaks of the company's expansion as part of a war and spouts ideas popularized by Mao Zedong.

Huawei is one of a new breed of Chinese companies that the domestic media has dubbed "tulang" or hyenas, admired for their aggressiveness and reviled for their tactics.

As a competitor, Huawei is a "violent attacker," according to a 2002 article in CEOCIO, a trade magazine run by China's Ministry of Information Industry, that detailed the company's rise. Its sales force was known for blowing into a town dominated by a competitor and winning over contracts by any means necessary. They "helped" the children of telecommunications bureau officers go to university, took their wives on trips to "see the sea view," according to CEOCIO. Sometimes, they even pretended to be from a competing company and received potential customers at airports -- only to shuttle them straight to Huawei's exhibition hall.

Huawei officials disputed the characterization but declined to discuss specific allegations. They attributed "our success to our passionate and dedicated employees, ability to rapidly respond to our customers' needs, high quality and reliable produces and excellent service."

Its aggressive strategies got the company into trouble in the United States in 2002 when Huawei was the target of a high-profile lawsuit brought by San Jose, Calif.-based Cisco Systems for allegedly illegally using Cisco's technology. The two companies settled before the case came to trial and Huawei chief executive Ren has been emphasizing the company's commitment to intellectual property protection ever since.

The United States is not the only place where Huawei's operations have triggered national security concerns. In India, where Huawei operates its largest research and development facility outside of China, the company's efforts to build a manufacturing base have raised concerns among the country's intelligence agencies.

In a note circulated at a meeting of India's joint intelligence committee on Nov. 8, Huawei is listed as a "sectoral threat."

But the controversy hasn't slowed Huawei's overseas expansion. As of 2006, Huawei's contracts abroad were valued at twice that of its domestic ones. The closely held company announced that revenues for the first half of 2007 were $8.4 billion, a 62 percent increase from the comparable period a year earlier. The company says it expects total 2007 sales to hit $15 billion.

About 10 percent of this revenue is funneled back into the company's research and development operations, to which it also devotes nearly half its manpower.

Huawei's approach to leadership and innovation is in some ways the antithesis of its Silicon Valley competitors. While California's high-tech giants pride themselves on their flat management structure, in which chief executives sit down next to engineers to brainstorm and allow their scientists and engineers the freedom to think big thoughts, Huawei is known for its military-style approach.

As an employer, Huawei is known for pushing what it calls the "three highs" -- high efficiency, high pressure, high wages. For those who are successful, there are generous cash awards and bonuses. But news reports linked work stress to the death of at least one employee. In July, Zhang Rui, a 26-year-old engineer at Huawei committed suicide because of what his family told Chinese media was too much job pressure.

Huawei said there was an investigation into the cause of death "but there was no evidence to link his death to work pressure." The company says it takes great measures "to ensure employee health and safety in the fast-paced, high-pressure industry of telecoms and information technology."

Zhang Xi, 27, who worked in research and development for Huawei's wireless products left Huawei in October after a little over a year ago because he wanted a more flexible job with fewer hours so that he could spend more time with his fianc¿e when they married. He now works at Motorola.

The demands of Huawei, Zhang said, are "more than a person can stand. It's not reasonable for a company."

On the other hand, said Eagle Zhang, senior vice president of Analysys, an information technology and telecommunications consultancy in Beijing, Huawei's command and control management style has allowed Huawei to concentrate its resources in a way that its global competitors can't match.

For example, when Huawei decided three years ago that it should make a big push overseas, it sent hundreds of its employees abroad to study foreign languages and cultures. When Huawei decided two years ago to try to push the boundaries of what's available in wireless, it hired about 10,000 research and development fellows to study the next generation of communications.

"If you don't have a strict military management system, how can you move so many people and make this in such a short period of time?" Zhang said.

This style has meant that while Huawei has not invented products that have made breakthroughs in its field, it has made significant, incremental innovations, said Peter Williamson, co-author of the book "Dragons at Your Door." For example, Huawei has created fast routers for Internet traffic by going after the underlying software that controls the devices instead of focusing on hardware like its competitors in the United States. It has also found a way to make its long-haul fiber-optic cables more robust so that they transmit data for thousands of miles without having to regenerate a signal.

Huawei engineer Wang Weifeng, who joined the company in 2000 immediately after he finished his undergraduate degree, said Huawei's emphasis on teamwork and the way it has mobilized so many people toward a single mission -- beating its competitors with the latest products -- has pushed its employees to work together to be creative.

"Huawei is forever chasing others. So in this kind of status you have the opportunities to reach for new things," Wang.

Researcher Wu Meng and correspondent Rama Lakshmi in New Delhi contributed to this report.

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