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.

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