Huawei Backs Out Of US Switch Market update from December 2013

When Huawei founder and co-CEO Ren Zhengfei granted an interview to French reporters at a research and development center opening in Paris last week, the press neglected to mention one rather interesting detail that came up: Huawei apparently intends to stop doing business in the United States. Zhengfei's words come amid a growing stockpile of accusations, conspiracy, and intrigue surrounding his company, almost none of it conclusive.

Although the French Press failed to remark on Huawei's US exit, the Chinese publication tech.163.com subsequently published the complete transcript of Zhengfei's press conference. Foreign Policy then translated the document into English, interpreting Zhengfei's statements to mean that Huawei has decided it's not worth pursuing the US market if that will hinder economic and foreign relations between the US and China.

A careful read of Google's translation of the transcript, corroborated in part by Foreign Policy, however, reveals somewhat less than a formal declaration of Huawei's exit from US markets. Indeed, the company has not issued a formal statement to this effect. What's more, Zhengfei did not explicitly state which specific technology markets such an exit would entail, if it comes at all.

This is not the first signal from Huawei of its growing disinterest with the US. In April, Executive Vice President Eric Xu made a similar statement at a gathering of financial analysts.

Chinese cybercrime fears

For years, US lawmakers have maintained that both Huawei and China-based competitor ZTE could potentially embed stealth espionage technology inside the gear they produce for the world's Internet routers, switches, and wireless transmitters. No explicit evidence of such a conspiracy has been uncovered, however, though the House Intelligence Committee has taken both companies to task for having failed to disprove it.

If his company should get caught in the middle of tensions between China and the US, stated Zhengfei in Paris, it's not worth it for Huawei to continue doing business with America. Some $10 billion in annual sales for his company, he said, represents a mere fraction of China's trillions in exports that are at stake, and with which the Chinese government is more importantly concerned. That figure may be somewhat inflated, as it would constitute 28% of its worldwide sales.

Tellingly, however, Zhengfei did add that the operating system for its Android smartphones is American-made, implying that any security problems posed should be considered an American problem.

If a US exit does actually come, it could embolden both lawmakers and competitive manufacturers worldwide to use the fear of global espionage as a successful marketing and campaigning tactic.

An October 2012 House Intelligence Committee report publicly rebuked Huawei and ZTE for failing to reveal the extent of their ties to the Chinese government, and declared both companies potential, if not current, threats to national security. It cited the lack of visibility into the amount of state control over Chinese private business as a major concern.

Unnamed US companies were also said to have experienced "odd or alerting incidents using Huawei or ZTE equipment." The result of that report was a US ban on all government transactions with either company without FBI oversight, followed by public condemnation from former CIA director Gen. Michael Hayden. Following their proposed merger, Sprint and Softbank told Intelligence Committee Chairman Rep. Mike Rogers (R-Mich.) that they would refrain from using Huawei equipment. Such assurances may have been necessary to avoid the House withholding its blessing on the merger.

Low enterprise impact

It's a safe bet that the exit from the US market of a manufacturer that most Americans can't pronounce won't cause much of a shakeup. An InformationWeek survey conducted in April of 450 business professionals in North America revealed only 12% of respondents had "good" or better knowledge of the products and services Huawei provides. A mere 6% of respondents perceived Huawei as a leader in core enterprise routers and data center switches.

In his comments in Paris, Zhengfei drew comparisons between Huawei and Cisco, his company's closest competitor. In 2003, Cisco accused Huawei of stealing its router source code and other intellectual property. That case was officially settled out of court, although Cisco legal chief Mark Chandler revealed that an independent expert concluded that Huawei copied Cisco's source code right down to the spacing in its comments. Cisco is believed to have just a five percent share of the Chinese infrastructure market, comparable to Huawei's share in the US.

American ignorance of Huawei stands in stark contrast to an emerging global reality where it is not just a contender, but a powerhouse. IDC ranks the company as the number three smartphone vendor, after Samsung and Apple. But an estimated 70% of Huawei's $35.35 billion in revenue for 2012 came from the sale of infrastructure equipment for telecom carriers.

While much of the press has credited Huawei's success to the continued economic growth of China itself, Western Europe has actually proven to be fertile ground for the company. In addition to the Paris R&D center, the company announced last October it is investing £125 million toward the development of a similar facility in Great Britain.

That investment came amid the objections of members of Parliament, who cited the House Intelligence Committee report. Zhengfei denounced those objections as examples of protectionism, which he believes is always due to fail wherever the Internet is concerned.

"Who can stop the progress of mankind towards an information-driven society?" he asked in the Paris press conference. "I think as long as there is traffic, there is hope." The growth rate of information is faster, Zhengfei said, than anyone's ability to divert traffic by means of protectionism. Because Huawei stands against protectionism, he added, whether you like it or not, when you use the Internet, you use Huawei equipment.