Huawei throws in the towel

This event is really not that surprising, given the developments in the past couple of years. (See, for example, 15 October 2012 in this column in Daily Trust.) The event took place early December 2013, as the reclusive founder and CEO of Huawei, Ren Zhengfei, told French journalists in a rare interview that the company […]

This event is really not that surprising, given the developments in the past couple of years. (See, for example, 15 October 2012 in this column in Daily Trust.) The event took place early December 2013, as the reclusive founder and CEO of Huawei, Ren Zhengfei, told French journalists in a rare interview that the company is exiting the North American market. His reasons are the tensions between China and the U.S. and the accusations made by U.S. lawmakers that Huawei is somehow tied to Chinese government intelligence. “If Huawei gets in the middle of U.S-China relations and causes problems, it’s not worth it,” Zhengfei reportedly said. “Therefore, we have decided to exit the U.S. market, and not stay in the middle.”
For the past few years, the law makers in the U.S. have tried to block the spread of Huawei’s equipment, and have convinced many U.S. firms to stop doing business with the Chinese company. The fear of U.S. lawmakers and regulators is that Huawei’s networking products would have secret backdoors built in, so that Chinese officials could spy on the U.S. About a year ago, Rep. Mike Rogers, the chairman of the U.S. House Intelligence Committee, advised U.S.-based businesses to find a vendor other than Huawei and ZTE, that the installation of their equipment could be disastrous for American security, and said in a public TV interview that “we have to be certain that Chinese telecommunication companies working in the United States can be trusted with access to our critical infrastructure. Any bug, beacon, or backdoor put into our critical systems could allow for a catastrophic and devastating domino effect of failures throughout our networks.”
Although Huawei is not currently a big name in Western Europe or the U.S., it is well known in the developing regions of Africa, Asia, and Latin America, where the company’s switches and routers have already captured markets. Zhengfei, a former People’s Liberation Army engineer, founded Huawei in 1987 for the purpose of selling telecommunications gear to China’s phone companies. Huawei, which is Shenzhen, China-headquartered, grew to an $18 billion business in 2010.
Extending its business activities to the U.S. and Western Europe has not been easy for Huawei, as the company is battling an image problem because of the perceived closeness to the Chinese military and government and the associated national security issues. In 2012, Huawei was reportedly blocked from bidding for contracts on Australia’s national broadband project, reportedly due to concerns about cyber-security. The U.S. government also has similar concerns, as mentioned above, as well as concerns over what it terms “Huawei’s undesirable intellectual-property practices.” There is the general belief among telecom giants in the U.S. that Huawei does not usually work hard on its products, but instead uses shortcuts, by stealing technology from others.
In a CBS 60 Minutes TV segment covered by Steve Kroft on Sunday October 7, 2012, Kroft alluded to a court case in which “Cisco accused Huawei of copying one of its network routers, right down to the design flaws and typos in the manual” and that “Motorola alleged that Huawei recruited its employees to steal company secrets.”
Huawei’s decision to throw in the towel is obviously not a good prospect for the company, given the sophistication and the expendable cash available to U.S. companies and consumers when compared to any other country in world. By some estimates, the U.S. alone represents 30% of the global market for telecom equipment. Most developed countries probably see things the same way as does the U.S. with regards to the perceived Chinese government’s espionage assignment for Huawei.
In late March 2013, the U.S. was said to have quietly activated a new process of buying IT equipment, prohibiting certain jurisdictions to purchase computer equipment and telecommunications “produced, manufactured or assembled by one or more entities owned, managed or individual subsidiaries by People’s Republic of China.” It is believed that the French government is also putting out a similar bill.
While the recent development will directly hurt Huawei’s revenue and income potential, another issue might be the perception of scores of developing countries, such as those in Africa and South/Central America, where Huawei’s presence is quite significant. Well-meaning, patriotic, and minimally-corrupt decision makers in those developing countries might find themselves asking whether or not national security isn’t luxury for poor countries. After all, government officials in countries like Nigeria “transact” in public e-mails (like Gmail, Yahoo, etc.) which are foreign-based. That is, what can poor countries lose if indeed it is the case that China is listening in to the discussions taking place in ministerial briefings, cabinet meetings, or inside presidential villas? It is the rich man who needs to spend money to guard his wealth, while the poor man, not having much to lose, doesn’t really need to bother himself with security guards!
These are speculations, obviously, but I think they are in order. No one outside of the Chinese government and Huawei top management really knows for sure what the relationship between the two is. However, my guess is that many developing countries doing business with Huawei might be wondering whether or not they too should be more careful with Huawei.
The main idea in this article is that Huawei has succumbed to U.S. pressure and is taking its business elsewhere – to developing countries, who, for now, do not appear to appreciate what the U.S. is fussing about!