Jumping The Hurdles At Huawei
After SARS and a lawsuit from Cisco, the network-gear maker is doing lots of deals and expanding exports
A few months back, 2003 was shaping up to be a lousy year for Huawei Technologies Co. When SARS swept through Asia last spring, the Shenzhen-based networking-equipment manufacturer lost sales when frightened foreign customers refused to travel to China. A proposed joint venture with 3Com Corp. (COMS ) was delayed as Beijing authorities were slow to grant approval. Worst of all, Cisco Systems Inc. (CSCO ) in January launched a broad lawsuit that lent credence to a damning, years-old rumor: that the Chinese upstart had built parts of its business on technology stolen from the Silicon Valley networking giant.
But as 2003 draws to a close, things look a lot brighter for Huawei. SARS is just a memory -- at least for the time being -- allowing the privately held company to boom along with the Chinese economy, which grew at a torrid 9.1% pace in the third quarter. Huawei's exports are expected to double this year, to $1 billion, as the company's total sales grow 35%, to $3.5 billion. The venture with 3Com, aimed at selling routers to corporate customers, is back on track after Beijing gave it the go-ahead in November. And in October, Cisco agreed to put a hold on the lawsuit. Pending a review of Huawei's technology, the companies will likely settle. Although Huawei withdrew many of its products from the market after the lawsuit was filed, the Cisco case and other troubles "had no effect on our business at all," says Executive Vice-President William Xu.
A host of multinationals -- many of them erstwhile competitors -- are likely to help Huawei continue improving its outlook. "Huawei is clearly on the move internationally," says Bruce L. Claflin, chief executive officer of 3Com. In addition to its deal with 3Com, Huawei is now working with an all-star list of tech companies: Qualcomm (QCOM ), Microsoft (MSFT ), Matsushita (MC ) -- more than a dozen in all. The list keeps growing as the company expands in Europe, Asia, and Latin America. Huawei's attraction: It has great connections in China and offers a foothold in a booming market of 1.3 billion people. And it can tap into a giant pool of low-cost engineers who work for one-fifth what their counterparts in Silicon Valley get, enabling Huawei to sell products for 30% less than rivals such as Cisco. That's a key reason Electronic Data Systems Corp., a longtime Cisco ally, on Dec. 2 signed a deal to sell Huawei gear in the U.S.
In a bit of ironic turnabout, even the Cisco imbroglio may have helped Huawei. "Having Cisco sue Huawei actually proved that they are a player," says Marcus Sigurdsson, an analyst in Hong Kong with Gartner Inc. (IT ). A potential customer hearing about Cisco's low-cost Chinese rival might consider working with Huawei to save money, he says, so the lawsuit was not that much of a problem. "It misfired" for Cisco, says Sigurdsson. For its part, Cisco says it's pleased with the agreement the two companies reached and hopes it will lead to a resolution of the lawsuit. "We're gratified that Huawei changed its products in response to the concerns we raised," says Cisco CEO John T. Chambers.
CHARM OFFENSIVE
To continue growing overseas, Huawei execs realize they need to burnish their company's image. Since it was founded in 1988 by Ren Zhengfei, a former People's Liberation Army officer, many have assumed the company is secretly controlled by China's military. So the company's recent aggressive international expansion has been backed up by a charm offensive. The reclusive Ren still won't grant interviews to the foreign press, but other Huawei execs are happy to sit down with skeptics. They say the company is owned by its employees, not the military. And to counter the impression created by the Cisco case, Huawei executives now insist the company respects competitors' intellectual property. "Before this, we didn't do much promotion of ourselves," says Xu. "People didn't understand Huawei very well."
There are, however, some teeth behind the smiles. Huawei reported to Chinese police that three former employees had given company secrets to their new employer, California-based telecom-equipment maker UTStarcom Inc. (UTSI ). In August, the three were arrested and remain in jail in China. "There was great harm to the company," says Fei Min, a Huawei executive vice-president. UTStarcom CEO Hong Lu denies any secrets were stolen and says the company stands by the three workers.
Key to Huawei's strategy is its push abroad. One focus is selling equipment for cellular networks using a low-cost standard called CDMA 450. Huawei has sold CDMA 450 networks in Portugal, Russia, and Belarus. It's also focusing on high-end routers. In October it signed a deal to sell them to British operator Fibernet Group PLC. And in India, Huawei is expanding its four-year-old Bangalore software-development center. By yearend 2005, some 1,500 engineers will be working there, up from 600 today.
Huawei's primary market, though, remains China. There, the company is benefiting from a rebound in infrastructure spending by state-owned operators such as China Telecommunications Corp., which on Dec. 8 awarded Huawei a contract to make key components for 2 million DSL lines. Demand in China for such high-speed Internet equipment is soaring: Over the past year, the number of DSL subscribers in China has tripled, to 7.5 million, according to researcher International Data Corp. Huawei is working on third-generation, or 3G, cellular equipment with German chipmaker Infineon, and is testing 3G infrastructure gear with China Mobile. And Germany's Siemens (SI ) announced in August it will partner with Huawei to manufacture phone equipment using a new 3G standard developed in China.
LINGERING QUESTIONS
While Siemens worked with a Huawei rival, state-owned Datang Mobile Communications Equipment Co., to develop the 3G technology, when it came time to manufacture the new equipment it chose Huawei instead. In launching a new product, "you better team up with good players," says Christoph Caselitz, president of Siemens Mobile Networks. "And Huawei is the strongest of them."
That doesn't mean there are only clear skies ahead for Huawei. SARS could always reappear and hurt both the Chinese economy and Huawei's business. While Huawei is enjoying a boost in sales abroad, some potential customers and partners say Huawei simply makes me-too products and does not back them up with adequate service. "We would not do business with Huawei," says Robert M. Cagnazzi, CEO of networking-gear distributor Dimension Data North America. And there are continuing doubts about Huawei's connections to the army. "There's too much military influence," says one prominent U.S. venture capitalist who does many deals in China but steers clear of Huawei. Whatever new problems arise, however, Huawei has managed to put what was shaping up to be its annus horribilis behind it, and rivals worldwide would do well to take notice.
By Bruce Einhorn in Shenzhen and Peter Burrows in San Mateo, Calif.
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