Breakingviews -How Huawei can dial down the fear factor

Mon Jun 10, 2013 1:42pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By John Foley

BEIJING, June 10 (Reuters Breakingviews) - How scary is Huawei? The Chinese telecom equipment maker has met resistance from politicians who fear it could be used as a Trojan horse by the Chinese government. Most recently a group of UK parliamentarians complained the group supplied critical infrastructure without ministers’ knowledge; American and Australian politicians have already blocked Huawei from key contracts. The political tribulations will take years to resolve, but there are ways to dial down the fear.

It’s not that Huawei’s growth has suffered. The company’s revenue has increased by 12 percent a year on average since 2008, and two-thirds of it comes from outside China. Still, the United States represents just 15 percent of the group’s total sales, despite representing a market with $1.1 trillion of telecoms spending in 2012, according to the Telecoms Industry Association. Moreover, since America sets the tone for global technology, Huawei-phobia could filter down to businesses and governments in other countries.

The main reason for that phobia is China. While Huawei says it has no links to the military, China's government is particularly untransparent and powerful. Even the big banks on which China’s large companies depend for financing are state-owned, and it's unthinkable that a company as big as Huawei could resist an order from the Communist Party. Equally, foreign governments would struggle to access data stored in the company’s mainland headquarters. So some disquiet is justified – though the same should apply to any Chinese company with access to important data.

Networks, too, are by their nature vulnerable. The risks from “back doors” through which data can be plucked out, remain theoretical. But the burden of proof is on the supplier. No system is perfectly secure, so companies and governments can only work on reducing the probability of an incursion. Avoiding a foreign supplier whose home country is known for international cyber-espionage has some logic.

True, China isn't alone: witness the furore over U.S. government requests for user data from some of the country’s biggest internet companies. But if America can strong-arm companies into handing over data, so can China. If companies put more and more financial value on security overall, it is likely to erodes the advantage Huawei gets from being cheaper than its rivals.

Huawei can't do much about its Chinese origins, or broader concerns about network security. Corporate governance, however, is an area where it could use a major upgrade. While a third of its employees and two-thirds of its revenue are outside the People's Republic, all 45 of the people who staff Huawei's top committees, as listed in its latest annual report, are Chinese. Every one of them has served at the company for more than 12 years.

Power is concentrated, too: the 98 percent of shares owned by employees - again, all Chinese - are treated as a single block, which gives founder Ren Zhengfei’s separate 1.2 percent stake disproportionate significance. Popping a couple of big-name foreign tech heavyweights on the Chinese board, and giving foreign employees a stake, would go a long way to combating perceptions that Huawei is fuelled by patriotism as much as profit.

Familiarity would also help. Seven years ago, products made by Lenovo (0992.HK) - which bought IBM's (IBM.N) laptop computer business - were barred for use on the U.S. State Department’s more sensitive networks. But since consumers and businesses were already hooked on its products, and large U.S. suppliers had an interest in seeing Lenovo succeed, the fear subsided. Foreign consumers aren’t yet fighting Huawei's corner. For every one of the 32 million smartphones it shipped in 2012, Korean rival Samsung (005930.KS) shipped seven.

The company could do worse than look to tiny rival Xiaomi for ideas. The Chinese handset maker has come from nowhere to become one of the country's hottest domestic smartphone brands, mostly by creating attractive handsets cheaply and upgrading its own operating system every week to please tech buffs. That shows Apple (AAPL.O) and Samsung don’t have a monopoly on consumer tastes. There's no reason Huawei, which spends a tenth of its revenue on research and has huge economies of scale, shouldn't be able to compete.

None of this is a quick fix. Huawei lacks the end-user marketing mentality that Samsung and Apple have cultivated over decades. Changing the company’s governance structure - perhaps even listing in New York or Hong Kong - might win friends overseas, but lose them at home. And ultimately, the extent of the company’s success outside of China will be determined by politicians. But if top-level relations improve, Huawei will find that self-help now pays dividends later.

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CONTEXT NEWS

- Huawei should not have been allowed to become embedded in critical UK infrastructure without ministers’ knowledge, a report by a parliamentary committee argued on June 6.

- The Chinese telecom equipment maker has supplied products used by BT Group under a contract allocated by the UK group in 2005. While BT told government officials about Huawei’s role in 2003, ministers were not informed until a year after the contract was allocated, the report said.

- Huawei, founded by Ren Zhengfei, a former officer with China’s People’s Liberation Army, has been blocked from certain infrastructure projects in Australia and the United States. It has repeatedly denied having links to the Chinese government or military, or receiving financial support from them.

- Huawei reported 220 billion yuan of revenue ($36 billion) in 2012, slightly more than the total sales of Ericsson. Some 22 percent of Huawei’s revenue is derived from consumer-related products such as smartphones, whereas its Swedish rival’s revenue is almost all from servicing network operators and businesses.

- The company booked 750 million yuan ($123 million) in 2012 from government grants associated with research and innovation projects in China, according to its annual report, contributing 3.7 percent to the group's operating profit.

- Reuters: UK lawmakers say Huawei-BT deal exposes flawed security controls [ID:nL5N0EJ03W]

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(Editing by Peter Thal Larsen and Katrina Hamlin)

((john.foley@thomsonreuters.com))

((Reuters messaging: john.foley.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS HUAWEI CHINA

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