(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
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
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.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- 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
- 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]
Things money can't buy [ID:nL3E8KC0ZP]
- For previous columns by the author, Reuters customers can
click on [FOLEY/]
(Editing by Peter Thal Larsen and Katrina Hamlin)
Keywords: BREAKINGVIEWS HUAWEI CHINA
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