Inside Huawei, the Chinese tech giant that's rattling nerves in DC

A congressional committee wants to know whether this telecommunications powerhouse is a national security threat. Why? CNET went to China to find out.

Huawei has a workforce with an average age of 27. Unlike the stereotyped Chinese company, Huawei doesn't primarily manufacture goods. Its highly educated employees create the routers, switches, and telecom gear that others vendors make. Huawei

SHENZHEN, China --Chen Lifang is a bit flummoxed.

Chen is a board member and senior vice president at Huawei, the giant telecommunications gear maker based here. She's digesting news that broke a day earlier that the U.S. House Intelligence Committee has increased the pressure it's putting on the company to disclose details about its ties to the Chinese government. The bombshell came in the form of a letter, released to the media, from the committee's chairman and the ranking Democrat to Huawei founder and Chairman Ren Zhengfei.

Chen Lifang, also known as Madame Chen, a board member and senior vice president at Huawei. Jay Greene/CNET

Really, the letter was more of an 11-page laundry list of accusations, wrapped around questions about everything from funding the company has allegedly received from the Chinese government to queries about how board members got their posts. In the letter, Congressmen Mike Rogers (R-Mich.) and C.A. Dutch Ruppersberger (D-Md.) said they were investigating "the threat posed to our critical infrastructure and counter-intelligence posture by companies with potential ties to the Chinese government."

Such concerns have tripped up Huawei's ambitions to displace Western tech giants such as Cisco and Ericsson, as well as compete in the mobile phone market against Samsung and Apple. Huawei might make better, cheaper telecom gear than rivals. And it's come up with a new sleek handset to compete against the iPhone. But years of pressure from the federal government have largely kept Huawei on the fringes in the United States.

Half a world away, Madame Chen, as she is known at Huawei, in a nod to her seniority in the company, isn't quite sure what more Huawei can do to convince lawmakers they have nothing to fear. In a different setting, Chen could be a soccer mom -- a middle-aged woman with a functional short haircut and a pleasant, engaging manner.

Today, though, Chen has the business of the congressional inquiry in front of her. Sitting in the appropriately named New World Cafe on Huawei's sprawling campus on a hazy, humid June day, Chen patiently and politely says Huawei is not helping the Chinese government spy on anyone. Doing so, of course, would amount to corporate suicide, because if the company were ever found to build backdoors in its technology, customers would disappear and its business would evaporate.

Ren, Chen and other Huawei officials had traveled three weeks earlier to a private club in Hong Kong to meet members of the House committee to answer many of the same questions and make the same points. The committee sought the meeting, a bit like a deposition, to press Huawei executives for details, something the committee leadership felt was best done in person.

"Whatever question was asked, we answered," said Chen, speaking through an interpreter. "We will, of course, provide answers to [the new questions in the letter]."

Lawmakers and their staff asked the executives if the Chinese government owns or controls Huawei. They sought specifics about Ren's background. They pressed to see if the Chinese government has ever pressured Huawei to seek any information on its behalf.

Chen and Huawei have given replies to the same line of questions so many times it's become rote. So, with only a touch of exasperation, Chen turns the question around this afternoon, wondering aloud what the company should do. There is no anger in her tone. No hostility in her reply. Chen seems merely resigned to having to answer yet again more allegations that Huawei is in bed with Chinese espionage agents. At this point, after years of defending the company from spying accusations that are impossible to entirely dispel, Chen will take any advice she can get.

In June and July, CNET visited Huawei's headquarters here, as well as its giant research and development operation in Shanghai and a research facility in Santa Clara, Calif. Huawei provided an in-depth look a company that's a rare breed -- a Chinese tech giant that's not merely cheap, outsourced manufacturing for Western electronics customers.

Huawei is the second largest telecommunications equipment maker in the world, behind only Sweden's Ericsson. It generated $32 billion in revenue last year, selling its networking technology to such global giants as Vodafone, Bell Canada and Telekom Malaysia, though only smaller U.S. carriers Leap and Clearwire use the company's gear. Huawei's heft has allowed it to pour resources into adjacent markets, such as mobile handset development and data center technology that's already paying off with new customers and billions more in revenue. This winter's Mobile World Congress in Barcelona was something of a coming out party for Huawei's consumer business , where it unveiled what it claims is the world's fastest mobile phone, the Ascend D Quad.

A Pegasus constructed entirely out of Huawei Ascend smartphones sat on the grounds of Mobile World Congress in Barcelona, Spain, just one of the many ways the company made its presence felt. Roger Cheng/CNET

Unlike the manufacturing companies that many Westerners associate with this south China city that it calls home, Huawei develops products. (While it does some limited manufacturing, it mostly outsources that work.) Some 62,000 of the company's 140,000 employees work in research and development. Compare that to archrival Cisco, whose total payroll is 65,000 workers.

And Huawei is a patent machine, with about 50,000 patents filed worldwide. Though accused years ago of pilfering the innovations of Cisco and others, Huawei gets credit these days for breakthroughs in complex technologies such as radio access networking that lets mobile carriers support multiple communications standards on a single network. It also pioneered the dongles that consumers slip into laptops to wirelessly connect to the Web.

"Huawei is eager to learn, to gain access to new markets, and is very ambitious," said X.J. Wang, a former Yankee analyst who covered technology in the Asia-Pacific region. "They want to chase bigger opportunities."

Huawei's workplace is much like what you'd find in Mountain View, Calif., strolling the Googleplex, or at Microsoft's Redmond, Wash., campus. The lush landscape is sprinkled with ponds and gardens, framing striking architecture including a testing lab housed in a colonial-style building complete with massive columns that employees have dubbed "The White House." Workers have access to pools, basketball courts and countless ping pong tables. The company provides a wide range of food in its cafeterias for the many expatriates who've moved to Shenzhen, including a Muslim canteen and the New World Cafe that caters to Western tastes.

Unlike employees at contract manufacturer Foxconn, which has a factory just across the freeway here, Huawei workers are some of the most highly educated in the country. The average age of the staff is 27.

Cyber suspicions and espionage anxieties
Despite its Western-style workplace, as well as its growing business and technical prowess, Huawei can't seem to convince some key companies and governments in the West that it's a company with which they should do business. And it's not simply because Westerners have a hard time pronouncing its name. (It's WAH-way.)

It'd be easy to write off the concerns in the United States as protectionism. As Huawei has grown, it's positioned itself as a low-cost alternative to Western rivals. While that could lead to lower prices for American customers and ultimately consumers, it also imperils American corporate interests. And have no doubt, Huawei is on an economic roll, adding 20,000 employees to its payroll in 2011. Meanwhile, Cisco announced plans last month to cut 1,300 workers , after laying off 11,500 a year ago.

But lawmakers insist there's more to it. The House Intelligence Committee has been vague about specific allegations, citing only the broad threat that Huawei might pose. A committee staffer involved with the investigation said lawmakers have received claims with varying degrees of credibility about cyberattacks internationally that may have been enabled by Huawei technology.

Huawei's Shenzhen campus is something of a Chinese take on the Googleplex in Mountain View, Calif., or Microsoft's Redmond, Wash., home. Huawei workers can take breaks, playing ping-pong. Huawei

The broader concern, though, is of a dangerous marriage of Huawei's capability -- it wants to build a massive swath of the telecommunications network, from routers and switches to the phones consumers use -- with the Chinese government's motive and intent. A report last year from the Office of the National Counterintelligence Executive found that the Chinese are the "world's most active and persistent perpetrators of economic espionage ." The committee wants to thwart the possibility Chinese cyberattacks in the United States over Huawei's technology before the company, which has only a modest U.S. presence, grows into a powerhouse here.

"It's the potential that they could [enable Chinese espionage] that puts the United States in a problematic strategic posture," said the staffer, who would not speak for attribution because the investigation is ongoing. "You can't unweave the basket."

So far, Huawei has done little to discourage lawmakers from continuing their investigation. CNET has learned that its answers to the questionnaire from Rogers and Ruppersberger weren't as forthcoming as lawmakers had hoped.

"It was surprisingly nonresponsive," the staffer said.

Huawei told the committee that answering some questions, for example, required disclosure of confidential information. But when offered the possibility of a confidentiality agreement to protect the information, the company declined.

"While we worked diligently to answer the Committee's recent written questions within the deadline they provided, in certain cases we determined that answering particular questions in detail could result in the publication of business proprietary information, which we explained to the Committee," Huawei said in a written statement.

The staffer said the committee hopes to issue its report, which could include suggestions for policy makers and the private sector for next steps, by the end of September or early October.

The troubles with the West stem primarily from Ren, who may well be one of the greatest entrepreneurs to emerge from the new economic powerhouse that is China. But he also served as a civil engineer for the People's Liberation Army before starting Huawei. Hawks in the federal government remain unconvinced that his company is merely a financial success story. They worry that Huawei, whose technology provides infrastructure to communications networks, is a tool of the Chinese government, potentially enabling it to snoop on critical corporate and government data through digital backdoors that Huawei has the ability to install.

They are not alone. In March, the Australian government blocked Huawei from bidding on any contracts for the country's A$38 billion (roughly US$39 billion) National Broadband Network. That decision was prompted by fears from the Australian Security Intelligence Organisation, which argued that there was "credible evidence" that Huawei was connected to the People's Liberation Army, according to The Australian newspaper, though the agency didn't disclose any details of that evidence publicly.

About the same time, Huawei unwound a joint venture with Symantec, paying the computer security company $530 million for its partnership stake. According to a New York Times report, the partnership fell apart amid fears from the computer security software company that its ties to Huawei would prevent it from obtaining United States government classified information about cyberthreats. Symantec said at the time that it "achieved the objectives" it set for the joint venture.

The concerns are not new. In November 2010, then-U.S. Commerce Secretary Gary Locke, who now serves as the U.S. ambassador to China, called Sprint CEO Dan Hesse to discourage the carrier from awarding a multibillion dollar contract to Huawei.

"I did make a phone call to Mr. Hesse to relay some very deep concerns from the defense sector and also even members of Congress," Locke told Bloomberg a month later. Sprint ultimately awarded the contract to Alcatel-Lucent, Ericsson, and Samsung Electronics, effectively shutting Huawei, which has no contracts from any top-tier U.S. carrier, out of this country's telecom equipment market for the next few years.

Spying, of course, is an impossible allegation to ever disprove. As long as critics are suspicious, or as long as they have political motivations to pursue an inquiry, the questions about espionage will linger.

There's no doubt that Chinese government policy -- both official and unspoken -- fuel the mistrust. China is a country that censors the Internet, blocking such sites as Facebook and Twitter. Snooping on Net communications is common. And there are plenty of examples of computer espionage as well as cyberattacks launched from China, including accusations by Google that its Gmail e-mail service has been targeted by attacks from China, intended to monitor messages. But there have never been anything more than vague accusations publicly leveled at Huawei.

A behind-closed-doors culture
Huawei's bigger challenge, though, may be its own inability to deal with the political and public relations fallout of the spying allegations. Much of the fear focuses on Ren. He remains an intensely private man, never granting interviews, rarely speaking in public. (Huawei declined CNET's request to make Ren available.) To the West, used to executives who parade themselves publicly, buying Hawaiian islands or giving billions to charity, Ren seems suspiciously furtive. That stokes anxieties about him and the company.

Moreover, the leadership of Huawei, raised in a country where political gamesmanship takes place behind closed doors and where the fear of public humiliation is deep, has been slow to respond to those allegations. Ren, Chen and their peers have never had reason to respond to public criticism because they never had to deal with it in China. So when U.S. lawmakers suggest that the company might be a tool for Chinese intelligence, the company's leadership has struggled to understand the magnitude of the charges and the importance of a quick and credible denial.

Even at the New World Cafe, which could pass for a large Starbucks with its earth tones and modern light fixtures, Chen chalks up the dispute to cultural differences. When Ren was a young man, he joined the military because that's where many of the engineering jobs were. Chairman Mao Zedong created all sorts of jobs in the military that had little to do with military infrastructure.

"The people in the West, they really don't understand" the history and culture of China that led Ren to join the military, Chen said.

Instead of focusing on Ren's military background, Huawei plays up his Horatio Alger-esque story to the West. He founded Huawei in 1987 with the equivalent of $2,500 at the time to make traditional public phone switches for Chinese businesses. He seized an opening created by the Chinese government's interest in moving away from its reliance on foreign telecommunications equipment. Over the next decade, the company migrated to more sophisticated gear, including wireless equipment and began to expand internationally.

By 1995, the company had generated annual sales of 1.5 billion renminbi, or about $236 million, business that largely came from rural China, far away from the government-run companies with which it couldn't compete. In the first six months of 2012, Huawei posted $16.1 billion in sales, a 5 percent gain in a tough telecom market.

Throughout it all, Ren has remained closely involved with the business and its strategy.

"Huawei is constantly shifting and if you look at the ecosystem around it, the company is still very much controlled by Ren Zhengfei," said an industry executive who has had business dealings with Ren.

While out of the public limelight, Ren is considered a charismatic figure with strong grasp for where he wants Huawei to go. He's a good storyteller, waxing on about his company's early days and the rise to power. He speaks only Mandarin and requires a translator when dealing with foreign companies and officials.

"You're ready to drink the Kool-Aid when you walk out," said the executive, who spoke on the condition of anonymity. "He's pretty inspirational."

While Huawei has three deputy chairmen who rotate into the chief executive job every six months, Chen describes Ren as the company's "spiritual leader." Even as other executives have operational roles at Huawei, all of the major corporate decisions about policy and strategy go before Ren.

"He still has the right to veto," Chen said.

To allay concerns about Ren's influence and China's sway over Huawei, management has gone to great lengths to hire several non-Chinese into high-profile posts. The company has also built up its public relations and government relations teams in Washington, D.C. It rolled out a massive brand awareness ad campaign in the United States, gobbling up pricey commercial airtime during the Olympic games. It's released a clever video with tourists and New Yorkers in Times Square struggling to pronounce the company's name. And it's created Futurewei Technologies, a Santa Clara, Calif.,-based research and development operation, owned by Huawei, with 1,000 employees, showcasing innovation that takes place outside of China.

The striking design of the Ascend P1
At the same time, Huawei is also pushing beyond its networking roots. In just a few short years, Huawei has become a force in making cheap mobile phones, sold largely in the developing world, as well as to a handful of prepaid carriers in the United States. It's now pushing into high-end smartphones, releasing its Ascend P1, a superslim, zippy device with a high-contrast display and a design with soft edges that fade away, meant to evoke an infinite swimming pool.

The ultra-slim Ascend P1. Brian Bennett/CNET

"It makes it look even thinner than it is," said Hagen Fendler, the chief design director of Huawei's handset business. Design, he said, "is a major strategic tool for the company to achieve its goals."

CNET reviewer Jessica Dolcourt gave the Ascend P1 3.5 stars , citing "great specs and a striking design" but noting shortcomings with its camera and call quality.

The German Fendler joined Huawei two years ago and has built up a design team that now numbers 300 employees. The group has offices in China, Stockholm, London, and San Diego. Huawei is sparing no expense as it tries to compete with Apple and Samsung to create devices consumers crave.

"We have one of the biggest design teams in China," Fendler said. "The resources are there."

While Huawei is chock full of ultra-serious, highly focused engineers, Fendler isn't one of them. He's the prototypical designer with his angular north European features, a pair of narrow, rectangular glasses, and wavy brown hair that nearly reaches his shoulders. Fendler moved to Shenzhen after running VanBerlo Strategy + Design in Germany, where Huawei was a client. Prior to that post, he served as head of concepts for Siemens, tasked with figuring out where markets were heading and how the company could create products to meet future needs.

Early in his Huawei career, Fendler struggled to get buy-in from the company's engineering-focused management

"Industrial design in China is such a young discipline," Fendler said. "At the beginning, it was challenging to make the company understand how important the role of design has to be."

But Fendler persisted, and continues to work to convince Huawei managers, citing "long discussions, very, very long discussions." He remains in frequent contact with Huawei's top brass, including Ren, helping him make his case internally.

Now Huawei has to convince carriers to sell its high-end devices such as the Android-running P1. Consumers in the United Kingdom can pick one up from Vodafone, starting this month. But no U.S. carrier is stocking the device.

The company's handset business is growing, but it's still just a speck in the rear-view mirror of the market leaders. Its worldwide market share climbed to 5 percent in the second quarter, up from 3 percent a year ago, according to research firm Strategy Analytics. At the same time, Samsung commands more than a third of the market, with Apple at roughly half that share.

"I don't really view them as a player," said Matthew Thornton, a former analyst with Avian Securities who covers the handset business.

Huawei is also using its vast resources to push into another adjacent market -- business-centric products for customers who connect to data networks. The company is innovating in data center equipment, building communication, collaboration, and Web-based services for specific vertical markets including government, finance, transportation and energy businesses. That's allowed the company to nearly double its enterprise unit's sales last year to $3.8 billion.

One showcase product for Huawei's enterprise unit is its clever telepresence technology. Many videoconferencing systems require every participant to be on the same expensive system in rooms specially set up to handle the calls. Huawei's telepresence offering lets users tap into videoconferences with consumer Web conferencing services such as Skype.

It has rolled out the technology in the Beijing and Shanghai locations of Haidilao, a popular Sichuan hotpot chain. On a scorcher of June afternoon, the Shanghai Haidilao isn't packed the way it often is during colder weather, when diners can wait an hour or more for tables. It's easy to see why. The steam from the bubbling pot of scalding hot broth, in which diners quick cook slabs of chicken, beef, fish and even frog, turns a private room into a sauna, so much so that waitresses hand out microfiber wipes to patrons to clean the fog from their glasses.

In a private room toward the back of the restaurant, diners can spend 200 renminbi, at little more than $31, an hour to dine in a room decked out with three large flat-panel televisions, an array of cameras and microphones, all connected to Huawei's telepresence system. There, they can eat in the virtual presence of colleagues, friends or family sitting in a similar room at the Beijing Haidilao location. To get the showcase room up and running, Huawei's engineers recreated the hotpot experience in its labs, testing its gear with oil splatter, excessive exhaust, and smoke.

"They were getting very tired of hotpot," said David He, president of marketing for the company's enterprise unit.

Huawei's goal is to build its enterprise unit into a $15 billion a year business by 2015.

Huawei's testing lab, dubbed the White House by some employees, features state-of-the art equipment to simulate all sorts of conditions that its gear must tolerate before the company releases prototypes to manufactuing. Huawei

It's not just revenue that Huawei is after as it pushes into markets adjacent to its core networking technology. It wants to build its presence in businesses that don't carry the same potential political baggage of network infrastructure. There's just a lot less to fear about a company selling smartphones and video conferencing technology.

"The company is very transparent," said John Roese, senior vice president and general manager of Huawei's North America R&D center in Santa Clara, Calif., a claim that rivals and some industry analysts would dispute. "We need to represent that face in all scenarios and not just ones that are controversial. It ultimately gets people over the hump."

Roese is another one of Huawei's new Western executives, hoovered up from a withered rival. Roese joined Huawei two years ago, after serving as the chief technical officer of Nortel. With his buzz cut, direct demeanor and a chain choker around his neck, Roese runs an organization from a nondescript office park just off the 101 freeway, tasked with divining new technology that Huawei's engineers back in Shenzhen can turn into products. To those leery of Huawei's Chinese influence, Roese cites his organization to suggest an alternative view.

"What Huawei did is they took some of the best jobs at the company and outsourced them to the United States," Roese said.

Clashing with Cisco
As Huawei's business grows and as it pushes into new markets, it runs headlong into a raft of entrenched rivals, none stronger or more threatened than Cisco Systems. The two companies have clashed for much of the last decade. In 2003, Cisco sued Huawei, accusing it of stealing patented source code used in its routers and switches. Huawei admitted to using the code, claiming it had come to them through an independent source, but downplayed its significance. Cisco dropped the lawsuit after Huawei removed the code a year later.

For many in the West, the legal tussle was the first impression of Huawei. And it wasn't a very good one. It played into the stereotype of Chinese imitators rather than the image Huawei wants to convey as an innovator. It didn't help that Motorola sued Huawei in 2010 for allegedly stealing trade secrets as part of a corporate espionage case, a claim it ultimately withdrew.

The impression of Huawei as an imitator is one that Cisco, a third larger than Huawei with $43 billion in fiscal 2011 revenue, often invokes as it battles its Chinese rival in the marketplace as well as the media. Chief Executive John Chambers told a Wall Street Journal conference in April that Huawei is his company's toughest competitor, adding that it doesn't always "play by the rules" when it comes to intellectual property protection and computer security. During a May conference call with analysts and the media to discuss Cisco's quarterly earnings, Rob Lloyd, the company's executive vice president of worldwide operations, chided Huawei again, in response to a question.

"What Huawei did is they took some of the best jobs at the company and outsourced them to the United States." <br />--John Roese, senior vice president and general manager of Huawei's North America R&D center in Santa Clara

"We clearly know that our customers view innovation from Cisco, and they don't see the same from Huawei," Lloyd said. "We would clearly say that imitation isn't innovation. And I think our customers recognize that."

Huawei executives chalk it up to heightened competition, and suggest that Cisco is often behind the efforts to besmirch the company's reputation. Cisco, which finds itself competing with Huawei even more as the Chinese company expands into enterprise markets such as video conferencing, declined to comment on Huawei's suggestion.

"Listen to one of their earnings calls," Huawei's Roese said. "They have done a great job teaching folks how to pronounce our name."

Those confrontations are only going to increase as the networking business consolidates and Huawei expands. With its growing revenue and focus on engineering, Huawei now spends 12 percent of its annual revenue -- some $3.8 billion last year - -on research and development. That's just shy of the roughly $5 billion that Cisco spends annually on R&D. What's more, it's voraciously gobbling up talented technical staff from Shenzhen to Santa Clara, engineers who want to work for that rarest of telecom companies--one that's growing and investing in new businesses.

There's little doubt, though, that the road ahead will be bumpy. Beefing up its R&D staff will do more to unnerve lawmakers concerned about Huawei facilitating Chinese espionage, rather than allay their fears.

For all its efforts to become a more Western-style technology power, Huawei continues to struggle to address the concerns of governments and businesses in the United States and elsewhere.

"In recent years, we've realized this is a necessity to do," Madame Chen said at the New World Café. "We understand it's difficult to change from old habits and do things in new ways."

For Huawei to thrive in the West, there is no other alternative.

 

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