Game plan: Raiders with the logo. Photo: Katherine Griffiths
Earlier this month, Chinese telco giant Huawei issued a press release and suite of photos that boasted a world first individual sponsorship deal with Canberra Raiders star Sandor Earl. Under the deal, he was to become a human billboard by tattooing his upper thigh with Huawei’s distinctive red digital lotus-like logo.
Within hours of the release, Earl was tweeting the photos, the company was promising Raiders fans fake tattoos at Canberra Stadium and a couple of media outlets wrote stories quoting Huawei company spokesman Jeremy Mitchell, a former adviser to Opposition Leader Tony Abbott, that he would get a tattoo if the Raiders topped the rugby league this season.
The story, an April Fool’s Day spoof, was almost believable, given the lengths Huawei has deemed it necessary to go to lift its profile and win the hearts and minds of the media, politicians and bureaucrats.
International revenue. Source Huawei.
For a company that has one-third of the world’s population connected to its telecommunications equipment, devices and software, is the second largest telecoms equipment maker in the world behind Ericsson and the third largest smartphone manufacturer behind Apple and Samsung, Huawei’s profile is remarkably low.
After being set up in Australia in 2004 with 20 staff, it came out of obscurity, albeit fleetingly.
In September 2009, five months after the then Rudd government announced the $37 billion national broadband network, The Australian wrote a front page story claiming the Australian Security Intelligence Organisation had been investigating reports of senior Huawei officials being summoned to frequent meetings with Chinese government officials at the Chinese embassy in Canberra. The report also claimed Huawei employed a security controller whose job was to monitor emails and other communications across the company.
Top 5 vendors. Source: Gartner March 2013.
All the allegations were denied by Huawei.
The next time Huawei’s name was emblazoned in the media was when the Gillard government decided it could not tender for the national broadband network because of ”national security issues”.
The news shocked Huawei’s headquarters in Shenzhen, particularly given the Australian government had not stopped the Chinese company from bidding on corporate contracts, including the rebuilding of Vodafone’s 2G and 3G mobile networks across Australia. For all the suspicion and allegations, there have never been any complaints of phone hacking or wrongdoing from companies Huawei works for. These include eight of the world’s nine national broadband networks – BT in Britain, Nucleus Connect in Singapore, New Zealand’s Ultra-Fast Broadband (UFB) project, Telekom Brunei, TM Malaysia, Qtel in Qatar, Camtel in Cameroon and CMC in Benin. Huawei is also working with 45 of the world’s top-50 telco operators and all of Australia’s big telcos.
Product share. Source: Huawei.
Speaking from Shenzhen through an interpreter, Chen Lifang, also known as Madam Chen, a global director, member of the company’s Australian board and corporate senior vice-president, says outside of China ”Huawei is the biggest company no one has heard of”.
Madam Chen says the plan is to raise Huawei’s brand awareness. ”In the past 20 years, over 2 billion people have used Huawei products without knowing about the company. In the past, we only had to deal with about 300 large corporate clients and we had very little contact with governments, media and broader community.”
Now that Huawei is expanding into the handset business, Madam Chen says it needs to raise its profile. ”We have beautifully designed mobile phones, but no one heard of us before.”
But the brand-building exercise is not just about selling more devices, it is also about building confidence so that the company can better crack the new growth area in telecommunications: the $1.4 trillion enterprise market, which provides telecoms equipment and services to corporate and business clients. It is no coincidence Huawei decided to diversify from its core carrier business into branded devices at the same time it moved into the enterprise market.
Huawei head of devices Wan Biao recently said Huawei’s ambition was to be No. 1 in smartphones. It is now No. 3, trailing Samsung and Apple. Considering it entered the smartphone market only two years ago and sold 27.2 million phones last year, this might not be as ambitious as it sounds.
Within weeks of Prime Minister Julia Gillard’s decision to block Huawei from the national broadband network, the telco signed a sponsorship deal with the Raiders. It realised it needed to change its image globally and Australia would be the most effective way to do it.
In Britain, as a way to convince authorities it was not working for the Chinese government, it set up a Cyber Security Evaluation Centre in 2010 and gave up its source code, the DNA of any organisation. It was a big move but it has little option if it wants to win over governments and companies.
To this end, Australia has become an increasingly important testing ground for Huawei’s international expansion strategy. If it can win over Australia, a close American ally, it might help bring about a change of perception in the US.
Huawei has set up an international advisory council that meets twice a year to discuss trends and issues affecting the industry and makes recommendations on the company’s business strategy. The council consists of 30 people, mainly chief executives outside of China. Australia has a strong representation, which includes media magnate Kerry Stokes and three of Huawei’s Australian directors.
Indeed, Huawei’s Australian board remains one of the most high-powered in the country. The directors include John Lord, former rear-admiral of the Australian Navy; Alexander Downer, former foreign affairs minister; and John Brumby, former Victorian premier.
The Australian board is a first for Huawei. In most countries, it has set up an advisory board instead of an independent board. The company is believed to be considering rolling out the Australian board model in its other important markets.
It had also used Australia as a test market for offering ”phantom shares” to employees. Privately-owned Chinese companies are not allowed to issue shares to foreigners, so Huawei has created a new scheme in Australia where employees are issued shares, which they cannot own, but they can reap the capital gains and annual dividend payout. So far this has been tested on 30 local staff.
”If Huawei really booms here, one would hope, the people in the US would say Huawei is in every country in the world including all our traditional allies, it is serving them well and there is no concern,” Lord says.
Australia is part of a ”five eyes” intelligence-sharing agreement among English-speaking countries, the others being Britain, New Zealand, Canada and the US. Huawei has had huge success in Britain and New Zealand, where it is a major vendor for their NBN-type projects.
”The image thing, if Huawei can compete openly in Australia, it would be great for the company,” Lord says. ”That is part of our focus here.”
The Holy Grail for Huawei would be winning over the US. Besides being the biggest market in the world, it has a lot of influence, as evidenced by Australia’s decision not to use Huawei for the national broadband network.
Indeed, at the time this happened, the company was attracting a lot of heat from the US.
In his recent book Sinophobia, The Huawei Story, Eric Anderson, a faculty member of the National Intelligence University and a member of the US intelligence community, says the problem is ”Sinophobia”. A lack of profile and a reclusive founder with ties to the People’s Liberation Army did not help Huawei’s cause.
”Perceived patent violations, potentially unfair business practices, and a historic lack of transparency also help explain … the lack of welcome [in the US]. However, they do not completely account for a reluctance to move forward when Huawei is taking bold steps to address these issues,” Anderson says.
He is referring to controversies that date back to 2003 when Cisco Systems accused Huawei of ”infringing” on its patents and stealing its Internetwork Operating System source code for network equipment.
Huawei brushed away the allegations and became one of the biggest patent owners in the world. It has made a big commitment to research and development, with 50 per cent of its staff working in this field.
The company spent $4.8 billion, or 14 per cent of its total revenue, on research and development last year, and will increase this figure by 28 per cent this year.
It has also moved to become more transparent by having its annual accounts reviewed by an external auditor and releasing a report each year.
Nevertheless, the US Congress launched an investigation into Huawei and its smaller Chinese counterpart, ZTE, in 2011. The report, released last October, accused both companies of being a ”national security threat”. Congressional committee chairman Mike Rogers issued a blunt warning to US companies: ”Find another vendor if you care about your intellectual property, if you care about your consumers’ privacy, and you care about national security.”
Some believe the US paranoia is based on protectionism. In less than three decades, Huawei has grown from having 14 staff and $2500 in capital in 1987, to a leviathan with 150,000 staff, a presence in 150 countries and revenue of more than $US34.4 billion. Its success has come as giants such as Nokia, Sony, Blackberry and Nortel have fallen or failed.
For most of its 26-year history, Huawei has been happy to remain obscure, content to build a business that focuses on back-room routers and mobile phone networks rather than brand recognition of a name most people would not know how to pronounce: ”Wah way”.
In Chinese, Huawei means splendid act or brilliant China. A more literal translation is a China that is capable of achieving greatness.
Huawei has achieved greatness over the years but having its roots in communist China and a reclusive founder, Ren Zhengfei – who served as a deputy director of the information engineering academy with the People’s Liberation Army before founding Huawei – began to stymie its success. Suspicions arose about just how independent the company and Ren were from the Chinese Communist Party and whether it was a Trojan horse for Chinese intelligence activities.
That the publicity-shy Ren has not granted a single interview to any media outlet in the world, including China’s state-owned heavyweights such as The People’s Daily, has not helped either.
Ren has always denied being close to the Chinese government.
He says in a new book by Tian Tao and Wu Chuanbo, two authors who had access to him: ”I don’t have any private relationships with any government officials, I don’t have any close working partners, I don’t have any dealings with any Chinese businessmen apart from Liu Chuanzhi of Lenovo [world’s largest PC maker] and Wang Shi of Wanke [China’s largest real estate developer].”
However, one of Huawei’s most powerful financial backers, Chen Yun, who recently retired as chief executive of China Development Bank, a behemoth with a balance sheet 3½ times that of the World Bank, admits the bank has extended more than $US30 billion of credit to Huawei since early 2000 to assist its global expansion.
Chen, a powerful princeling and a trained engineer, believes China’s telecommunications industry needs to be supported in order to break away from the stranglehold of Western companies.
John Suffolk, a former chief information officer for the British government before joining Huawei, says he had made repeated offers to intelligence agencies, including ASIO, to set up an independent testing centre to ensure Huawei’s equipment could not be used for spying. ”I think most people recognise now, including Australia, that keeping Huawei out of the NBN has done nothing to improve the security of the NBN,” he says.
”It has done nothing to improve the economics validity, the cost effectiveness and innovation of NBN infrastructure, because the more you reduce vendors, the more you reduce innovation, and the price goes up.
”If you open up a Huawei box, 70 per cent of its equipment in that box is not from Huawei. It is from global supply chains and the biggest provider of components in Huawei equipment is America, at 32 per cent.”
Huawei might have won over a few countries but the US market remains elusive, with a market share of less than 1 per cent and no contracts with leading carriers. With so much damaging publicity, Huawei decided this week to announce it was ”not interested in the US market any more”.
According to London’s Financial Times, the retreat came as Huawei revised downwards its long-term outlook for its enterprise business, a division it set up in 2010 to crack the $1.4 trillion enterprise sector globally. Its target has been to generate $US10 billion in revenue by 2017, from a previous $US15 billion. Last year, Huawei’s enterprise business generated $US1.9 billion in revenue.
The decision probably came from Ren, who owns less than 2 per cent of the company and has supposedly stepped back from its day-to-day running. Staff say he still has the final say over everything, right down to the design of the gardens that surround the Shenzhen campus.
Common folklore told to new employees is that Ren will let nothing stand in the way of making Huawei great.
A favourite tale dates back to 1992, when the company was five years old: Ren told his engineers that if they could not develop the telephone switch on time, he would jump out of the five-storey building. His engineering team, led by a child prodigy, spent months on the stone-cold floor of their makeshift lab and produced one of China’s first domestically designed digital telephone switches, C&C08. The product was a runaway success.
Despite the US setbacks, Huawei has proved its resilience.
In the words of Madam Chen, ”It is a very cruel industry, in less than 30 years, we have seen many companies that used to rank ahead of Huawei fall behind. Despite the fact we are a high-tech company with more than 150,000 employees, our profit margin never exceeds more than 10 per cent.
”We often joke that we can make more money by selling apples and carrots.”
If it outflanks Apple, it just might.
Adele Ferguson was a guest of Huawei during a recent visit to China. This included the use of a mobile handset.