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Michael Hiltzik

Suspicions keep Chinese telecom firm Huawei out of U.S. market

Huawei is held back by conviction in Washington that it has undisclosed connections with Chinese government

— In mid-November, the giant Chinese telecommunications firm Huawei invited networking executives from some of the more than 170 countries where it does business for a two-day Global Mobile Broadband Forum. The potential buyers wandered among display tables bathed in a ghostly blue light as corporate associates talked up the products. They represented about 400 companies. None was American.

That illustrates the challenge facing this technology company with a global reach but no detectable footprint in the U.S.: How can it shed its image as a cat's-paw of the Chinese government and break into the largest telecommunications market in the world?

Huawei (pronounced "Hwa-way") says it does just fine without the U.S. market. Last year it reported a profit of $3.5 billion on sales of about $39.5 billion. While most sales are to mobile carriers, in the consumer sector Huawei has been jostling with fellow Chinese firms Xiaomi and Lenovo for third place in global smartphone sales, behind world leaders Samsung and Apple.

But it might do even better if it could access U.S. customers: Its U.S. revenues came to $876 million last year, only about 2.2% of the total.

"You're playing in 70% of the market if you can't compete in the U.S.," Joe Kelly, the company's head of international media affairs, told a group of U.S. journalists visiting during the mobile forum. The journalists were visiting China under the auspices of the All-China Journalists Assn. and the Honolulu-based East West Center, which receives funding from the U.S. government.

What's holding Huawei back is the conviction in Washington that the company has undisclosed connections with the Chinese government, and suspicions that Huawei equipment could surreptitiously harbor software to facilitate cyberwarfare, including espionage or network disruption. Huawei denies both assertions.

It describes itself as an entirely private and independent firm, founded in 1987 in Shenzhen by Ren Zhengfei, a former military engineer. Most of the company's shares are held by Chinese employees (foreigners are generally barred from holding shares in Chinese companies).

Some in the West have suggested that Huawei could assuage concerns about its ties to the Chinese government by listing its shares on a U.S. or European stock exchange, but that doesn't seem to be in the cards. Its chief defense against the suspicions about concealed spyware is that such behavior would be suicidal, given the obsession its customers have with network security. No evidence backs up such fears, the company says.

"Virtually in every single NATO and [Organization for Economic Cooperation and Development] country we have nationwide carriers as customers, deploying our gear without incident or concern," says William Plummer, a veteran telecom executive who is Huawei's vice president for external affairs in the U.S. "That's a pretty impressive statistic."

Huawei buys many of its components from U.S. suppliers, and other international firms source plenty of their components from China. "The suggestion of blackballing one company from one market by virtue of its geographical headquarters is nonsense, in an industry where every one of us is conducting research and development and building globally," Plummer says.

The U.S. isn't the only country that has expressed doubts about Huawei's products. In 2012, the Australian government excluded the firm from bidding on its $38-billion national broadband network, citing cybersecurity concerns.

In Britain, where British Telecom is a customer, Huawei had to set up a cybersecurity evaluation center for vetting its equipment before installation. Although a government investigator found that Huawei-made systems had no deliberate vulnerabilities, a furor broke out when it was learned that the center's staff members were on Huawei's payroll. In the aftermath, the government communications security agency GCHQ was given stronger oversight over the center.

Huawei isn't formally barred from the U.S. market. The anti-Huawei campaign in Washington has been waged more through bureaucratic winks and hints.

For instance, in 2010, while Sprint Nextel was pondering a bid from Huawei to upgrade its cellular network, Commerce Secretary Gary Locke called Sprint Chief Executive Dan Hesse "to relay some very deep concerns from the defense sector and also even members of Congress," as Locke later told Bloomberg. Sprint took Huawei out of the running even though it was one of the lowest bidders. Plummer says that shows how American consumers are deprived of the lower prices and superior technology that Huawei could offer.

Two years after the Sprint affair, the House Permanent Select Committee on Intelligence issued an "investigative report" on Huawei and ZTE, another Chinese telecommunications company, citing the "threat to U.S. national security interests" posed by the firms. The committee recommended that mergers and takeovers by the companies be blocked in the U.S. and that components they manufacture be excluded from government systems. U.S. companies should be "strongly encouraged to seek other vendors," it added.

Yet the report was long on innuendo and short on hard information. (The Economist magazine judged it to have so little meat that it seemed to be "written for vegetarians.") The concerns expressed in the report were nebulous and disingenuous; the committee questioned, for example, whether Huawei's purported 60,000 employee-shareholders "really control the company's decisions." It observed that "many analysts believe that Huawei is not actually controlled by its common shareholders, but … by an elite subset of its management." It could have been referring to IBM or JPMorgan.

The report's bottom line was that "China has the means, opportunity, and motive to use telecommunications companies for malicious purposes" and "may seek cooperation from the leadership of a company like Huawei." But it produced no evidence that this has happened.

Such outbursts of commercial xenophobia are hardly unprecedented, especially when China is involved. In 1998, a proposal by China Ocean Shipping Co., or Cosco, to lease a terminal at the Port of Long Beach was quashed by former Rep. Duncan L. Hunter (R-El Cajon) and a clutch of fellow right-wingers who thought it would allow China to infiltrate spies into the U.S.

"We believe that in time the U.S. will change its mind" about Huawei, Kelly says. But given the difficulty of proving a negative — that Huawei is not assisting espionage — it's hard to detect a path for the company to gain official acceptance any time soon. Despite America's trade ties with China, the latter country is likely to be viewed for many decades as our leading geopolitical and industrial rival. Against that backdrop, too many interested parties on this side of the Pacific will profit from depicting Huawei not as an honest competitor, but an interloper.

Michael Hiltzik's column appears Sundays and Wednesdays. Read his blog, the Economy Hub, at latimes.com/business/hiltzik, reach him at mhiltzik@latimes.com, check out facebook.com/hiltzik and follow @hiltzikm on Twitter.

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