Abstract: As the House Intelligence Committee continues its investigation into China-based telecom companies over alleged security threats; Dr. Dan Steinbock examines the barriers companies like Huawei face when entering U.S. markets. Of the 56 networks that are in use worldwide today, half are deploying Huawei technologies. Despite Huawei’s global success, the company continues to face challenges in Washington, even though U.S.-Chinese mergers and acquisitions entail great potential complementary opportunities.

Unipolar Trade In A Multipolar World:

The Case for Huawei in America

Dan Steinbock

September 19, 2012

Finance & Economy, Foreign Policy

Starting in a one-room workshop in Shenzhen in the early 1980s, Huawei is today a global giant generating over $32 billion in annual revenues, with offices in more than 140 countries.

Like many other emerging Chinese multinationals, Huawei’s strengths are in cost-efficiencies, increasing differentiation capabilities and disruptive innovation. But unlike many Chinese multinationals, it grew up in the market-driven city of Shenzhen – growing up in the private sector in China’s first Special Economic Zone.

Today, four of every five major telecoms operators worldwide cooperate with Huawei. In the United States, however, the company’s further expansion has been more challenging.

The question is why.

Huawei’s Challenges in the United States

Like Sam Walton’s Walmart, Huawei started its expansion in the countryside and captured cities only later. It entered America on Valentine’s Day in 2001. Despite repeated bids, its efforts to win a major contract from the top-tier U.S. carriers AT&T, Sprint, T-Mobile and Verizon have been frustrating.

A few examples: In 2007, Huawei’s effort to buy 3Com was thwarted by a U.S. government intervention. In fall 2010, Sprint Nextel solicited bids for a network upgrade. Reportedly, Huawei offered a deal that would have saved the carrier at least $800 million from its existing costs in its first year of operation alone. However, as members of Congress urged Sprint not to include Huawei, the then-Commerce Secretary (and current U.S. Ambassador to China) Gary Locke called Sprint CEO Dan Hesse to convey his "very deep concerns" about the company and national security.

While Huawei employs 140,000 people worldwide, less than 1.3% of its personnel are in the U.S. In light of business potential, this translates to missed opportunities.

If there truly is a security case to be made against Huawei, it should be made publicly, in a transparent and specific manner. That would benefit all parties involved in the case.

Toward Joint Opportunities

Huawei’s further expansion in America could also be seen as an opportunity for the U.S. government, companies, innovation and consumers.

• Huawei’s expansion in the U.S. brings jobs, capital and tax revenues. In the absence of substantiated allegations, anti-market interventions translate to missed job creation, capital and tax revenues in America.

• Boosting Competitiveness. In addition to differentiation and innovation, Huawei continues to exert a major competitive impact on price rivalry.

• Supporting Innovation. Currently, the company maintains seven advanced R&D centers in the U.S. and is partnering with over 50 higher-education institutions.

• Ensuring Network Security. Due to its efforts to ensure cyber security – with the support of an end-to-end global cyber security assurance system, independent third-party testing institutes, open source code, and the role of its global chief cyber security officer (and former CIO for the UK government) John Suffolk – Huawei could be seen as a role model for security practices in the ICT sector.

Huawei and Its Founder

In the West, the argument is that since Huawei is not public, it must be suspicious. Why has the company not gone public?

Well, from the Chinese perspective, Huawei’s corporate governance has served to retain human capital. Besides, there are many winning U.S. companies that have not gone public or have gone private in order to retain their flexibility – like Huawei.

Since 1990, Huawei has rewarded some 65,000 employees with the right to buy Huawei stock. The stock ownership plan has allowed the company to attract and retain talent. Some 98.6% of shares in Huawei belong to employees. Chinese rules prevent companies with large employee ownership from going public.

The current friction on Huawei’s corporate governance reflects the company’s transition from a regional giant to a global ICT leader. As Huawei continues to globalize, it seeks to reconcile Chinese and global corporate norms.

Then, there is the issue of Huawei’s founder Ren Zhengfei. In the West, he is often claimed to have a mysterious role in the People’s Liberation Army (PLA) and the Chinese Communist Party (CCP). Again, reality may be more intricate and prosaic.

Struggling his way from humble circumstances, Ren was not only confronted by the potential of abject poverty that threatened all Chinese lives, but the legacy of his parents in the nationalist Kuomingtang (that led both to labor camps in the 1960s). It was Ren’s technology success that paved his way to the PLA’s engineering forces, in which he participated five years, more than three decades ago.

In turn, the influence of private entrepreneurs within the CCP has increased mainly after 2002, with efforts to open up the Party to business and executives. This policy is in line with Chinese views on inner-party democratization, which stress increasing diversity and inclusiveness in the political system – values that are recognized in American democracy as well.

Risk of Anti-Market Interventions

Due to different stages of economic development, U.S.-Chinese M&As are now poised to reap complementary opportunities in the marketplace. In the coming decades, China will need advanced technology and know-how, whereas America will need jobs and capital.

Overall, the expansion of Chinese companies has led to significant economic contributions in the foreign markets in which they operate, via job creation and contributions to GDP and local taxes, says the prestigious World Economic Forum (WEF). The WEF considers Huawei an exemplary case.

As long as barriers continue to deter Chinese foreign direct investment in America, U.S. trade and investment policy is at risk for being perceived as unipolar. In the long-run, such threats may return to haunt U.S. corporations and their efforts to grow and expand in foreign markets, which are today more vital than ever before to American corporations.

The Committee on Foreign Investment in the United States (CFIUS) has historically monitored the impact of and coordinated U.S. policy on foreign investment. However, increased transparency would support the mandated goals of the CFIUS process, as members of the U.S. intelligence community have rightly argued.

In the coming decades, the role of U.S. corporations in the world economy will decrease in relative terms, while those of large emerging economies will gradually increase. Seeking unipolar sanctions in a multipolar world may escalate trade and investment conflicts in the future and undermine the activities of American companies worldwide.

In turn, a successful outcome in the Huawei case could prove a game-changer by accelerating investment flows into America at a historical moment when inward investment is needed the most.

If a security case against Huawei does not exist or if it cannot be made, then there is a win-win case for Huawei in America.

This commentary is based on Dr. Dan Steinbock’s “The Case for Huawei in America,” an independent report for Huawei.

Dr. Dan Steinbock is Research Director of International Business at India, China and America Institute.

Dr Steinbock’s previous contributions on China-US F ocus (abstracts):

How China’s Stimulus Lite Works

Dan Steinbock

July 24, 2012 Finance & Economy

Despite prophecies of gloom and doom, China is moving toward rebound – through stimulus lite. Not a day seems to go by without still another headline predicting gloom and doom in China. In reality, China’s economy has been recovering since the government’s monetary loosening in fall 2011, whereas major economies in the United States, Europe and Japan are deteriorating. [...]

From Economic Reforms to Financial Reforms

Dan Steinbock

May 25, 2012

Finance & Economy

Recently, the U.S.-Chinese Strategic & Economic Dialogue (S&ED) was overshadowed by international politics, rapid escalation of challenges in the Eurozone, and debates on the slowdown in Asia. Nonetheless, the Dialogue was surprisingly productive, in light of the magnitude of challenges facing the global economy and Sino-U.S. bilateral relations today. Most importantly, it precipitated a major [...]

Two Policies, One Agenda: How 2012 Elections May En danger US-China Relations

Dan Steinbock

March 23, 2012

Foreign Policy

In U.S. 2012 elections, the leading candidates of the two parties have fairly similar agendas on China. Hoping for greater electoral support, both are sharpening stated policy positions. Since 2008, this has resulted in more aggressive foreign policy positions in general and more assertive policy toward China in particular.

Unipolar policies in a multipolar era are precisely the wrong policy approach in the wrong time.

[…]

Once-In-A-Century Election:The US 2012 Election and China

Dan Steinbock

November 24, 2011

Political & Social Development

US presidential elections of 2012 will take place in the most challenging environment, which will not be immune to catastrophic crises.

In the coming months, the US economy will be close to or in recession territory. Due to the Eurozone crisis, risks are heavily tilted to the downside. Meanwhile, large emerging economies, spearheaded by China and other BRIC nations as well as the surging Asia, are driving global growth.

To make things even more complicated, the US presidential election will coincide with China’s 18th Party Congress in 2012, when current Vice President Xi Jinping will succeed President Hu Jintao, and Vice Premier Li Keqiang is expected to replace Premier Wen Jiabao.

From Washington to Beijing, the US-China relationship is seen as the most important bilateral relationship of the 21st century. What are the implications of the 2012 elections on the bilateral relationship?

[…]