How Huawei can dial down the fear factorJune 12, 2013: 5:00 AM ET
Huawei can't do much about its Chinese origins or the phobia that comes with it, but there are certain steps it can take to put foreign governments at ease.
By John Foley, Reuters Breakingviews
FORTUNE -- 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% a year on average since 2008, and two-thirds of it comes from outside China. Still, the United States represents just 15% 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 furor 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 erode the advantage Huawei gets from being cheaper than its rivals.
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 years.
Power is concentrated, too: the 98% of shares owned by employees -- again, all Chinese -- are treated as a single block, which gives founder Ren Zhengfei's separate 1.2% 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 -- which bought IBM's 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 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) 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.
Read more at Reuters Breakingviews.