From Friday's Globe and Mail
Published Thursday, Nov. 24, 2011
As Wind Mobile considered bids for $30 million in contracts to expand its wireless network in Canada, one of the competing companies put in a peculiar request. Wind CEO Anthony Lacavera was talking to world-beating network equipment stalwarts like Ericsson and Nokia Siemens when the Chinese firm Huawei asked if it could rent office space at Wind’s headquarters on Toronto’s waterfront.
Lacavera could see no reason why not, and Huawei moved in 25 engineers who promptly began working with his staff to craft their bid. Lacavera was dumbstruck by how perfect the results were; Huawei won the contract.
As the network expanded, he looked to the Chinese company again. When operators like Wind build out cellular towers and rooftop antenna sites, they typically contract a company for a lump sum—between $250,000 and $500,000—and the work is done in the same fashion as most construction projects in the West: That is, one of the usual industry suspects does the job dutifully, sending around five or six people.
Huawei, Lacavera says, sent five times that. They do it like it’s done in China, he says, piling on to get the job done fast. Usually Huawei’s price is cheaper, to boot. And if there’s a problem, Huawei’s representatives will arrive at Wind’s offices in a group of about six. They’ll silently nod as they hear about the glitch, accept blame for whatever has just occurred and promise to fix it immediately. Old-guard companies would push back, in Lacavera’s experience, blaming Wind or a third party for the error. Not Huawei. “Even if it’s our fault, they just sit there, eating it,” says Lacavera, shaking his head in disbelief. “I don’t see how anyone else can compete with them.”
Huawei, a supplier of telecommunications equipment and services based in Southern China, is now a global juggernaut. The company’s eagerness and aggressiveness have upended its entire industry, driving down prices that were set by old-world conglomerates. To many in the technology business, Huawei’s long march up the value chain is emblematic of the attempt by China as a whole to move, like Taiwan and Japan, beyond cheap manufacturing to a sustainably profitable knowledge economy. Looking down upon the hundreds of engineers working in Huawei’s Shanghai offices this year, one wireless executive simply thought to himself: “We’re screwed.” By “we,” he meant the West.
But Huawei has one problem as it pushes ahead as China’s first home-grown, non-state-owned multinational success story: A lot of very powerful people don’t trust it.
Forty-five minutes from the centre of Shenzhen, the bustling industrial city that neighbours Hong Kong, a winding, tree-lined road reaches a fork. Head left, and you end up at the enormous main complex of Taiwanese manufacturing giant Foxconn, where hundreds of thousands of young migrant workers do the grunt work of global technology by assembling iPhones that were designed and engineered in far-off Cupertino. This is the familiar face of the Chinese economy today: A factory floor populated by piece workers and lorded over by foreign companies profiting from pools of cheap labour.
But head right, and you will find yourself driving past the innumerable low-rise buildings that make up the city-sized headquarters of Huawei, which is busy rewriting what it means to be a Chinese company today. One building, perhaps symbolically, resembles the White House; in its basement, engineers in teal and white lab coats smash, hammer, freeze and scorch samples of the company’s equipment, ensuring it won’t fail once the gear has been dispatched to rural Nigeria, the plains of Mongolia, the foothills of the Andes or any other far-flung corner of the 140 countries where Huawei does business. Huge wireless carriers in the United Kingdom, Germany, France, Sweden and Finland are now all buying Huawei’s gear. The company also was the lead hand on the construction of the shared 3G network that allowed Bell and Telus to begin offering the iPhone in 2009. The company has sizable offices in both suburban Toronto and Ottawa, as well as a massive U.S. headquarters in Texas. By the end of 2011, the company’s revenues are expected to reach $31 billion (U.S.). More than 70% of that cash comes from outside Huawei’s home market.
The company’s enormous catalogue of products is startling. Huawei sells everything from Android tablets and smartphones in Kenya to advanced teleconferencing units in Latin America and Europe. Like everyone else these days, Huawei is pushing into cloud computing. But it is also building portable wireless networks for disaster areas, as well as surveillance equipment—including a unit called “Mega Eyes”—for anxious governments in Nigeria, Cambodia and Ecuador. The company makes everything from the routers, circuitry and antennas that carry wireless signals and data to advanced closed-circuit monitoring systems, smart traffic control systems and enterprise solutions for major companies.
All this from a company that was founded only in 1987, with the modest raison d’être of reselling phone switches for a Hong Kong firm. Throughout the 1990s, as China’s government liberalized the economy, Huawei began its own R&D and started doing business far away from China’s booming coastal cities, where competition from established, Western telecom infrastructure companies was fierce. Huawei found a niche offering equipment to operators in the impoverished Chinese countryside, where subtle, hardy innovations like rodent-proof base stations won business in markets that nobody else wanted to serve.
In those early days, Huawei learned to be humble, and executives instilled a customer-focused culture within the company. That culture gradually became a razor-sharp competitive advantage vis-à-vis global industry giants like Ericsson or Alcatel-Lucent, which were used to walking all over domestic wireless carriers and charging a premium. The Huawei ethos helps in high-value developed markets; but it’s also still paying dividends in the company’s original turf, rural and emerging markets such as India, where there is a flurry of network-building to accommodate wireless data services.
Hu Xiao Hui, an engineer whose work for Huawei included a stint in Egypt, recalls battling with Ericsson for a contract to build a network for the UAE-based carrier Etisilat. Huawei had around 300 staff in Egypt, while the rival team at Ericsson numbered only a dozen or so. Alcatel-Lucent was also gunning for the job, but Hu says the attitude of both rival companies was all wrong. “We are not like Westerners, we were born in the countryside,” Hu says. “The only reason we exist is to provide value to customers. ...Their response was so different from Huawei’s. We are so eager to work with customers. They”—he pauses—“were a little bit arrogant.”
In Shanghai, where Huawei has its main R&D centre, Hu shows a visitor a fitting symbol of the company’s expansion. Deep inside a building that is longer than any of the city’s skyscrapers laid flat, a digitized globe spins slowly, showing the Earth’s borderless landscape, over and over again. Sunk halfway into the floor and protected by a sleek handrail, the apparatus housing the globe looks like the bridge of an intergalactic warship. And the war looks like it’s off to a pretty good start: In every country where Huawei does business, the digital globe shows the company’s cheerful logo, which resembles a multicoloured, feathered headdress. The logos are scattered across a truly startling array of countries. Given the company’s history of adapting copycat products for dirt-poor rural markets, it’s no surprise to see that Huawei has operations in locations like Kenya, Venezuela and India. But as the planet continues to rotate, the company’s dramatic evolution becomes clearer.
Hu speaks in a hushed voice that borders on theatrical as he stands over the globe. In Europe, the sprinkling of Huawei headdresses becomes a hive. “It was hard to get business with European operators,” he says. “Then, ‘Made in China’ was a symbol of low cost, low quality.” That, of course, is no longer the case. And that’s mainly because of Huawei. Looking proudly over the world he’s travelled for the company, Hu sighs. “Ah, Europe. There we tasted the fruits of our efforts.”
A lot of Huawei’s success stems from its vast scale. It boasts more than 20 global innovation centres and more than 120,000 employees—compared to 90,000 at Ericsson, currently the world’s No. 1 wireless equipment provider. The success also has to do with that relentless customer-first culture, and the company’s young, highly skilled employees (with an average age of 30, 46% work in R&D. No less than 7,500 have PhDs). E-mail interviews with several of Huawei’s junior Chinese employees reveal a proud but obsessive work culture, with mandatory overtime piling higher than at foreign IT firms operating in China, such as Cisco, or at other Chinese telecom firms, such as ZTE.
Unlike at many state-owned firms, connections—guanxi—are relatively useless in Huawei’s meritocracy, though this varies from city to city (bureaucratic Beijing’s offices are more obsessed with politics, one insider says, while the migrant-worker culture of Shenzhen is more merit-based). Because the brand is well known and the pay is good, single Huawei employees are considered attractive marriage material in China. But given the arduous work schedule, Huawei employees find it often makes more sense to simply marry each other.
Like China in general and Foxconn in particular, Huawei has a reputation for overworking its employees. One former executive, who worked for Huawei in North America, says the company is known for mistreating the junior ranks. Even mid-level executives have to be prepared to be elbowed out of meetings if heavyweights from Shenzhen decide to fly in to seal a deal. Suicides are not as common at Huawei as at Foxconn—which has a much larger working population, of more than 900,000—but Huawei was still rocked when several workers took their own lives in 2008. Where the pressures at Foxconn include bullying and the stress of being a migrant, “Overwork at Huawei is more related to office pressure, staying at your desk until your work quotas are done,” says Geoffrey Crothall of the China Labour Bulletin, a non-profit organization in Hong Kong. “They call it a mattress culture—you bring it to the office.” Management, Crothall says, are “absolutely ruthless—like Foxconn—in their quest to get ahead.”
That culture, of course, doesn’t mean Huawei is a shoe-in to win any given contract, nor has it yet created products that are winning the hearts of Western consumers, many of whom have never heard of the company. Huawei’s smartphones can’t yet compete with Apple’s iPhone or any of the advanced devices from Samsung or HTC that run Google’s Android operating system. Huawei’s ultracheap smartphones may be hot sellers in Kenya, but most of the Huawei employees I met carried iPhones. Huawei’s tablets are likewise not yet a viable alternative to the likes of the iPad.
The sheer newness and strangeness of Huawei can make it a hard sell compared to well-established European rivals. Lee Bragg, who is launching a wireless network in the Maritimes with his family-owned EastLink company, chose Ericsson over Huawei even though it cost more. “There seemed to be no end to the people [Huawei] could throw at the problem, and they were very aggressive on price,” Bragg says. But that still didn’t sway him, not with an investment of this size. “We paid a little bit more for the Ericsson gear, but not a lot more, and we just felt it was a safer bet.” Faced with the same decision, Mobilicity, a fellow traveller of Wind as a new wireless company in Canada, decided to outsource its network management entirely to Ericsson.
Huawei is privately owned—by its employees, it often points out—so it isn’t required to release an annual report. But it issues one anyway for the sake of transparency. A glance at the balance sheet shows that telecom executives who are uneasy with the Chinese giant are in a minority: Year-over-year network equipment sales have grown 23%, and overseas sales have grown nearly 34%. Huawei is now the No. 2 telecom equipment maker in the world behind Ericsson, and it has displaced Nokia Siemens and Alcatel-Lucent in many fast-growing emerging markets like India.
Huawei’s mere presence in a bidding process can reduce prices by as much as 25%, one Canadian wireless executive says, and it has broken up what another refers to as a complacent “oligopoly” that could dictate premium prices. “People should not underestimate the potential these guys have,” says a former Huawei executive for Canada. “They built a wireless lab in two weeks, start to finish. They’re amazing.” In mid-October, an analyst at Danske Markets Equities downgraded Ericsson to a sell because “product differences are disappearing, price has become the No. 1 weapon in the market [and] Huawei is emerging as a global competitor with larger scale and broader scope than Ericsson.”
It’s a sign of the times, perhaps, that more than a decade after it moved to expand globally, Huawei is not worried about the Europeans. “You want to know what Huawei’s biggest fear is? It’s ZTE—because it’s them, it’s Huawei but 10, 15 years ago,” the former executive says. But many think that the publicly traded Chinese firm still has a long way to go to compete on network equipment quality.
“Maybe before, we just had more people,” Huawei wireless research executive Ying Weimin says. “But now it is product quality—Huawei doesn’t have to send a lot of people, because the product is a lot better. [But] even as we get stronger and stronger, our attitude to customers must remain very humble.”
There is another very good reason to remain quiet and humble in the face of angry rivals: The company’s near-invisible founder and current CEO, Ren Zhengfei, was an engineer in the People’s Liberation Army (PLA). He started Huawei after he was downsized out of his job. This fact makes Western governments, particularly those of the United States and Canada, very nervous. In response, all the company can do is grimly explain, over and over again, that Huawei is not a proxy for the Chinese government. It does receive research grants from Beijing, it’s true, but they amounted to a drop in the bucket—$68.9 million—in 2010.
Political opposition to Huawei in the U.S. has already derailed an acquisition attempt (of 3Com) and spoiled a potentially huge contract (with Sprint Nextel, which has some government contracts). Since growth in the world’s most valuable wireless market is a top priority for Huawei, overcoming the Republican Party’s national security paranoia—which has fused with anxiety over the state of American competitiveness—may be the biggest challenge it faces. If Huawei were ever in a position where a major stateside buyout was absolutely crucial, it could very well be stuck.
Of course, it doesn’t help that Huawei is growing in lockstep with cyber-crime perpetrated from Chinese IP addresses. And Western paranoia feeds Eastern paranoia. Huawei scaled back scheduled interviews in China for this article after the Canadian Security Intelligence Service renewed its investigation of the company back in Canada—an investigation that included the physical examination of some of Huawei’s installed wireless network equipment in Toronto, according to a wireless industry executive with direct knowledge of the incident. The investigation stemmed from complaints by Canadian pharmaceutical companies about China-based hacking and attempted thefts of generic drug formulas; there was worry that having Chinese network equipment in Canada could compound the problem.
Huawei faces even more suspicions in India. Judging by conversations with senior telecommunications officials and political leaders, it is almost taken for granted that Huawei is an arm of the PLA. As in the U.S., officials may just be voicing frustration at their country’s own lack of homegrown telecom innovation, and keeping out potentially disruptive companies by playing the national security card. But more than one report to the U.S. Congress has flagged Huawei’s links to the Chinese military. A particularly damaging report by the RAND think tank in 2005 said Huawei “maintains deep ties with the Chinese military, which serves a multifaceted role as an important customer, as well as Huawei’s political patron and research and development partner.” In 2010, the U.S. National Security Agency reportedly called AT&T and warned it away from awarding Huawei contracts worth hundreds of millions of dollars—unless, of course, AT&T wanted to endanger its contracts with the U.S. government.
No one points to any direct correlation between the rise in cyber attacks and Huawei’s success, but the fear remains, and that’s really all that matters—perception is more important than reality. One Canadian official in China says Huawei has done an awful job of explaining itself, even after it was encouraged to invest in Canada by diplomats who pointed out the gateway opportunity to the U.S. market. The joint network that Huawei built for Bell and Telus is a prime example—on par with Huawei’s big contract with British Telecom in England—of a metaphorical flag stuck in Huawei’s non-native soil, signalling to major carriers that Huawei is capable of doing big business, securely, with the industry’s most demanding players.
The company has begun a global hiring binge of localized talent, from engineers all the way to big-name executives like John Roese (former CTO of Nortel), Matt Bross (former CTO of British Telecom) and John Suffolk (former CIO for the U.K. government). Roese, an American himself, said in an interview that Huawei’s big contract wins in Europe and Asia have helped put people in the U.S. at ease. He’s been visiting politicians at the state and federal levels in an effort to change perceptions of Huawei. He thinks that work is paying off, and that it’s inevitable American companies and policy makers will come around—and if they don’t, that it will be like skipping a party featuring all your best friends.
But for all the domestic concerns, the larger part of Huawei’s image problem in the U.S. relates to the company’s dealings abroad. Despite launching a public relations push to calm nerves, Huawei seems forever mired in controversy. Recently, for instance, it was revealed that Huawei has filled the void in Iran as U.S. telecom companies withdrew after a brutal government crackdown in 2009.
Another public-relations hit stemmed from a WikiLeaks release of a diplomatic cable. According to the cable, in 2007 Huawei deliberately misled Michael Joseph, an American who was then CEO of Safaricom, Kenya’s largest wireless provider. The deal Huawei offered for wireless equipment seemed too good to be true, he allegedly told U.S. diplomats, and it was: Huawei reneged and only delivered half the agreed-upon equipment, leading Joseph to fly to China and engage with Ren Zhengfei. The CEO eventually agreed to cancel the contract.
The cable offers a rare glimpse into how developing-country firms deal with developing-country governments. “When [Joseph] returned from China...he was summoned to the office of Mutahi Kagwe, the Minister of Information and Communication, and told the cancellation put all Chinese foreign assistance to Kenya at risk,” the cable says. “He also received phone calls from different ministers [in other portfolios]...who insisted that he reconsider the cancellation. One was the Minister of Immigration, who hinted that Joseph, a foreigner, might have work permit problems if he cancelled the contract. He held his ground.”
According to the cable, Joseph also said that state-owned Telkom Kenya awarded a contract for a wireless network to Huawei unilaterally, without public tender—a fact reiterated by another local executive to whom the diplomats spoke. Joseph (now a fellow at the World Bank) declined to comment on the matter, and former Huawei employees in the region refused to speak for this article. When I brought it up with Huawei’s main spokesperson, Ross Gan, he dismissed it. Whether the Chinese diplomatic pressure revealed in the WikiLeaks cable is the norm for Huawei in these markets, an unsavoury anomaly or the result of pressure exerted by most powerful countries through modern, economic gunboat diplomacy is unclear. But it doesn’t make Huawei look good—and again, sometimes that’s all that really matters.
There are, of course, different levels of security. Rogers doesn’t use any Huawei gear. Bell and Telus use tons of it, but their most sensitive equipment is built by other companies. It is only at Wind Mobile, one of Canada’s newest wireless competitors, that Huawei was actually responsible for building most of the network’s core—the gear that handles subscriber information, credit card numbers and other sensitive data. But since Wind was starting from scratch, and had no government or corporate contracts, it was deemed okay to use Huawei’s cutthroat-priced equipment to fill out the core, giving the company yet another developed-economy milestone.
A light rain is misting the taxis lined up outside the Longyang metro stop in suburban Shanghai, where the city’s impressive Maglev train starts its route out to the gleaming international airport.
Climbing aboard the high-speed train, Huawei engineer Shen Lie Jun takes a black GPS unit with a red flashing light out of his backpack and places it on the windowsill. He puts the laptop on a seat and crouches on the floor as the train glides silently out of the station. Rain streaks horizontally across the window as we pick up speed. Shen clicks on a file and begins to download over a Long Term Evolution, or LTE, wireless network that Huawei has built over the track. As the train clocks 170 kilometres per hour, the download speed has already hit 43 megabits per second, way faster than the LTE networks Bell and Rogers have just built in small, urban parts of Canada. “The bandwidth is limited by China Telecom,” Shen says. “The max we can go up to is 46.1.” The train is now going 300 kilometres per hour; leafy industrial parks flit by the window. Shen points to a visualization of the GPS, which shows his download signal switching seamlessly between two wireless towers. The train rocks back and forth as it reaches its maximum speed of 431 km/h, but Shen’s download speed is still wavering between 43 and 44.9 mbps. At this point, I can’t help but think of Toronto—where there is no rail link to the airport at any speed—and the unreliable WiFi on the Ottawa-Toronto VIA line. Here, we are downloading faster than most existing wireless networks can possibly go, while travelling at almost the speed of an airplane. Then I think of Nortel, which if it hadn’t collapsed thanks to the follies of its owners might have survived long enough to have been eaten alive by Huawei. Then, suddenly, the signal cuts out—but not because of wonky equipment; we’ve entered the 20-kilometre radius around the airport, where Huawei isn’t allowed to test.
In short, Huawei’s equipment isn’t half bad, and sometimes it’s necessary to step away from the rumours and actually just look at the stuff—to dig as deep as John Roese did when he was hired to head Nortel’s R&D division back in 2006. At the time, Huawei was an expanding presence, but still one that was wildly misunderstood by most people in the industry. Roese and the teetering Nortel couldn’t afford to take any chances. “The first thing I did was I went and bought all the Huawei product, and had a tear-down,” he says. “It shocked people at Nortel. ...It was good enough, and it was clearly getting better.”
That was in 2006. And if the American government and U.S. carriers remain unconvinced in 2011, then at least Huawei has managed to convince the vast majority of the global private sector. From Vodafone to Deutsch Telkom and Telefonica, Huawei likes to point out that 45 of the world’s 50 top wireless operators use its equipment. Of the five that don’t, four are American—and the other is Rogers. From making copycat equipment that no one took seriously—and that forced a settlement with Cisco, after Huawei was revealed to have cloned a Cisco router right down to its defects—Huawei has evolved into a company that no longer makes cheap junk. After all, the company also likes to point out that the majority of carrier costs come from operating expenditures over the life of equipment, not on the purchase cost. That means major carriers—with reputations that don’t really allow them to cut corners—are choosing Huawei gear because it’s cheaper to operate over the long term, not just cheaper out of the box. That’s a result of quality, not eagerness to please. “There’s an execution engine here that’s unlike anything I’ve ever seen,” Roese says. “If you’re in an industry where there isn’t a Huawei, there will be.”
And so people adjust. Roese says that many of the top technologists under his command at Nortel now work for Huawei in Ottawa. Despite his anxiousness about Huawei, Lee Bragg of EastLink is talking to the company about a purchase of handsets and other peripheral network equipment. Huawei already has one North American core network to its name. If there’s further politicized resistance to Huawei at some major U.S. carriers, how long will they remain competitive as their rivals start installing cheaper but entirely comparable gear? And how long will it take for other Chinese firms to utilize the country’s legions of graduating engineers to go global? Wireless executive Ying says, “I believe Huawei’s success story will be copied by a lot of Chinese companies.”
Because in the end, Huawei’s tablet isn’t really as bad as Hewlett-Packard’s abysmal TouchPad was; and its surveillance equipment is clearly good enough, and will only get better—much like the rest of its products. And that has huge implications for the wider, multibillion-dollar telecom sector. Some discount Canadian wireless operators like Wind and Public Mobile already offer Huawei and 2TE phones, which are dirt cheap. Telus sells Huawei Internet data sticks for laptops. There’s really nothing stopping the People’s Engineering Army from upping its game in all of its other business areas. At one point, in the back seat of a car with Gan, Huawei’s spokesperson, I check my aging BlackBerry. He looks at me with something approaching pity. “Do you worry about them?” he asks.