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U.S. Protectionism against Huawei and why that was a good thing [for Huawei]

Stan Abrams over at China Hearsay has a good article out today, “U.S. Practices the Art of Zen Protectionism on Huawei.”

(If you follow Huawei, you will know that it is one of the most innovative companies in China, and it has made substantial inroads around the world for its reliable and cost-effective telecom equipment. Actually, if you talk to some Cisco engineers about Huawei, they will tell you Huawei is incredibly innovative. Huawei may even be more active in international bodies defining standards – yes – even more so than Cisco!)

Abrams writes about the recent Huawei failed attempts at acquiring 3Com, 2Wire, and Motorola’s wireless equipment unit, despite offering $100 million more than the competition. He argues this was “blatantly protectionist.” I couldn’t agree more. The only disagreement I have with his article is his characterizing this blatant protectionist act on the U.S.’s part as “Zen.” It is American insecurity and xenophobia; pure and simple. Everyone in China recognize it as such.

In my opinion, this was really a blessing in disguise for Huawei.

I actually think it is better Huawei not have purchased these companies. On one hand, I can understand Huawei interested in the short term acquiring the patent portfolios of these companies to get a stronger foot-hold in the U.S. – against the likes of Cisco whose competitive strategy is to bog down foreign competition through patent lawsuits. I can also see Huawei acquiring the sales and marketing talents within these companies and leverage the sales connections to U.S. telecoms and corporations.

Imagine if any of these deals had gone through. The most talented sales and marketing employees could very well find jobs with other companies, especially at a time where these companies are on the chopping blocks to be sold. Let’s face it – everything “China” and “Chinese” are still trashed in the U.S. media, and that certainly will affect retention of top talents following acquisition. Instead, Huawei would be better off simply hiring the best talent it can find within these industries through head-hunters – on a “one of” basis.

Unlike IBM’s ThinkPad line, 3Com, 2Wire, and Motorola’s wireless equipment units are hardly first rate. I just think their patent portfolio is weak and may not have enough mileage for the long haul. Huawei would be better served purchasing startup’s that are three to five years old who have made significant strides in these areas and have brand new patents.

  1. Charles Liu
    August 5th, 2010 at 13:35 | #1

    The same thing was said about Japan 20 years ago, like they are buying up Hawaii and stuff.

  2. XiangXiang
    August 6th, 2010 at 03:09 | #2

    “reliable and cost-effective telecom equipment”
    And where did you get that from…their reliability is ok, cost-effective no..but the purchase price+integration services fee is usually lower then their competitors.

    Regarding being active in bodies for standards, every company in this branch is active in it.
    Depending on what they offer and what is accepted as a standard is a different story.

    I have seen inside numbers, it’s fascinating.

  3. August 6th, 2010 at 11:20 | #3

    @XiangXiang,

    I think its generally known in the networking industry that Huawei’s products are “standards-based and low-cost.”

    I also remember reading an article related to Cisco around end of 2009 – John Chambers was asked who he thought was Cisco’s main rival. After thinking about it, he said, “Huawei, Huawei, and Huawei.”

    Here’s a stat on Huawei’s WiMax products in developing country markets – where price is much more sensitive:

    Statistics shows that over 60% of Huawei’ s WiMAX market share last year came from developing countries, examples include operators such as Vodacom, Globe, MTN, and Mobilink. Broadband drives the demand for WiMAX. According to statistics from Juniper, WiMAX is suitable for countries and regions where telecom services are undersupplied and governmental plans boost WiMAX development.

    You said:
    “Depending on what they offer and what is accepted as a standard is a different story.”

    I can agree with that.

    But, in general, tech companies in monopolistic or very dominant positions usually are anti-standardization. That’s been the truth.

    Less dominant players will have to rely on standardization as a “moral ground” to compete. Once they become the dominant player, they behave like the dominant player, which is andi-standardization.

  4. October 3rd, 2010 at 20:23 | #4

    Because of extremely important national security issues, the possibility of a PRC telecom selling equipment to, or owning a company in, the United States is very close to zero. A search will reveal that a current investigation in the UK is also leading security experts there to the same conclusion. Until the political relationships between the PRC and leading western military powers is much more friendly… for a long time, e.g. a few decades, this kind of commercial relationship is simply not in the cards. Citizens of the PRC need to understand the strategic issues surrounding this kind of technology, especially the history of decisive military success by UK, Israeli and US eavesdropping and infrastructure shutdown operations over the last half century. You can be quite confident that the senior intelligence services of the PRC have a full understanding of this politically sophisticated issue.

  5. October 3rd, 2010 at 22:27 | #5

    @Mike Cahill

    If we apply that same logic to American technologies, then I guess there is no point for foreign countries to buy anything from Intel, Microsoft, Cisco, IBM, and whatever you name. That same logic applies to using Google services and so on.

    We can get really absurd applying that logic to a point where no countries trade with each other.

    I think it’s a matter of WTO on these issues that are thinly veiled by national security grounds. China can easily use the same logic. I’d bet American corporations oppose this logic – domestically or abroad. The U.S. has much more to lose given how much more the U.S. corporations are entrenched in China vs. the other way around. If the U.S. continues this trend, my next bet is the U.S. will face the same protectionism.

  6. October 3rd, 2010 at 22:42 | #6

    What you say is essentially true. There are varying levels of risk that countries are willing to take with their telecom infrastructure, but telecom is a core element of the National Defense System. For example, the CIA might buy PRC made PCs, and they do, but for certain kinds of operations the CIA buys CPUs from Intel and makes its own puters. What this means in practice is that no great power, including PRC, can afford to take certain kinds of risks. Here is a link about UK spies that discusses more

    http://www.timesonline.co.uk/tol/news/uk/article5993156.ece

    It is the job of these guys to be “paranoid” because in case of war, they only get one chance. If they are wrong, their country goes down. This means that these spooks are extremely conservative in risk analysis. I assure you, and you can check it out, that counter intel operators in the PRC fully understand this and do not argue with it.

  7. October 3rd, 2010 at 22:45 | #7

    BTW, every spy agency in the world hates to use Microsoft because they are sure that the CIA or DIA has bugged these programs and they are probably correct. This is a sustainable competitive advantage that the US has has for over a half century.

  8. October 4th, 2010 at 00:55 | #8

    I can see how paranoid and brainless readers get caught into the Times Online article you provided link for. It’s a modern form of “red scare” – quite blatant too.

    Think of it this way – if Huawei’s product (just one of thousands) is found with a malicious code, that’d probably ruin the company around the world. If Microsoft’s OS is found with certain intentional spyware,
    that too will cause irreparable damage to the company.

    I suppose the argument about “could” is always possible with anything. Maybe there is a special kind of poison in Viagra made by Pfizer. The company has a way to activate the poison for whomever have taken the pill.

    Maybe the U.K. should not allow anything – goods or humans to enter the country, because in times of war, such could explode.

  9. October 4th, 2010 at 15:28 | #9

    I think I understand what you are saying, but also I am concerned that we may not have a common view of how the world works in these established powers like the United Kingdom. My understanding is that the UK has several hundred years of published, detailed history documenting how it has conducted its national security and intelligence affairs. The UK, as an imperial power, conducted extensive espionage operations very early in modern history… e.g. against Napoleon’s France well before there was a thing called “telecom”. So we know how they DO this stuff. The Times article is well within the boundaries of their Standard Process, and the article does not exhibit paranoia in its classical sense. This is a case where UK counter-intelligence agencies have, according to the Times, advised their political leaders that Huawei constitutes a genuine threat and that the company should be black listed. However the politicians, at the time the Labor party, decided to ignore the warning. End of story? Not quite: In a time honored traditon, just as they did regarding the Nazi buildup in the 1930s, someone LEAKED the risk analysis to a right wing journal for publication… and so I can send you a link today.

    (note particularly that this article cites the case of Wen Jiabao’s comments, made during a press conference with German Chancellor Angela Merkel in Beijing, were he seems to NOT deny the penetration of her office, and he promises an investigation of Chinese hackers who apparently, he thinks pending investigation, might have infected computers that were IN HER office)

    The discussion about Huawei in the United States ended in a totally different place. As the guarantor of NATO security, there is no way that the US well let Huawei stuff into US infrastructure. Therefore, as in the UK the same reports were made but the outcome was different.

    Now my concern is that many PRC citizens are not exposed to this kind of information and will therefore be unable to appreciate the complex political processes that result in a Huawei banning. Additionally, many people in the West are concerned that PRC politicians are also not completely familiar with these process, and will mis-communicate their intentions to these intelligence agencies… as they probably did when they briefly banned rare earth shipments to Japan last week. Albeit brief, this banning is resulting in an accelerated reopening of a rare earths mine here in California, a Japanese scramble for these compounds in various other countries, BUT most importantly, alarm bells began to ring at MI5, CIA, DIA, MI6, etc. regarding the long term military intentions of PRC politicians. This is just another little set back in the relationship between the PRC and the West… a relationship that should not be set back at this time, in the humble opinion of your correspondent.

  10. October 4th, 2010 at 22:47 | #10

    @Mike

    You said:

    This is just another little set back in the relationship between the PRC and the West… a relationship that should not be set back at this time, in the humble opinion of your correspondent.

    I agree.

    In how we view the world – allow me to put it this way. Even within the U.K. it will be between the faction who opposes protectionism and those who wants it. China has this dichotomy too. The thing that is a matter of WTO would be if the U.K. is extra insecure than “normal.” I’d bet that’s what gets argued in WTO courts.

    The Times article is lame because it accuses Huawei of “state owned.” GM is “state owned” so does that mean China now kick GM out? Perhaps GM will get all its cars in China to detonate in time of war? That’s rather silly. I am more familiar with the U.S., and no one here disputes the fact that Google is linked with the U.S. government. Intel and Microsoft and just about most big high tech companies in the U.S. probably get government funding in research in one form or another. Should that then be grounds for the world to not “trust” American corporations?

    If the U.K. wants the Chinese people to accept their argument that Huawei is a dangerous company, then the only way is the U.K. prove malice on Huawei’s part. Otherwise, the attitude exhibited in the Times article is somewhat racist, red scare, or whatever.

    There are plenty of U.S. corporations with employees or management from the U.S. military. So what?

    Is the world suppose to believe Boeing 777’s are going to crash at the push of a button by the U.S. government, because some retired U.S. air force offices are now management at the company?

    Perhaps at the end of the day, U.K. will block Huawei on the grounds of national security. But U.K. and the U.S. does not represent the world. Huawei still does well outside these two countries. China will eventually get tired of such measures. A trade war could ensue, but I think everyone basically agree this is not a good idea.

  11. October 5th, 2010 at 15:50 | #11

    My understanding of US political trends is that the trade war that you potentate is already being planned (by GE and “tea party” others) because the PRC manufacturing model is too effective under current WTO rules. I can go into this further, but first give me your ideas on this Times attitude that is “somewhat racist”. This is an interesting point; however, I think that you may be imposing this idea ON the article. I do not see it IN the piece. But you can make the case.

  12. October 5th, 2010 at 16:05 | #12

    potentiate

  13. October 5th, 2010 at 23:24 | #13

    @Mike

    I didn’t just say “somewhat racist.” I in fact said, “somewhat racist, red scare, or whatever.”

    The article has not cited any evidence warranting Huawei as a national security threat to the U.K. Instead, it cites state ownership or some management coming via ex-PLA as grounds for the worry.

    I should probably throw “protectionism” in there. To me it’s quite simple I think – it’s probably a concoction of a bit of all the somewhat’s thus far. How else would you explain this fear over Huawei? I have already argued why the fear is irrational.

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