Thursday, July 28, 2005

WSJ : Huawei Stumbles on Road to the U.S.

Huawei Discovers Low PricesAren't Enough to Take On Giants Cisco and Lucent

In America, Call It Futurewei


In March 2001, a handful of executives from Huawei Technologies Co. took a floor in a five-story glass office building off a highway in a suburb of Dallas. Their mission: Use the company's cut-rate prices to take customers from the likes of Cisco Systems Inc. and Lucent Technologies Inc.
Today, that goal remains elusive. China's largest telecom-equipment maker has yet to land any deals with big U.S. phone companies, such as SBC Communications Inc. or BellSouth Corp., winning only some contracts with smaller firms.
"It has taken longer than we thought," says Bai Yi, Huawei's business-development director for North America and one of the first Huawei executives in the U.S. "We still have a long way to go to learn about this market."
Driven by a tighter market at home and a desire to build its own multinationals, the Chinese government has begun encouraging its leading companies to grow abroad. Chinese oil company Cnooc Ltd.'s recent $18.5 billion bid to acquire Unocal Corp. is just the boldest example of corporate China's global aspiration. Yet a look at Huawei's U.S. experience to date shows just how far China still has to go to translate its growing economic might into sophisticated global competitors.
With little experience in marketing, Huawei has struggled to build brand recognition in the U.S. It confused customers by using a new name for its U.S. business. With the headquarters in Shenzhen, China, hesitant to delegate, local executives have trouble adapting to the local culture. The company has been dogged by suspicions of cutting corners on intellectual-property rights, and alienated some job applicants by pumping them for detailed technical information. Huawei's successful formula winning business in other countries with low prices hasn't worked as well in a U.S. market marked by long-term ties between phone companies and their equipment suppliers.
The company's setbacks in the U.S. contrast with its recent progress elsewhere outside China. From the Middle East to Latin America and, more recently, Europe, Huawei has taken business from global giants such as Germany's Siemens AG and France's Alcatel SA. Of the 19 licenses issued around the world last year for high-end wireless networks known as "third generation," Huawei was involved in building 14 of them, according to BDA China Ltd., a Beijing-based research firm. BT Group PLC, the large British telecom company, recently gave Huawei an important stamp of approval, awarding the Chinese vendor part of a $19 billion project.
Huawei has come a long way from its beginnings in 1988, when founder Ren Zhengfei, a former officer in China's People's Liberation Army, used a contact in the Chinese government to obtain some rudimentary telecom gear. Mr. Ren's background helped the company win military contracts during the early, lean years, according to former Huawei executives.
Today, the PLA accounts for less than 1% of Huawei's business, the company says. With $3.8 billion of revenue in 2004, Huawei still ranks far behind leaders like Alcatel, which had $15 billion of revenue last year. But Huawei is growing by nearly 50% a year, while established vendors are only just beginning to grow again after the telecom bust wiped out much of their business several years ago.
With eight regional headquarters and 55 offices around the world, the company expects that this year revenue from outside China will at least equal that from China for the first time. Of its global work force of 24,000, many are housed at Huawei's sprawling, modern headquarters in Shenzhen, in brightly painted dorms, surrounded by neatly manicured lawns, basketball courts and swimming pools. The streets are named after famous scientists, such as Marie Curie and Deng Jiaxian, a key developer of China's first atomic bomb.
Like the global push of Cnooc and other large Chinese companies, Huawei's expansion is fueled in part by cheap loans from the Chinese government. Last year, the company, which is owned by its employees, received a $10 billion line of credit from the China Development Bank, and an additional $600 million from the official Export-Import Bank of China for its international expansion.
But Huawei's push into the U.S. differs from its compatriots in one key way: While other expansion-minded Chinese firms are trying to buy their way into the American market, Huawei is trying to grow by lining up its own new customers.
When they opened their doors in 2001 in Plano, Texas, Huawei executives sought to blend into their surroundings as quickly as possible. They share their building with law offices, realtors and a regional office of lingerie company Victoria's Secret. A Texas state flag and an American receptionist greet visitors in Huawei's ground-floor lobby. The company now has about 150 employees in the Plano office and in a few sales offices around the U.S.
Shortly after the U.S. launch, Huawei executives realized that Americans had trouble pronouncing the company's name (HWA-way). Mr. Bai, 32 years old, says he noticed that the company's new landlord in Plano kept calling it "hoo-way." Potential customers, and even some of Huawei's own American employees, called it "high-way" and "how-way," among other variations.
The company decided to come up with another name for the U.S. subsidiary. It decided on Futurewei as a working name, and then contacted Darren Avrea, the co-founder of Dallas advertising firm AvreaFoster, to test it and provide alternatives. Mr. Avrea says his firm offered 30 possible names for Huawei's U.S. business. The project became frustrating, Mr. Avrea says, because all decision-making was handled by company headquarters in China. And then, after several months, the company opted for its initial idea, Futurewei.
"From a global marketing point of view, we never understood why not stay with the Huawei name in the U.S. and ride the coattails of the mother ship," says Mr. Avrea.
While Americans could more easily pronounce the new name, the company now had two names. "We have to explain to customers, what is Huawei and what is Futurewei, and what the relationship is, and that can take two minutes," says Mr. Bai. The company has done little to promote the new name. What few ads have appeared in U.S. magazines have used the Huawei name, rather than the Futurewei name, according to Douglas Black, the Huawei spokesman for North America. The Futurewei name appears on its booths at trade shows, brochures and other materials.
For their part, Huawei employees struggled with understanding the Texas accent and some expressions. "There are a lot of words in Texas that are completely different from the English that we learned in China," acknowledges Lin Haibo, an executive in charge of Huawei's research and engineering in North America. Mr. Bai says some Huawei executives were perplexed in the early days when Americans said, "have a wonderful day."
Huawei sought to make its public face as American as possible. The company began recruiting from the deep pool of local telecom talent in the Plano area, home to offices of many large telecom companies, such as Nortel Networks Corp. and Cisco. But the relationship between U.S. employees and Huawei executives was sometimes strained.
Chad Reynolds, Huawei's former head of human resources for North America, says when he visited the headquarters in China he was forbidden from carrying his briefcase into any of the main meeting rooms. He says his employers worried about theft of product documents. He was never given a security pass and was accompanied by security personnel wherever he went. "I never felt like I was truly part of the family at Huawei," says Mr. Reynolds, who says he quit in spring 2003. Huawei declined to comment about Mr. Reynolds.
Huawei admits it wasn't prepared for the time and effort needed to break into the U.S. market, where lower prices are sometimes not enough to land a deal.
In the developing world, where Huawei has enjoyed the bulk of its success outside of China, the company has won business with prices 25% or more below those of Western bidders. In mature markets, like Europe and the U.S. where vendors and clients have longstanding ties, leading-edge technology is just as important as a good price.
One potential customer, Telepak Networks Inc., a telecom-services provider in Jackson, Miss., said it would consider Huawei equipment after putting it through exhaustive, months-long trials -- a common procedure when considering new equipment from an unknown company. Scott Rice, who was in charge of Huawei's carrier sales at the time and led the effort to win the Telepak business, says his superiors at Huawei were surprised by this. "I think they expected things to be more like the Chinese market, where you get products in the network quickly without going through the paces," says the 54-year-old Mr. Rice. Telepak ultimately took its business elsewhere.
"The product just wasn't the best at the time in the industry," says Tillman Rodabough, the director of commercial networks at Telepak.
Huawei also raised eyebrows because of the lengths it would go to obtain industry know-how. Recruiters would ask job applicants to prepare highly detailed reports on specific product areas in which the company intended to compete in the U.S., Mr. Reynolds and several other former employees say.
Two years ago, David Fox, a software engineer who had worked at several area telecom firms, was invited for an interview in Huawei's Shenzhen headquarters. On the first day of his visit, Mr. Fox, then 39, says he was startled when a group of 25 to 30 Chinese engineers began peppering him with detailed questions on engineering minutiae, scribbling notes as he spoke. "It became evident that this wasn't an interview," says Mr. Fox. "They were pumping me for technical knowledge of the U.S."
Mr. Fox became more alarmed when the company then asked him to agree in writing that any invention that came from his visit would belong to the company, he says. He refused to sign, he says, informing his hosts of his wish to end his visit and return to the U.S. Several days after returning home, Mr. Fox was informed the company wasn't interested in hiring him, he says. Mr. Fox later got a job with Tellabs Inc., another telecom-equipment vendor.
Mr. Black, the Huawei spokesman, says he can't comment on Mr. Fox's interview because he is unfamiliar with the company's hiring practices before 2003, when the current head of human resources took the job. "Our practices today are standard interview techniques," says Mr. Black. "We don't ask anyone for proprietary information."
In January 2003, Cisco sued Huawei in a U.S. district court in Marshall, Texas, alleging the Chinese company copied its router code, including bugs in Cisco's code, according to the complaint. Huawei even used the same model numbers, to make it easier for customers to switch to the cheaper Huawei versions, according to the suit.
Sales contracts in the works were killed at the news, including a "significant" deal with WorldCom Inc., according to Mr. Rice, the former salesperson. Huawei had planned to trumpet the important business in a press release as a sign of its U.S. progress, he says.
Cisco later agreed to drop the lawsuit after Huawei removed the router products from the market and then altered them. Huawei didn't admit guilt in the settlement. The suit "affected us adversely," acknowledges Mr. Bai. Due to the subsequent decline in sales, the company laid off about a half-dozen salespeople, he says.
Just as the bad publicity from the Cisco suit was fading, Huawei stumbled again. In June 2004, at a trade show in Chicago, a Huawei employee was caught taking pictures after hours of the insides of some high-end equipment from Fujitsu Ltd. Authorities found a list in the employee's clothing of names of other telecom companies. Huawei later fired the employee, explaining the company hadn't used his photos and that it was his first time in the U.S.
Huawei can look to Japan for an encouraging case history. When Japan's Toyota Motor Corp. first entered the U.S. in the 1970s, it had a poor dealer network and cars seen as cheap, small and unreliable. Ultimately, Chinese firms like Huawei "will learn and invest, just as Japan and South Korea did before them," says Albert Lin, an analyst in the San Francisco office of American Technology Research.
In February 2004, Huawei landed its first contract with a U.S. wireless carrier. In recent months, it has announced several other deals with small wireless U.S. carriers, such as NTCH Inc. of Hermosa Beach, Calif. Huawei declined to specify the number or amounts of the deals.
"We need to present Huawei better," says Mr. Lin, Huawei's head of R&D for North America. "We also have to make it clear that we are not just testing the waters in the U.S."


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