Ringing true?

As Ren Zhengfei mulls succession, Snowden case reignites Huawei row

Ren Zhengfei w

Ren: built China’s most successful and arguably most controversial firm

Maybe Ren Zhengfei was right all along. After refusing to give media interviews throughout his career, the 68 year-old boss of Huawei, the telecoms networking and equipment giant, finally relented last month in New Zealand. And almost immediately something went wrong.

“Can you be confident that if the Chinese security agencies approached any of your staff and asked them to conduct espionage on your behalf that your staff would always be in a position to refuse,” he was asked at the news conference in Wellington.

“No”, Ren responded through his translator, smiling broadly.

Huawei later dismissed the remark as a “simple translation error”, saying that Ren’s answer was the opposite, a definitive ‘yes’. But for a man seen by some as an extension of the People’s Liberation Army – intent on bugging the telecoms networks of China’s rivals – it was an awkward moment.

In fact, Ren had countered the rumours of military ties during the interview, pointing out that he had left his job as an army engineer before he founded Huawei in Shenzhen in 1987.

Becoming a member of the Communist Party in 1978 was also a sign of the times more than 30 years ago. All “exceptional people” joined the Party, Ren explained. “At the time my personal belief was to work hard, dedicate myself or even sacrifice myself for the benefit of the people. Joining the Communist Party was in line with that aspiration.”

Whatever his early career choices, Ren now has a solid claim to have built China’s most successful global firm, with Huawei earning two-thirds of its revenues outside the Chinese market. But he remains an enigma, with an old-school, paternalistic style and a penchant for dropping the occasional Maoist phrase into conversation (“surrounding the cities from the countryside” was one example, used to describe Huawei’s push for more sales in rural areas).

Ren can also come across as secretive, especially about Huawei’s ownership structure, in which employees are said to own shares in the privately-held firm but in a manner that seems to have left Ren with tight, overall control (see WiC155).

He’s a hard taskmaster too, rewarding workers who do well but demanding their total dedication. As an example: in WiC90 we wrote about how Huawei was asking staff to sign a declaration in which they classified themselves as either a ‘Striver’ or a ‘Labourer’. What was the distinction? Strivers committed to giving up paid leave and overtime pay but stood a better chance of a year-end bonus and promotion. Labourers were free to go home on time. But their prospects at the firm looked dimmer.

Yet Ren gets results. He’s built Huawei into a stellar success story with revenues of $35 billion last year, supported by a workforce of 150,000 (and that includes as many as 40,000 non-Chinese nationals). Huawei is the world’s second largest manufacturer of telecoms equipment after Ericsson and now trails only Apple and Samsung as a manufacturer of smartphones too.

Similar to other industries in which Chinese firms now compete internationally, Huawei’s rivals grumble that it is a copycat and has shown little capacity to innovate.

Not necessarily, said James Cheng, a fund manager and a regular WiC reader in an essay in issue 76. Arguing for a more nuanced view, Cheng agreed that Chinese firms like Huawei might not be changing the world by creating too many new technologies. But he felt that they have had a huge impact by making things much more cheaply. Increasingly, they also own the intellectual property for the processes that enable them to do so.

Much of that comes from a commitment to research and development, Cheng said at the time, including a 40,000-strong R&D team at Huawei that is double the size of Ericsson’s but which operates at less than half the cost. This has been crucial in delivering lower-priced products, particularly to less developed parts of the world, where Huawei has grabbed market share. “This is not innovation but it is critically important in making products available to the 5 billion people who have not been part of the global economy in the past,” Cheng wrote.

Of course, there are other markets where millions of people aren’t so reliant on Huawei products, and nowhere is that more true than the United States. In Washington the political resistance to Chinese networking equipment has been loud and determined, on fears that Huawei’s alleged military ties might see eavesdropping devices embedded into telecoms infrastructure. There’s also a suspicion it will insert ‘kill switches’ which could immobilise US communications should the two countries ever go to war.

Such concerns were expressed by five US senators in a letter to the Federal Communications Commission three years ago: “When telecommunications carriers purchase equipment from Huawei, the result is that US communications will travel over switches, routers and other equipment that was manufactured and designed in China and may be remotely accessed and programmed from that country.”

Huawei has persistently denied these claims but they have meant that it has been blocked from acquiring companies in the US. It has also lost the opportunity to win supply contracts with American firms.

Huawei’s response has been two-fold: a charm offensive, with lobbying in Washington, and an open invitation to the House of Representatives Intelligence Committee to examine the company directly, and put its fears to rest. But as we reported in WiC168, if the hope was to clear the air, the plan backfired. Instead, after an 11-month probe into Huawei and its smaller rival ZTE, the committee’s verdict was that the two firms “cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and our systems”. Correspondingly, US network providers were “strongly encouraged to seek other vendors for their projects”.

Huawei and ZTE were incensed, bristling at the criticism that they had not cooperated fully in the investigation, and furious at what they saw as a lack of evidence that they constituted a security threat.

Further, they argue that the globalised supply chain means that it is almost impossible for non-Chinese firms to offer products without Chinese parts, heightening their suspicion that they are being singled out by US legislators more concerned by the commercial threat from China than the security risk.

Of course, the recent revelations about NSA monitoring activity from whistleblower Edward Snowden has done little to improve the Chinese mood. “We can see… that when American politicians and businessmen make accusatory remarks, their eyes are firmly fixed on foreign countries and they turn a blind eye to their own misdeeds,” thundered the People’s Daily. And as we reported in WiC198, Snowden’s disclosures offered a classic “I told you so” moment for China’s telecommunications equipment makers. A senior spokesman for Huawei was quick to point out that not a single company in its industry had been named as cooperating with the PRISM spying programme. “Why? Because equipment vendors build the ‘pipes’ that form the network, but they do not manage the information that flows through the network or that is stored in data reservoirs, like internet company servers,” said William Plummer, vice-president of external affairs.

Whether this improves Huawei’s prospects in the US remains an open question, as does the issue of who will eventually take over from Ren. He has been coy about his replacement, although he has denied rumours that his CFO (and daughter) Cathy Meng is in the frame.

Ren has said that his own ambitions are much more limited. “My life aspiration is to open a coffee shop or maybe a restaurant,” he told Kiwi reporters, “and then have a farm of my own.”

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