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| March 21, 2001 | atimes.com | ||
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China
China: Huawei's massive US connections STRATFOR.COM's Global Intelligence Update Mar 20, 2001 Summary One of China's largest telecommunications companies, Huawei Technologies, is at the center of a controversy over the sale and installation of fiber-optic cables by Chinese firms in Iraq. The Bush administration's challenge will be balancing foreign policy objectives against the business interests of American firms in China. But Huawei's powerful connections throughout the global telecom industry will likely constrain the administration's options. Analysis In a March 5 meeting with US Ambassador Joseph Prueher, Chinese officials admitted three Chinese telecommunications firms had violated UN sanctions against Iraq by selling and installing fiber-optic communication cables. At the center of this controversy is China's largest telecommunications equipment company, Shenzhen-based Huawei Technologies Co. US officials identified Huawei as the primary culprit in Iraq, though the company has denied any wrongdoing and claims involvement only in UN-authorized projects. The issue provides the first real test of US President George W Bush and his effort to be more assertive and less compromising toward China than former president Clinton. This harsher tone - coupled with Bush's aggressive push for anti-missile defense, tensions over Taiwan and another State Department report on China's human rights record - has strained relations between the two governments. But Washington must consider both the diplomatic impact of its actions and the economic implications. This episode also foretells a new dynamic emerging as China moves toward WTO membership and as Chinese firms step onto the global economic stage. Huawei is a prime example of this new dynamic. Huawei is an emerging global powerhouse with powerful internal backers and strong global alliances. A former officer of the People's Liberation Army, Ren Zhengfei, founded the company in 1988 as a reseller of imported telecommunications equipment. The company quickly began producing its own branded telecom and information technology equipment. Huawei's 1999 net profits of US$182 million made it China's most profitable telecom equipment company. The company has benefited from powerful connections. The PLA remains a steady customer and - by some accounts - is more intimately involved with the company. Another key supporter is Beijing, which in 1996 introduced a policy to support domestic telecom companies in the face of foreign competition. Huawei was designated a "key development project" by the Shenzhen government. State-sponsored credit poured into the company. The government also expedited company issues through China's vast bureaucracy, extended generous credit to Huawei's customers and lent the company large sums for research and development. This allowed Huawei to consolidate its domestic business and move aggressively into foreign markets. Huawei targeted emerging markets where China has long-standing relationships and where competition from the dominant global players is more limited. Some countries that fall into this category - Myanmar, Cuba, Iraq, Iran, Libya and Sudan - are considered pariah states in the United States and represent sources of potential conflict similar to the current Iraq/Huawei case. Huawei employed its strategy effectively, gaining market share in Russia and portions of Eastern Europe and Africa. Huawei is now competing with the likes of Cisco and Lucent, recently beating out both for a contract to supply equipment to Thailand's second-largest Internet service provider. American firms might be tempted to support sanctions on the company as a means of undercutting an emerging competitor. But American firms, recognizing Huawei offers access into lucrative Chinese telecom and data communications markets as well as into the rest of Asia, prefer to engage Huawei and will likely resist attempts to sanction the company. China is the fastest growing communications market in the world outside the United States. Cooperating with Huawei ingratiates foreign companies to Beijing and can help them meet local content requirements for manufacturing facilities. The list of American companies aggressively courting Huawei include 3Com, AT&T, Cisco, IBM, Intel, Lucent and Motorola. IBM signed an agreement last September to be Huawei's primary supplier of processors and chips for the company's routers and switches. The deal should add about 10 percent to IBM's worldwide network processing equipment revenues, according to Computerwire. Motorola signed an agreement last year to purchase Huawei mobile communications equipment for its Chinese base stations. American firms are developing vital relationships and facing new competition, which affects their global business strategies. This will lead to greater resistance to a hard-line policy on China or sanctions on its firms. And American sanctions on countries like Cuba and Iraq giving Chinese competitors an advantage in emerging markets could increase pressure on the Bush administration to abandon sanctions. China won't tie the hands of its most competitive firms to appease Washington. China wants to close the technology gap with the West and is relying on companies like Huawei to do so. Beijing also depends on these companies to attract foreign investment and fuel export growth. There is no reason to believe China will lessen its support and protection of key industries leading up to - or after - WTO accession, the terms of which leave room for Beijing to continue to protect strategic industries. Beijing will give Huawei and its brethren a long leash, further increasing their power and the chance of conflict. Economic considerations will likely trump political objectives in the Iraq/Huawei case and lead to a muted response from the Bush administration. Meanwhile, China's global power base is expanding through its multinationals, while America's economic powers may be lining up against the Bush administration's foreign policy objectives. (c) 2000, WNI, Inc. _________________________________ For republication policy contact: STRATFOR, Inc. 504 Lavaca, Suite 1100 Austin, TX 78701 Phone: 512-583-5000 Fax: 512-583-5025 Internet: http://www.stratfor.com/ Email: info@stratfor.com |
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