More transparency needed from Chinese tech vendors

Summary:Huawei and ZTE need to address issues with corporate governance and sales tactics to gain wider acceptance in western markets, regardless of whether U.S. investigations are politically-charged.

Chinese tech vendors Huawei Technologies and ZTE need to be more transparent and address issues such as those related to corporate governance and sales tactics if they want to succeed in overseas markets.

And they should strive to achieve these regardless of whether investigations into their business practices were politically motivated.

The companies had been in the spotlight recently with interest heightening last week after the U.S. House of Representatives' Intelligence Committee released its investigative report on the business practices, governance and security management of the two Chinese vendors. It urged American companies to reconsider buying equipment from Huawei and ZTE.

In a statement issued Thursday, Matt Walker, principal analyst of network infrastructure at Ovum, said with geopolitics as they stand today, Chinese vendors should not be surprised at the level of opposition thrown at them.

To achieve broader acceptance in the United States and other western markets, both Huawei and ZTE will have to "do more to address the issues of corporate governance, national security, and state relationships", Walker said.

Jessie Yu, senior industry analyst of Asia-Pacific ICT practice at Frost & Sullivan, agreed.

She pointed to the companies' sales strategies in overseas markets and details of how these deals were conducted and secured, leaving much to be desired.

For example, Huawei tends to replicate how it conducts business in its domestic market in overseas markets, which usually means direct sales pitches are made to C-level management executives. This goes against the industry norm of relying on local channel and reseller networks to promote its equipment and, more importantly, leaves a question mark over what transpired in its sales pitch and how a deal was won over competing bids, Yu elaborated.

This sales strategy has helped the Chinese IT vendor clinch deals and expand its presence in markets such as in Southeast Asia, in Europe such as the United Kingdom, France and Germany, as well as in Latin America and Africa, she said.

However, it has not been as well-received in North America, Australia and New Zealand, she noted.

Response to U.S. report inadequate
Asked if Huawei had done enough to address the concerns raised by the U.S. report, such as the vendor's links with the Chinese ruling party and how its equipment could potentially be used in cyberespionage activities for China, Walker replied in the negative.

"I think Huawei underestimated the U.S. Committee's ability to use this investigation for political purposes," the Ovum analyst said. "The U.S. Committee asked for an incredible amount of detail from both vendors, and perhaps they could never be satisfied [with the information provide] given the politics [involved]. But Huawei could have done more to avoid this confrontation."

He added that investing in public relations and marketing efforts alone was not sufficient. Both companies would have to effect real change and transparency to break into the North America market, he said.

To offer more transparency into how Huawei and ZTE conduct their sales, Yu suggested they establish a scalable distribution network comprising channel partners to push their equipment in overseas markets.

Huawei, for one, chose to go the direct-sales route because it does not have the capability to manage a wide sales channel network overseas and did not want to compete directly with global rivals such as Cisco Systems, Ericsson and Juniper Networks, she explained.

In response to the U.S. Committee report , Huawei told ZDNet Asia it had put its "best effort" to ensure the investigation would be fact-based and objective in the government's review of its business activities and the issue of cybersecurity.

Over the 11-month investigation, Huawei had its top management team carry out multiple rounds of face-to-face interviews with panel members in various locations such as Washington D.C. in U.S., as well as Hong Kong and Shenzhen in China.

It also opened its research and development (R&D), training and manufacturing centers to investigators, offering documentation that included annual sales data and a list of members of its Board of Directors and supervisory board over the past 10 years since the company was established in 1987.

Furthermore, in terms of security and cyberespionage threats, Huawei pointed out almost every ICT vendor is conducting R&D, software coding and production activities globally. These companies also share the same supply chain which means network security challenges are now beyond one company or one country's scope of control, it said.

When approached on the supply chain issue, a Cisco spokesperson said: "Our global supply chain organization uses various technologies, together with certain physical and logical security processes, to help ensure Cisco products are manufactured in controlled environments."

Yu added that networking and telecom equipment vendors such as Ericsson also have manufacturing plants in China, and since the supply chain for infrastructure hardware is global, security threats posed by Huawei and ZTE are applicable to other vendors too.

U.S. mistrust of China and its tech companies stems from past cyberespionage attacks, which the former accused the latter of being the main perpetrator. Last December, a senior intelligence official was quoted saying Chinese hackers used Internet service provider iBahn's network to access millions of confidential e-mail messages including encrypted ones as the traveling executives reported back on everything within the company, from new product development to merger negotiation.

The U.S. intelligence agency also compiled a report stating China had made industrial espionage an integral part of its economic policy , stealing company secrets give them an edge over U.S. and other foreign competitors to further its goal of being the world's biggest economy.

Huawei: U.S. government impeding market competition
Ultimately, the outcome of the report was disappointing, Huawei said.

Its company spokesperson said: "We adopted a transparent approach in providing the information to ensure the results are fact-based and unbiased, hoping the committee's objective review of our business activities and the global cybersecurity issue can clarify the misperception of Huawei.

"However, despite our best effort, the committee appears to have been committed to a predetermined outcome. We have to suspect that the only purpose of such a report is to impede competition and obstruct Chinese ICT companies from entering the U.S. market," she added.

The Chinese commerce ministry this week also hit out at the report . A ministry spokesperson, Shen Danyang, said it strongly opposed the report as it was based on subjective guesswork and untrue evidence, and used national security as an excuse to block Chinese companies from fair competition in the U.S. market.

ZDNet Asia asked Cisco whether it would suffer any business repercussion in China and other markets friendly to China, as a result of the U.S. government report. To this, the spokespersons said: "This is not a China issue. This is a Huawei issue."

Not giving up on North America
Despite the challenges, Huawei said it will not throw in the towel in its efforts to break into the U.S. market .

The company said it was committed to being a long-term investor and provide innovative products and services to its U.S. customers, as well as a "responsible investor, tax payer and corporate citizen".

Yu pointed out that the North America market was too big for the Chinese vendors to ignore, given that many operators were in the midst of upgrading their wireless infrastructures for 4G deployments. The market remains a significant component of the companies' overall global strategies, the analyst said.

That said, she believes both companies will experience a slowdown in growth in the foreseeable future.

Walker agreed. He said both companies will see their businesses affected in both the U.S. and Europe, although the reasons for this go beyond just business and will range from the upcoming U.S. presidential elections, U.S.-China relations, and other geopolitical issues.

In the meantime, Chinese vendors will have to adopt a wait-and-see position and ride out the storm, he said.

Alternatively, they can seek a compromise with relevant authorities so they can carry on with driving their global business, he added.

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Topics: Networking, Government, Huawei, Security

About

A Singapore-based freelance IT writer, Kevin made the move from custom publishing focusing on travel and lifestyle to the ever-changing, jargon-filled world of IT and biz tech reporting, and considered this somewhat a leap of faith. Since then, he has covered a myriad of beats including security, mobile communications, and cloud computing... Full Bio

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