Huawei - Chinese Telecom Firm Plans for Growth in U.S. Market

C O N F I D E N T I A L GUANGZHOU 000410

SIPDIS

STATE FOR EAP/CM, S/P, EEB/CIP, EAP/J, AND INR/EAP
STATE PASS USTR FOR TSTRATFORD, WINELAND, JMCHALE
COMMERCE FOR IKASOFF, NMELCHER

E.O. 12958: DECL: 07/06/2029
TAGS: EIND ECPS ETTC ETRD EINT ECON PGOV PINR CH
SUBJECT: Huawei - Chinese Telecom Firm Plans for Growth in U.S. Market


1. (U) Classified by Economic/Political Section Chief Stephan Lang
for reasons 1.4 (b) and (d).


2. (C) Summary: Huawei will nearly double its U.S. workforce this
year, according to executives who briefed visiting students from the
U.S. National Defense University's Industrial College of the Armed
Forces (ICAF). The global telecommunications equipment manufacturer
and solutions provider headquartered in Shenzhen will soon have
facilities in 10 U.S. cities. It continues to grow through the
economic downturn, expecting 2009 revenue to be up about 29 percent
from last year. Emphasizing the firm's commitment to research and
development, executives said that Huawei had filed more applications
under the international Patent Cooperation Treaty last year than any
other company in the world. Repeating statements that Huawei is a
private, employee-owned company, the executives said its rapid
expansion had been financed primarily by company profits. The
briefing concluded with the senior Huawei executive repeating an
oft-asked question about why western media continues to portray the
company as controlled by China's government and expressing the
company's desire to engage in more dialogue with international actors
to counter this notion. End summary.

Expanding Presence in the United States
--------------


3. (C) Huawei plans to grow its U.S. workforce dramatically in 2009,
according to Ross GAN, the firm's global branding manager. In a
briefing for U.S. military and civilian students from the ICAF, Gan
said the firm now employs more than 560 people in the United States
with a localization ratio of more than 70 percent. It plans to
employ a total of 1000 U.S. employees by January 2010.


4. (C) Huawei's U.S. research and development (R&D) and sales office
locations in the United States have also expanded quickly in recent
years. It first established a U.S. presence in 2001 at its Plano,
Texas, headquarters. Gan said Huawei's U.S. locations now include
Dallas, San Diego, Santa Clara, Chicago, New Jersey, San Antonio,
Walnut Creek, Philadelphia, Denver, and a new office in Seattle that
will open soon. In addition, the company has worked aggressively to
establish joint research labs with technology partners that include
Microsoft, HP, Qualcomm, Texas Instruments and Infineon. Gan said
Huawei has also entered joint ventures with other technology partners
like Global Marine, Symantec, Motorola and Nokia-Siemens.


5. (C) Gan emphasized how Huawei's management and business models
have been strengthened by partnerships with U.S. firms. He said IBM
consultants have worked with Huawei executives on leadership
development, quality control and other key business processes.
Accenture helped Huawei develop its customer relations management
system, Hay Group has been a major consultant for modernizing
Huawei's human resources processes, and PricewaterhouseCoopers has
been instrumental in developing sound financial management systems.

Huawei's Growth Has Not Slowed
--------------


6. (C) Huawei's vice president of global marketing, Chaowen (Charles)
HUANG, said the company's annual revenue is expected to exceed USD 30
billion this year, up from USD 23.3 billion in 2008. The company has
grown steadily since 2004 when revenue was USD 5.6 billion. Last
year, 75 percent of revenue was generated outside of China, with the
highest growth in Latin America at 71 percent and North America
(primarily in Canada) at 58 percent. Revenue growth in China last
year was 38 percent.


7. (C) Although Huawei's core business remains telecom equipment, the
company's future lies at the intersection of three core product lines
- fixed, mobile and IP (internet protocol) networks, according to
Huang. Huawei has positioned itself to compete with fixed network
market leaders Alcatel-Lucent and Nortel, mobile network solution
leaders Ericsson and Nokia-Siemens, and IP network leaders Juniper
and Cisco. Huang claimed that no other firm could offer unified
solutions for telecom service providers around the world. Huawei
currently supplies more than 35 major telecom service providers,
including British Telecom, Vodaphone and Telefonica. Recent projects
include new deals with Telus and Bell Canada, Cox Communications in
the United States, continued work with eMobile in Japan, and
Hutchinson and PCCW in Hong Kong.

R&D is Key
--------------


8. (C) In response to a question about Huawei's approach to
intellectual property rights (IPR),Huang said the company's rapid
growth had only been possible because of relentless focus on R&D and
technological innovation. He pointed out that the company annually
spends 10 percent of total revenue on R&D. Full-time R&D staff
exceeds 37,000 people worldwide, including major facilities in
Silicon Valley, a wireless technology research center in Dallas-Fort
Worth, and 2000 software engineers in Bangalore.


9. (C) Huawei filed the most international Patent Cooperation Treaty
(PCT) applications in the world for the first time in 2008, according
to Huang. The firm had 1,737 PCT applications last year, up from
1,365 in 2007 and just 249 in 2005. Huang said the company's recent
technical achievements included the world's first commercial contract
for "Long Term Evolution" (LTE) mobile network technologies and the
first commercial deployment of single radio access network (RAN)
wireless technology.

Financing Rapid Growth
--------------


10. (C) When asked how the company financed its rapid expansion,
Huang repeated public statements that Huawei is a private,
employee-owned corporation. He claimed that although Huawei's growth
over the last 20 years appeared fast when compared to other Chinese
companies, it was average or even a bit slow when compared to U.S.
firms like Cisco or Google. Because Huawei is not a publicly listed
company and China's capital markets are not as well suited as U.S.
markets for raising large amounts of capital, the firm has had to
rely primarily on profits to finance expansion, according to Huang.
He also said China's large commercial banks had financed some of the
firm's expansion. In addition, Huang noted that Huawei had spun off
lucrative but non-core subsidiaries such as an energy division that
was sold to Emerson and an Internet company that was purchased by
3Com. The sale of the two firms earned Huawei approximately USD 2
billion, which provided additional financing for the firm's growth.


11. (C) Huang concluded the discussion by asking why western media
continued to portray Huawei as being closely associated with China's
government and military. He described the company's ongoing efforts
to counter western misperceptions by increasing transparency with the
media, customers and the public, as well as more direct interaction
with western governments, citing the ICAF visit as an example. The
Huawei executives said they would continue these efforts and invited
additional opportunities to expand dialogue.

A Tour of Huawei's Shenzhen Campus
--------------


12. (C) Before the briefing with the Huawei executives, the ICAF
visitors were given a guided tour of the firm's 1.3 square kilometer
campus, located in Longgang district of Shenzhen. The Huawei
facility is close to other major technology manufacturers like
Taiwan's Foxconn (Hon Hai) and Singapore's Flextronics. Tour guides
said the campus is divided into seven functional "neighborhoods,"
namely headquarters, R&D, training, manufacturing, data/IT,
logistics, and a residential area.

13. (C) The group also visited Huawei's data center; a large,
two-story stone building where tour guides said the company's server
farm was located on the first floor. The group was escorted to the
second floor and shown a conference room that overlooks Huawei's call
and data system control center, a large hall with rows of phone and
computer terminals arranged in front of massive wall-sized projection
monitors. Technical support operators, sitting at more than 50
stations, faced large projections of worldwide network and data
traffic in real time on the front wall of the control center. One
executive commented that the data system "war room" was designed in
conjunction with IBM consultants, although many of the features have
not yet been tested a true emergency.


14. (C) The tour also included a brief walk-through of Huawei's
logistics center, an 11,000 square meter automated warehouse, which
Huawei employees said was the largest of its kind in China. Guides
pointed out that because the storage area of the warehouse is managed
entirely by computers and robots using bar code scanners, the
logistics operation can run twenty four hours a day without air
conditioning or lighting. In addition to the high volume of
components entering and leaving the logistics center via cargo truck,
a large conveyor belt housed in a wire suspension bridge connects the
automated warehouse with the campus's manufacturing center across the
road. However, company representatives noted that most of the firm's
equipment manufacturing had migrated to factories in nearby Dongguan
in recent years.

JACOBSEN