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Cablegate: Huawei Says 3com Plans Still Uncertain

VZCZCXRO2435
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0171/01 0810832
ZNR UUUUU ZZH
R 210832Z MAR 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6991
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC
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UNCLAS SECTION 01 OF 02 GUANGZHOU 000171

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SENSITIVE
SIPDIS

STATE FOR EAP/CM
STATE PASS USTR

E.O. 12958: N/A
TAGS: ETTC EINV ECPS ECON CH
SUBJECT: HUAWEI SAYS 3COM PLANS STILL UNCERTAIN

GUANGZHOU 00000171 001.2 OF 002


(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. IT SHOULD NOT BE
DISSEMINATED OUTSIDE U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC FORUM
WITHOUT THE WRITTEN CONCURRENCE OF THE ORIGINATOR. IT SHOULD NOT BE
POSTED ON THE INTERNET.

REF: 07 GUANGZHOU 1227

1. (SBU) Summary: Huawei Technologies' plans on whether to resubmit
a bid for Massachusetts-based 3Com Corporation remain unclear,
according to senior executives. Expressing frustration with the
approval process, one senior executive wondered if Huawei had been
singled out by the U.S. government. They stressed that Huawei is
privately owned by its employees and repeated denials of any link to
the Chinese military. The Chief Executive Officer (CEO) complained
that neither the U.S. nor Chinese government trust Huawei. End
summary.

No Decision on Resubmitting 3Com Bid
------------------------------------

2. (SBU) Huawei has not yet made a final decision on whether to
resubmit a bid for 3Com and may give up on the deal instead,
according to Chief Sales and Service Officer Ken Hu. He told
Embassy Economic Minister Counselor on March 17 that Huawei had not
initiated the acquisition plan, but rather had been approached by
Bain Capital to participate in the buyout. The approval process for
the deal had already been very long and disappointing. Describing
Huawei's investment in 3Com as financial rather than strategic, Hu
said he didn't understand why it had created so much controversy.
Huawei has made acquisitions in Europe and has been subjected to
similar review processes by European governments but had no
difficulty obtaining approval there. He complained that the
questions Huawei was asked during the U.S. approval process
suggested that the process had been politicized, citing questions on
links to the People's Liberation Army (PLA).

3. (SBU) Hu called Huawei's expansion plans for the U.S. market a
top priority, noting that Huawei's market share was very small in
comparison to its share in both the developing world and the EU.
Huawei had sales of just US$130 million in the United States in 2007
and aims to increase sales to US$200 million this year. It wants to
add major U.S. telecommunications companies like AT&T, Verizon and
Sprint to its list of customers. Hu said the company was
considering both acquisitions and greenfield investments, but was
leaning toward expanding existing greenfield projects, which are
more strategic. (At present the company has six sales offices and
four R&D centers in the United States.) He noted that these types
of investments create new jobs and might also be less likely to draw
political objections and asked how best to approach expansion in the
U.S. market so as to avoid future political problems.

Singled Out by U.S. Government?
-------------------------------

4. (SBU) Referring to recent visa cases, Hu wondered whether the
firm was being singled out by the U.S. government. He stated that
for the last year all Huawei employees had been limited to
single-entry visas only. Hu noted that even the CEO, Ren Zhengfei,
received only a single-entry visa earlier in the month. Hu
complained that this made things particularly difficult for top
management like himself who have to travel frequently on short
notice to meet customers in the United States. He emphasized the
company's strong relations with numerous reputable U.S. firms,
including IBM, HP, Intel, Motorola, and Microsoft among others.
Note: Per Department guidance, virtually all Huawei employees are
subject to clearance under the Visas Mantis program, which is
designed to prevent the unauthorized transfer of sensitive
technologies. Under Department policy, Chinese nationals who
receive Mantis clearance are only authorized single-entry visas.
End note.

Claiming 100 Percent Employee Ownership
---------------------------------------

5. (SBU) Hu asserted that Huawei is 100 percent privately owned and
the firm's employees are the only stockholders. Seventy percent of
its employees have stock, according to Hu. Explaining why the firm
had not listed publicly, he noted that Huawei operates in a
fast-changing industry. Many other companies, he argued, had
suddenly run into trouble because they needed to respond to investor
demands for short-term gains. He cited examples such as Lucent,
Sprint, Siemens and Alcatel. Much of Huawei's capital has come from
banks instead. Hu named Citibank, HSBC, Deutschebank, China
Development Bank and Industrial and Commercial Bank of China as
financial partners.

GUANGZHOU 00000171 002.2 OF 002

Denying Political/Military Connections
--------------------------------------

6. (SBU) Ren Zhengfei, Huawei's founder and CEO, denied claims that
either Huawei or Ren had close ties to the Chinese Government or
military in a separate meeting with the Consul General on March 10.
He argued that if Huawei had such connections it would be in the
real estate industry, where it could make quick, easy money. Ren
also pointed out that his service in the PLA during the Cultural
Revaluation was unusual considering his unfavorable political
background. Ren explained that his parents had both been sent to
labor camps during the Cultural Revolution because they were
identified as intellectuals. However, because the PLA had a
shortage of skilled technicians, he was allowed to join in order to
work on a chemical fiber joint-venture with France in northeast
China. Ren said he left the military as a major in 1983, when Deng
Xiaoping downsized the PLA.

Complaining of Lack of Trust
----------------------------

7. (SBU) Ren complained that neither the U.S. nor the Chinese
Government trusted Huawei. Huawei has had to slow its expansion
plans on more than one occasion as a result, he said. Ren commented
that Huawei had no intention of acquiring a controlling stake in
3Com. Expressing frustration with the process, and pointing out
that Huawei was not in a position to be a competitor with similar
hi-tech companies in the U.S., Ren speculated that the best solution
might be for U.S. investors to buy out Huawei's employees, who might
be happy to cash out after all the hard work they had put into the
company.

© Scoop Media

 
 
 
 
 
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