Inside The Chinese Company America Can’t Trust

At lunchtime in a company restaurant in Shenzhen, young engineers and programmers lounge over plates of grilled salmon, tap on their smartphones and chat in several languages. Like their counterparts in Silicon Valley and Bangalore, these ambitious Chinese 20-somethings, with degrees from top universities, are trying to build lucrative careers at one of their nation’s biggest private companies, the telecommunications giant Huawei Technologies. In their sedate jackets and open-necked shirts, they don’t look like a mortal threat to the U.S. But to politicians and cybersecurity experts in Washington, these kids are potential spies and saboteurs, and the telecom equipment they design is too dangerous to install in American communications networks.

These experts worry that allowing Huawei equipment to plug into the networks would give the Chinese government or the People’s Liberation Army (PLA) backdoor access to sensitive computer systems or telephone lines, potentially allowing them to disrupt communications or pilfer valuable economic and military secrets. The danger, the company’s detractors say, isn’t just theoretical. “We believe that China has the means, opportunity and motive to use their telecommunications company against the U.S.,” says Congressman Dutch Ruppersberger, the ranking Democrat on the House Permanent Select Committee on Intelligence. He says the committee wants “to put our citizens on notice” about “how serious this is and that the Chinese government is working with them and is involved.” Fears over Huawei also reflect the growing concern about the vulnerability of American communications networks, which have recently come under repeated attacks by Chinese hackers.

Largely unknown to U.S. consumers, Huawei not too long ago was barely known to the Chinese. But the telecommunications behemoth is the chief rival to Sweden’s Ericsson for top share in the global market for telecom infrastructure–the plumbing for the world’s mobile-phone networks. With $35.4 billion in sales last year, more than Goldman Sachs or McDonald’s, Huawei likes to brag that a third of the world’s population is hooked up to networks featuring its gear. Huawei is also the world’s third largest smartphone company, behind Samsung and Apple, and made a splashy display of its handsets at January’s Consumer Electronics Show in Las Vegas.

Huawei’s rapid rise and global reach is making U.S. lawmakers extremely nervous. Last October, Ruppersberger’s committee concluded that Huawei’s equipment “could undermine core U.S. national-security interests.” Huawei hasn’t been shut out of the American market entirely: U.S. sales of its products topped $1.3 billion in 2011. But that represents a mere 4% of the firm’s total revenue, and no major U.S. service provider uses Huawei-made hardware in its networks. To get approval to buy a controlling stake in Sprint Nextel in late March, Japan’s Softbank had to pledge to strip out any Huawei equipment being used in the U.S. and not buy any more.

Huawei says it would never spy on the U.S. Countries from South Korea to the U.K. have used its gear without incident. “There is no evidence that Huawei has ever been complicit in abetting or conducting espionage on anyone,” says Eric Anderson, author of Sinophobia: The Huawei Story and a professor at the National Intelligence University in Washington, a federal institution that trains national-security officials.

But fears that China is seeking opportunities for digital skulduggery have been exacerbated by the recent explosion in Chinese cyberattacks on the U.S. government and businesses. In recent weeks President Barack Obama and Treasury Secretary Jack Lew have both warned China to stop its online aggression, and Defense Secretary Chuck Hagel in March called for U.S. intelligence assets to be repositioned from the Middle East to Asia to protect against the growing threat. In February a U.S. security firm accused the PLA of running a massive hacking ring. (There’s also alarm about old-fashioned spying. In the past year alone, the Justice Department has charged more than 100 individuals or corporate defendants with stealing trade secrets or dual-use technology for China or Chinese entities.) With the links between Huawei and the Chinese state and military still murky, its critics are convinced that the company is a Trojan horse. As a major global telecom player, Huawei is certainly too big to ignore. Is it also too big to trust?

The controversy over Huawei is, in part, a product of the broader decline in American manufacturing. The U.S. telecom industry, like so many others, is increasingly reliant on Chinese manufacturing. While Cisco Systems is a major player, most companies in the industry are not American but Swedish (Ericsson), French (Alcatel-Lucent), Finnish (Nokia Siemens) or, in Huawei’s case, Chinese. In 2006, Alcatel acquired what had been the U.S. leader, Lucent Technologies.

To the Chinese, Huawei’s rise is a prime example of the country’s ability to rapidly catch up to the West. To its critics, Huawei is a creation of the Chinese government, not free-market ingenuity. A 2005 report from the Rand Corp. characterized Huawei as part of a “digital triangle” composed of commercial technology companies, state research institutes and the Chinese military, all aimed at upgrading China’s defense capabilities. Huawei denies having any special ties to the PLA. Never having listed on any stock exchange, its management is not obligated to share its finances or other information about the company. Under a persistent spotlight, the firm has started opening up by printing an annual report with financial statements and hiring an army of smooth-talking spokespeople. Although TIME was allowed to interview some managers, repeated requests over several months to meet top Chinese executives at Huawei were rebuffed.

Enigmatic Entrepreneur

Much of the suspicion Huawei attracts can be traced to its founder, Ren Zhengfei, 68, who rarely appears in public. “People in the industry often say Ren Zhengfei is as mysterious as he is great,” said a 2011 note to Huawei employees written by Ren himself. “I keep a low profile not because I attempt to build myself up but because I am scared.” The businessman “has no hobbies, and most of his [private] time he spends on reading,” says longtime friend Tian Tao. When he’s not consuming books on everything from Western history to Taoist philosophy, Ren keeps a firm hand on his company, retaining veto power over decisions taken by a board made up mostly of close associates, including his daughter Cathy Meng, who is also Huawei’s CFO.

Born in the southern province of Guizhou to schoolteachers, Ren graduated from the Chongqing Institute of Civil Engineering and Architecture in 1963. In 1974, according to Huawei’s latest annual report, he joined the engineering corps of the PLA and was assigned to build a chemical-fiber factory. He retired from the PLA in 1983, but security analysts suspect that Huawei maintains a relationship with the army to this day. Cheng Li, a senior fellow at the Brookings Institution, says telecom and military interests are too entwined in China for one to believe otherwise. “The telecom industry is part of a national defense industry in China,” he says. “Because of the nature of the company, how can you think there is no relationship [with the PLA]?” Huawei counters that it manufactures equipment solely for commercial use and conducts no research activities with the PLA. Ken Hu, a top Huawei executive, pointed out in a 2011 statement that “Mr. Ren is just one of the many CEOs around the world who have served in the military.”

After leaving the PLA, Ren relocated to Shenzhen, a special economic zone and the centerpiece of China’s early experiment in economic liberalization. He worked briefly at a state oil company and launched Huawei in 1987 with $3,400 from his savings and other investors. The company was a tiny start-up in a Chinese market dominated by big foreign firms and state-owned enterprises. “We were considering something that was a bit unimaginable, almost like a toad trying to catch a swan for its meat,” Ren wrote in his 2011 note.

Huawei initially resold telecom switches in China from a firm in nearby Hong Kong, but in four years it had developed its own switch. By 1993, Ren’s team had designed a much larger switch that allowed the firm to enter the mainstream telecom market. Critics are suspicious of the company’s meteoric rise. Chinese press reports and academics who have studied the company claim, for instance, that Ren did some kind of telecom-related work while he was in the PLA and that Huawei got help from state banks or an outside infusion of technology–claims Huawei denies or won’t discuss. Other analysts believe that Huawei was not on the government’s radar in its early years. What is clear is that Huawei’s hardware quickly grabbed market share from powerful Chinese state enterprises and foreign firms. Huawei landed its first contract outside China in 1997 in Hong Kong and then targeted emerging markets in Africa, Southeast Asia and Latin America. The company undercut its Western competitors by as much as 20% and made an early move into the U.S. market in 2001, opening its American headquarters in Plano, Texas.

Huawei did not achieve its global reach without help from Beijing, analysts say. The company “has huge pockets because of the way it has integrated with the Chinese government,” says David Emberley, who analyzes telecom equipment at the research firm IDC. According to Hu’s 2011 open letter, the state-owned China Development Bank made credit lines worth $30 billion available for potential customers of Huawei equipment. Huawei strenuously denies that its ties to the government are cause for alarm. “We have the same relationship [with the Chinese government] as Cisco does with the U.S. government,” says spokesman Scott Sykes.

Barriers to Entry

That cuts no ice with U.S. Lawmakers, who have repeatedly intervened to stymie Huawei: this is a rare economic issue that enjoys almost total bipartisan support in Congress. “Given the number of cyberattacks which have occurred in the past year alone, the U.S. government must take every precaution in protecting their networks,” says Senator Saxby Chambliss, the top Republican on the Senate Intelligence Committee. In 2011, Huawei was pressured by U.S. officials to unwind a $2 million acquisition of assets from insolvent server-technology firm 3Leaf Systems after it had already completed the deal. As far back as 2007–08, Huawei backed out of an attempt to acquire U.S. network-equipment outfit 3Com with Bain Capital after the proposal faced resistance from Washington. Ruppersberger says he met with Huawei’s founder last May and confronted him. “I basically said, ‘Look, I know we’re in a global economy, but the bottom line is you need to tell your country to stop cyberattacking our businesses because, if not, it’s our obligation to protect United States citizens from these thefts.'” Ruppersberger says Ren denied any link between his company and the Chinese government.

Huawei executives argue that spying on customers would be corporate suicide. “It would be immensely foolish for Huawei to risk involvement in national security or economic espionage,” Charles Ding, a senior vice president at the company, told the House committee during hearings last year. Other Huawei officials suggest that security jitters are a cover for old-fashioned protectionism. “Security is not the real issue,” says Rajiv Weimin Yao, a Huawei vice president based in Gurgaon, near New Delhi. Huawei says its competitors benefit from steps to block its progress. “You can’t help looking at the U.S. [security concerns] with jaded eyes,” says Eric Harwit, a professor of Asian studies at the University of Hawaii and the author of China’s Telecommunications Revolution. U.S. politicians, he says, “are just protecting their own companies.” Huawei points out that it manufactures equipment in the same way most major technology firms do, with parts collected from all over the world, including the U.S. For some of its production, Huawei outsources the assembly to other companies like Taiwan’s Foxconn, which also makes Apple’s iPhones.

But it isn’t just the U.S. that is worried about Huawei’s intentions. Last year the Australian government prohibited the company from bidding to supply equipment for a national broadband network. In the U.K., a parliamentary committee is investigating the security implications of British Telecom’s use of Huawei equipment. Canada, too, has expressed concerns about the company’s gear.

Huawei has made efforts to ease the concerns of foreign governments. In the U.K., it set up a special center to test its equipment for security flaws. In New Delhi, the company says, it agreed to share sensitive technology with the Indian government. But some U.S. security analysts say those measures are not enough. Telecom systems require constant updating and maintenance, in theory giving manufacturers endless opportunities to subvert networks. John Suffolk, Huawei’s U.K.-based chief cybersecurity officer, says Huawei would be willing to try any new method to ensure the trustworthiness of its systems. “If they come up with a better model, it is in our interests to do that,” he says. “If you don’t think [the testing process] is enough, then what is?”

Even the most sophisticated testing can’t assuage the fear of what Huawei might do or might be compelled to do in the future. What, ask security experts, would Ren do if asked by the PLA to use his equipment for spying or sabotage? Even Harwit, who dismisses claims that Huawei has any meaningful ties to the PLA, believes that “like any Chinese company, they are going to follow Chinese-government requests.” The company dismisses such scenarios as far-fetched. “Huawei is not China,” insists Sykes. “Huawei is Huawei.”

With Washington plainly unconvinced by such protestations, Huawei may have no option but to limit its ambitions in the U.S. to the market for smartphones, which do not pose the same security threat. “No one cares about handsets,” says James Lewis, director of the technology and public policy program at the Center for Strategic and International Studies. “They can sell as many as the market can take.” But keeping Huawei’s telecom equipment out of the U.S. won’t entirely remove the risks to American communications systems. The supply chains of many electronics manufacturers stretch into China, and these complex networks of commerce are difficult to monitor. The most dangerous Trojan horses may be the ones that don’t publish annual reports or employ p.r. consultants.