Technology

China's Huawei, Unwelcome in the U.S., Finds Favor in Canada


For years, Huawei Technologies has been a pariah in the U.S. The House Permanent Select Committee on Intelligence in 2012 issued a report concluding that its ties to the Chinese government pose a threat to U.S. national security and that Americans should avoid buying from the company, China’s biggest maker of telecom-networking equipment. In July 2013 former National Security Agency Director Michael Hayden, now a director at rival Motorola Solutions (MSI), said he had evidence that Huawei, whose founder and chief executive officer served in the People’s Liberation Army, provided customer information to the Chinese government. Huawei, which also makes smartphones and tablets, has denied the claims, calling them “tired, unsubstantiated, defamatory remarks.”

The company has scaled back its ambitions in the U.S. for the time being. Instead, it’s turned to another North American market, with far better results. In Canada, Huawei supplies 3G and 4G network equipment to Bell Canada (BCE:CN) and Telus (TU), two of the nation’s big three cellular operators. Its hardware makes up 100 percent of the 4G network of Saskatchewan Telecommunications, the regional carrier owned by the provincial government. SaskTel also relies on the Chinese company to troubleshoot technical problems and help the carrier plan ways to expand its service. “Huawei is not just here to sell equipment and leave,” says Ron Styles, SaskTel’s CEO. “They are at the table with us when we are making decisions about what’s needed for our customers.”

Until recently, the Chinese company’s strategy up north was “to maintain a relatively low profile,” says Scott Bradley, Huawei Canada’s vice president for corporate and government affairs. Although it has almost doubled its quarterly smartphone shipments this year, sending 20.3 million phones around the world in the second quarter to place third behind Samsung Electronics (005930:KS) and Apple (AAPL), most of its sales outside China are in Europe, Africa, and the Middle East. It’s now ramping up efforts to sell smartphones in Canada, where it has less than 1 percent of the market. “Recognizing that we had challenges in the United States, we weren’t in a position to aggressively build a consumer brand” in Canada, but that’s changing, says Bradley. In a July 29 report, IDC said its figures “show that the momentum is undoubtedly there” for Huawei to push further into markets where it’s been weak.

Bradley says Huawei has new opportunities in Canada because of changing regulations that, as of December, prohibit carriers from locking consumers into three-year contracts. The new policy, which gives people more flexibility to switch from one carrier to another, means operators have to make in two years the money they used to make in three. The shorter window has pushed carriers to cut back on subsidies for pricier phones, making Huawei’s models more attractive, says Bradley. Huawei phones can’t compete with an iPhone or a Samsung Galaxy when the competitors’ phones are heavily subsidized and comparable in price, he says. But as consumers see the true cost of their phones, the Chinese company may have an edge.

To help sell its products in Canada, Huawei is pumping up marketing. This summer it’s sponsoring the Canadian leg of pop singer Katy Perry’s concert tour; it’s also helping to pay for uniforms and equipment for some 35 amateur hockey, curling, and soccer teams in Canada. It’s donating networking hardware to remote communities in the far north of the country to better link them with cell networks. “We want to be embedded with people’s lives,” says Sean Yang, Huawei’s top executive in Canada.

That prospect concerns some Canadians. While Huawei hasn’t encountered the same level of resistance in Canada as it has in the U.S., it’s still had to respond to accusations that it’s spying for its home country. On a visit to Beijing in February 2012, Canadian Prime Minister Stephen Harper attended a signing ceremony for a Huawei deal with Bell Canada and Telus, but after the U.S. House Intelligence Committee’s report came out later that year, Harper’s administration barred Huawei from bidding on national government contracts for networking equipment. Former Canadian security and intelligence agents have expressed concern in legislative hearings and in the press that Huawei’s presence in Canada’s cellular network makes the country more vulnerable to cyber attack. “You wonder, is it too late? Have we drunk the water and now we’re contaminated?” says Michel Juneau-Katsuya, former head of the Asia-Pacific desk at the Canadian Security Intelligence Service, Canada’s equivalent of the CIA. Bradley says the company is “working openly and transparently with our customers and government.”

Styles of SaskTel makes no apologies for cooperating closely with Huawei. “The province is my shareholder, and the province has no concerns at all about the relationship,” he says. “They have seen the benefits of working with Huawei.” SaskTel sells two midrange Huawei smartphones for C$350 ($320) and C$450, less than half the price of an unsubsidized iPhone 5S, and Styles says he expects demand to grow. “A lot of people are looking for phones at slightly lower prices,” he says. “Phones are very expensive, and there’s a real opportunity for companies that are able to bring the price down a notch.”

Last month, Huawei reported operating profit of 24.85 billion yuan ($4 billion) for the first half of the year, with sales up 19 percent to 135.8 billion yuan. CEO Ren Zhengfei says he isn’t racing to invest in the U.S. “We will accelerate efforts in countries that have accepted us,” he told reporters in London in May. “Right now we should not be expending too much effort in the United States, as it might take 10 or 20 years for them to know that Huawei is a company with integrity.”

The bottom line: Huawei has sold Canada on its telecom equipment and is starting to pitch its phones to consumers there.

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Einhorn is Asia regional editor in Bloomberg Businessweek’s Hong Kong bureau. Follow him on Twitter @BruceEinhorn.
Mayeda is a reporter for Bloomberg News in Ottawa.
Argitis is Ottawa bureau chief for Bloomberg News.

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