Vic Socotra

31 July 2008

The Phone Company

The scariest company you have never heard of just leapt past Nortel Networks and Motorola to become Number 4 in the global telecom hardware market.

I don’t mean to imply that the Huawei Technologies Co. Ltd. i s a direct and imminent threat to the national security of the United States of America. That would be putting it too lightly.

Let me say it explicitly: Huawei is flooding the developing world with appropriated technology at subsidized prices no network administrator could pass up. At a stroke, the legacy of AT&T and its successors is being appropriated by the People’s Republic of China.

There has been a tempest of controversy of late regarding the Foreign Intelligence Surveillance Act, or FISA, and whether the20US telecommunications industry should be immune to prosecution for their willing participation in the NSA warrantless wiretapping program.

The fuss about whether American companies cooperated, for good or ill, with their own government is going to seem quaint when the dust settles on this decade. Can you imagine the future Director of NSA calling up Zhengfei Ren, Chairman of Huawei at his headquarters in Shenzhen and asking him to help out the agency for the good of the country?

Permit me to anglicize Mr. Ren’s name, that is his family name, and his given name is Zhengfei. This may be the last decade in which we can anglicize anything.

Mr. Ren is reportedly the 190th richest person in China, not a billionaire yet, but just wait for the next quarterly report.

I am not quivering with the latest version of the Yellow Peril. I am a fan of most of the Chinas, and some of their governments. Zhengfei Ren has a Horatio Alger story that would make anyone proud. This is not “The Good Earth” of Pearl Buck8 0s time, though the story starts at the same time she told her parable of rags to riches to rags nearly a century ago.

Ren’s grandfather was from Jiangsu Province, and was a master chef who specialized in the curing of ham and pork for export to neighboring Zhejiang. His father was almost done with his university studies when his grandfather died in his junior year, and he had to get out on the pavement and make a living.

It was the time of the other Yellow Peril. The Japanese adveture in Manchuri a was in progress, and the invasion in the north forced the senior Mr. Ren south, where he went to work in one of Professor Mao’s arms plants as an accountant, and there he married a senior teacher at the local junior high school.

Their first child- good luck, a son- was Zhengfei. Over the decade of the civil war and the ascent of the Communists over the Kuomintong Nationalist he was joined by six siblings.

After junior high, Zhengfei matriculated at the Chongqing University of Civil Engineering and Archit ecture before joining an army research institute to work as a military technologist. He was excluded from Party membership then, which would have been a showstopper, had it not been for the quality of his work.

Based on his innovative contributions to the national defense, he was selected to be a People’s Army delegate to the National Science Conference in 1978. That was at the moment of the great awakening, when the post-Mao leadership realized that vast numbers of men under arms could not counter the technical superiority of the West. In 1982, Ren was forced to leave the army as part of a massive restructuring and reduction in force. Nearly a half million troops and civilian support personnel were put on the street to make their way in a new and aggressive socialist society that incorporated the capitalist strains of the West.

Within reason, of course.

Ren moved to Shenzhen and began work in the electronics section.

In 1988 he took a chance, and founded the Huawei Technologies Corporation, specializing in a Private Branc h Exchange (PBX) system of his own design, derived from available models compatible with international standards. The Chinese character he selected for his logo, in one context can mean “The nation of China,” or it can be used as adjective to mean “splendid,” or “magnificent.”

Nothing in the miracle of China is quite what it appears to be, since the concept of the military-industrial complex is not one that would occur to anyone. Of course it is all interconnected. Ren himself was a PLA engineer for most of his career, and venture capital in a socialist state has to come from somewhere, doesn’t it?

Once started, Mr. Ren contracted IBM for management consulting services, and streamlined his business operations. He was able to undercut virtually every company in the markets in which he chose to compete, and one by one the dominoes began to fall.

He formed joint ventures with the other great telecommunications firms, Siemens, and others, who were desperate to crack the perceived jackpot of the domestic Chinese market. After 2001, Huawei increased its speed of expanding into the vibrant overseas market. By 2004, overseas sales had surpassed that of the domestic market, and Ren had partnered with 3Com, Semantic and Cisco.

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If certain proprietary intellectual properties migrated along the way, it is only to be expected.

2004 was a big year for me in the telecommunications industry. A chance encounter in the pickle aisle of the Fort Myer Military Commissary led directly to a delightful stint with the Lucent Technologies Corporation, the rump organization that survived the court-ordered dismantlement of the AT&T Goliath.

It was in 2006 that I was sitting in my brown chair, listening to National Public Radio when I heard that our chairman, Pat Russo, had made a stunning announcement.

I have fond that it never good news to hear word about your company on the radio, unless is it commercial. I discovered, to my growing horror, that she had entered into an agreement with the French telecom giant Alcatel, and its chairman Serge Tchuruck to join forces in what she said was a merger of equals, but which we all knew was a takeover. To salve national pride, Pat became the CEO, and Serge moved up to become chairman emeritus.

Since my business was the one that connected the phone company with the Government, there was an unwillingness to deal directly with what had suddenly become a French company.

I went my way, presently, on excellent terms and with a lasting gratitude to a wonderful organization. But along the way, I had become acquainted with Mr. Ren’s firm, and the remarkable competitive advantage his routers and switches had in the global market.

I was thinking about that when I heard this week that Pat and Serge were both canned. Competition problems brought them down. I had to shrug. They will both do well with the millions they were paid to engineer the merger, and they will not have the anxiety that the rest of us felt when the news came down.

But I do have to consider that when the Director of NSA used to call us up, I had a reasonable expectation that we would do the right thing, whatever it seemed to be at the moment.
I do not have the same feeling about Zengfei Ren, at least about the three AM call from Fort Meade.

I have a suspicion that if it is Beijing on the line, he will pick right up.

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