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China: Too Fast a Learner?

By Bruce Einhorn The issue of intellectual-property rights protection in China is in the headlines these days, thanks to a high-profile lawsuit by Cisco Systems against Huawei Technologies, China's leading manufacturer of telecom and network equipment gear. Cisco alleges that the Chinese outfit has copied everything from software to training manuals, a charge that Huawei denies. After weeks of negotiations to avoid litigation, Cisco filed suit in Federal District Court in Texas, where a Huawei affiliate has an office (see BW, 02/10/03, "Cisco: Making a Federal Case Out of It").

Is Huawei guilty of piracy? Or is Cisco (CSCO)

trying to use the courts to blunt the advance of a hard-charging Chinese rival? It's hard to say, given the complexities of patent and copyright law. But the Cisco-Huawei fracas does illustrate the growing dangers that multinationals face when operating in China.

Huawei isn't even two decades old, having been founded in the late 1980s by a former officer in China's People Liberation Army. But in a relatively short time, it has leaped to the head of the pack in the country -- and now poses a large enough threat to Cisco's overseas markets that the Silicon Valley behemoth has resorted to legal action.

CONCRETE PLANS. Nobody from Huawei would talk to me last week, after the news of the lawsuit broke -- but the Shenzhen-based company did issue a press statement emphatically denying the charges and pointing out that more than 10,000 engineers work at Huawei on developing its own patents and other intellectual property.

In an interview with me last year, Huawei Vice-President William Xu boasted of its commitment to research and development. Out of 22,000 total Huawei workers, he said, "We have more than 10,000 R&D engineers -- and 40% hold master's degrees or higher." Indeed, it had so many that the department long ago outgrew its space at headquarters, forcing Huawei to install many of its R&D workers at a resort hotel in Shekou, on the other side of Shenzhen and close to the Hong Kong ferry pier.

That's why a steel-and-glass multistory R&D headquarters was rising on the Huawei campus, which would allow it to concentrate its engineers, rather than having them spread around town. "From the start, we've attached a lot of importance to R&D," Xu said. "We have a commitment to put no less than 10% of our sales into R&D." Thanks to lower wages in China, Xu said, Huawei's R&D costs were just one-third those of rivals in the U.S. or Europe.

PRICE OF ADMISSION. There's no question that Huawei and other Chinese companies such as ZTE Corp., another Shenzhen-based company that makes communication equipment, have been able to take advantage of the extensive transfer of technology by multinationals eager to break into the China market. As Western outfits open factories and research centers in China, they've helped train thousands of local engineers.

This phenomenon partly explains why India has no Huaweis or ZTEs, even though it's also a country with a billion-plus people that each year graduates many thousands of brilliant engineers from its top schools. The subcontinent simply has far fewer high-tech multinationals.

In the long run, this training will help China create companies of its own that can compete with the foreigners. So far, it has been a price that most multinationals have been willing to pay, since they know that they need to be regarded as good corporate citizens if they want to do well in China.

A DEMANDING PARTNER. That's "the bargain that the foreign-vendor community is stuck with for China Inc.," says Ross O'Brien, director of research for Asia-Pacific at Pyramid Research in Hong Kong. "Foreign technology companies have educated a generation of [Chinese] telecom engineers in the technology and platforms that the companies themselves have developed. They have to, because China demands more and more commitment."

It will be up to a Texas jury to decide if Huawei violated Cisco patents and copyrights. But one thing seems sure: Chinese companies are becoming increasingly confident in their ability to match the best of Silicon Valley -- and Cisco may need a lot more ammunition than one lawsuit to stop this charge. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

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