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Huawei Isn't in the Clear Yet

By Peter Burrows For China-based networking giant Huawei Technologies, it's out of the frying pan and into the fire. Ever since it was sued by Cisco Systems (CSCO) in early 2003 for a slew of alleged intellectual-property violations, the Chinese company has been out to prove that it can be trusted to follow global norms for intellectual-property protection. Huawei got a major stamp of approval on July 28 when Cisco agreed to dismiss the lawsuit, but its problems may not be over.

On July 21, the general counsel of Fujitsu Network Communications sent a letter to Huawei CEO Ren Zhengfei, informing him that a Huawei employee had been caught allegedly trying to filch information on rivals' products at a recent trade show.

On June 23, Yi Bin Zhu was discovered after hours at the SuperComm show in Fujitsu's booth removing the casing from a $1 million piece of networking gear and taking photos of the circuit boards inside. According to a July 21 letter sent by Melanie Scofield, the Fujitsu unit's chief counsel, a security guard was summoned and confiscated the photo card in Zhu's digital camera along with a notebook containing notes and diagrams of other suppliers' gear.

SENT TO THE FBI. Executives from AT&T (T), Cisco, Lucent (LU), Nortel (NT), and Tellabs (TLAB) also received copies of the letter, suggesting Zhu may have had information on some of their products as well. Zhu was wearing a badge saying he worked for an unknown company called "Weihua" (Huawei, with the syllables in reverse order). But a source tells BusinessWeek Zhu gave the guard a Huawei business card as well.

Zhu couldn't be reached by BusinessWeek, but he told the online trade magazine Light Reading that it was the first time he had attended a U.S. trade show, and that he did not know photography was verboten. He denied removing circuit boards from the systems, according to Light Reading.

Fujitsu has given the photo card and notebook to the FBI. "Because of the potentially sensitive nature of this information, the only logical conclusion that one can draw is that the employee in question was engaged in unlawful activities that may have been a violation of the Economic Espionage Act of 1996," reads Scofield's letter. "By this letter you are hereby put on notice that such behavior will not be tolerated by FNC or any other companies that have potentially been affected by your employee's actions."

TARNISHED REPUTATION. Scofield was on vacation and couldn't be reached for comment, but a company source says Fujitsu has decided not to press any charges against Huawei. The FBI declined comment. Other companies say they haven't heard from the Feds. Huawei says the FBI hasn't gotten in touch. It calls the incident "an unfortunate misunderstanding" and is trying to determine if disciplinary action is needed. Zhu is still working, but with reduced pay.

Regardless of legal events that may or may not occur, the incident will surely hurt Huawei's effort to rehabilitate its reputation as a law-abiding corporate citizen. It claims to have gone to great lengths in recent years to adopt Western standards of intellectual-property protections -- especially after admitting in the course of the Cisco trial that a Huawei contractor had indeed introduced some Cisco source code into Huawei's own software.

The dismissal of the Cisco case suggests that Huawei has made headway in that regard, but reputations die hard. An executive from one of the companies that received Scofield's letter says, "I'm not surprised by any of this. That's Huawei's mode of business. They take what other people have done and build on it -- and sometimes improve on it!"

The Zhu incident surely isn't the worst thing that has ever happened on a trade-show floor, where checking out the competition's new gear under the guise of a friend's badge is a time-honored tradition. But given Huawei's circumstances, it's certainly bad for the company. Kevin Mitchell, an analyst with Infonetics Research, says, "Huawei doesn't have the best reputation in terms of intellectual property integrity, and this certainly doesn't help." With Bruce Einhorn in Hong Kong

Burrows is computer editor for BusinessWeek in the Silicon Valley bureau

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