Huawei Technologies has emerged as the world’s second-largest maker of networking gear thanks to growth in China, Europe, and emerging markets. The U.S. business is a different story. Just $1.3 billion of its estimated $35 billion in 2012 sales came from America. Now, amid rising congressional concerns about Chinese government-sanctioned hacking, Huawei may lose one of its most important stateside customers: Level 3 Communications, which runs a massive broadband network that helps carry traffic for most telecoms. JMP Securities analyst Erik Suppiger estimates that the Broomfield (Colo.)-based carrier has bought $200 million in optical networking gear from Huawei since 2009. It’s soliciting bids for its next three-year order, and Huawei isn’t likely to win, say two people who have spoken with Level 3 about its intentions but weren’t authorized to discuss them publicly. “There’s no way Level 3 will possibly select Huawei,” says Andrew Schmitt, an analyst for Infonetics Research.
Until recently, Level 3 has managed to keep its use of Huawei gear out of the spotlight, possibly because it only sells services to other networks. The company has never confirmed its use of the equipment; the only public evidence of it is an analyst report written at the time of the Huawei deal in 2009. Level 3 spokesman Jon Paul McLeary declined to comment.
In March, President Obama signed into law an appropriations bill (PDF) that prohibits federal agencies from buying IT systems from Chinese companies without first getting approval from the FBI or other federal cyber-espionage investigators. Mike Rogers (R-Mich.), chairman of the House Intelligence Committee, on April 8 reiterated earlier claims that Huawei is a security risk to the U.S. Citing similar concerns, AT&T and Verizon have spurned use of the company’s network gear for years, and SoftBank’s attempted takeover of Sprint Nextel was held up partly because SoftBank uses Huawei equipment. At an April 23 meeting at its Shenzhen headquarters, Huawei Executive Vice President Eric Xu told stock analysts the company was “not interested in the U.S. market anymore.”
Huawei’s effective blacklisting in the U.S. may result in a backlash against American tech companies in China. The magazine China Economy and Informatization ran a cover story about the security threats of U.S.-based Cisco Systems’ equipment in November, replacing the “S” in Cisco with a snake, shortly after its sales partnership with Chinese equipment maker ZTE ended. “The Chinese government may choose to retaliate against U.S.-based IT vendors by enacting a similar policy for screening IT system purchases in China,” the U.S. Chamber of Commerce, the Software Alliance (PDF), and nine other industry groups wrote in an April 4 letter to congressional leaders.
Cisco’s sales in China fell 4 percent in its most recent quarter, to about $500 million. Jaime Vallés, the company’s new head of Asia Pacific operations, says the slowdown was caused in part by a spending lull during the presidential transition from Hu Jintao to Xi Jinping. Cisco may be somewhat insulated from a backlash because of its long history in China. The company worked closely with the Chinese government to develop the country’s Internet infrastructure in the 1990s and continues to teach thousands of Chinese technicians to use its products. Joyce Ding, a teacher at the Institute of Services and Outsourcing in the eastern Chinese city of Suzhou, spent three weeks last year training at Cisco’s Silicon Valley headquarters. “Cisco sets the standard for networking,” she says.
China hasn’t been as hospitable to other Huawei competitors in the $12 billion optical networking business. U.S. providers, including Infinera and Ciena, both pulled out of China in the last decade. “I no longer have any interest in selling to China,” says Infinera Chief Executive Officer Tom Fallon. Now those U.S. companies are among the favorites to win back the Level 3 account, says Ray Mota, an ACG Research analyst. Ciena spokesman Nevin Reilly declined to comment.