Huawei-Level 3 Sales Seen Off as Spy Concerns Ripple
(Corrects spelling of Shenzhen in second paragraph.)
Just $1.3 billion of the Shenzhen, southern China-based company’s $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 Inc. (LVLT), which runs a broadband network that helps carry traffic for most telecoms.
Level 3 has bought $200 million in optical networking gear from Huawei since 2009, according to an estimate by Erik Suppiger, a JMP Securities LLC analyst. The Broomfield, Colorado-based carrier is soliciting bids for its next three- year order, and Huawei isn’t likely to win, said two people who have spoken with Level 3 about its intentions and weren’t authorized to discuss them publicly.
“There’s no way Level 3 will possibly select Huawei,” said Andrew Schmitt, an analyst for Infonetics Research Inc.
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. Jon Paul McLeary, a Level 3 spokesman, declined to comment.
In March, President Barack Obama signed into law an appropriations bill that prohibits federal agencies from buying IT systems from Chinese companies without first getting approval from the FBI or other federal cyber-espionage investigators. U.S. Representative Mike Rogers, a Republican from Michigan, chairman of the House Intelligence Committee, on April 8 reiterated that Huawei is a security risk to the U.S.
Citing similar concerns, AT&T Inc. (T) and Verizon Communications Inc. (VZ) have spurned use of the privately held company’s network gear for years, and SoftBank Corp. (9984)’s attempted takeover of Sprint Nextel Corp. (S) was held up partly because SoftBank uses Huawei equipment. At an April 23 meeting at Huawei’s headquarters, 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 technology companies in China. The magazine China Economy and Informatization ran a cover story about the security threats of San Jose, California-based Cisco Systems Inc. (CSCO)’s equipment in November, replacing the “S” in Cisco with a snake, shortly after its sales partnership with Shenzhen-based equipment maker ZTE Corp. (763) 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, 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. The slowdown was caused in part by a spending lull during the presidential transition from Hu Jintao to Xi Jinping, according to Jaime Valles, the company’s new head of Asia Pacific operations.
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 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 said.
China hasn’t been as hospitable to other Huawei competitors in the $12 billion optical networking business. U.S. providers Infinera Corp. (INFN) and Ciena Corp. (CIEN) both pulled out of China in the past decade.
“I no longer have any interest in selling to China,” Infinera Chief Executive Officer Tom Fallon said.
Now those U.S. companies are among the favorites to win back the Level 3 account, said Ray Mota, an ACG Research analyst. Nevin Reilly, a Ciena spokesman, declined to comment.
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