China's Huawei needs makeover to win big markets

By Kirby Chien - Analysis

BEIJING (Reuters) - The meteoric rise of China's Huawei to challenge the world's top telecom gear makers has been mainly in secondary markets, but a serious push into larger, more profitable, developed markets may hinge on an image makeover.

Huawei Technologies HWT.UL has been winning client kudos and market share, especially in developing markets where pricing is a more critical factor.

But founder and CEO Ren Zhengfei's military background and the privately-owned company's lack of transparency have raised eyebrows and triggered alarms in countries such as the United States, the world's largest telecoms market.

Those concerns derailed an attempt by Huawei and partner Bain Capital to buy U.S.-based 3Com (COMS.O) in 2007, and last month the Financial Times reported that Huawei had blamed unfounded security concerns in India for hobbling its growth there.

"If anyone wants to be a world class telecom gear maker it must be in those two markets," said Edward Yu, chief executive of Beijing-based researcher Analysys International, referring to the United States and Japan, the world's two largest markets.

Huawei has less than 2 percent market share in those markets.

"The best chance for Huawei, if it wants to gain more market share in those two countries, is to transform itself and become more transparent," Yu said.

This year, Huawei overtook Alcatel-Lucent (ALUA.PA) as the world's No.3 mobile networking equipment maker, but still ranks far behind market leader Ericsson (ERICb.ST).

The 21-year-old firm's media shy founder was an officer in China's military and helped build its communications network before starting Huawei to make the switches, networks, routers and, increasingly, the software used to direct data around telecoms networks.

Huawei and cross-town rival ZTE Corp (000063.SZ) (0763.HK) have gained global market share via aggressive pricing policy and generous financial support from state-run banks.

IMAGE IS EVERYTHING

Huawei lists 36 of the world's top 50 telecom operators as customers, and expects 2009 sales to exceed $30 billion, up 29 percent. It has said markets outside China accounted for more than 75 percent of its total sales.

"It's going to be difficult for Huawei. It will be regarded with more suspicion than the average Chinese company," said Derek Scissors, a China specialist for the U.S.-based Heritage Foundation, talking about the company's ambitions in the U.S.

Matt Walker, analyst at research firm Ovum, also sees Huawei's business aspirations possibly hampered by its profile.

"In the U.S., a few European markets, and Japan, Huawei clearly faces some tricky political and perceptual challenges."