Huawei’s Problems In The U.S. Point To Branding Challenges For Other Chinese Tech Companies

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After two years of dealing with espionage accusations, Huawei CEO Ren Zhengfei recently told French publication Les Echos that he wants the telecom equipment manufacturer to pull out of the U.S. market. Huawei’s problems stem in large part from Ren’s past association with the People’s Liberation Army, but they also serve as a warning about potential marketing issues for other Chinese companies that want to break into the U.S.

The Les Echos interview was first published last week, but published in English today by Foreign Policy. Ren, who rarely grants media interviews, declared that he is giving up after two years of issues with the U.S. government, including concerns from the U.S. House Intelligence Committee that the telecoms equipment manufacturer may be spying on behalf of the Chinese government.

“If Huawei gets in the middle of U.S.-China relations, it’s not worth it. Therefore, we have decided to exit the U.S. market and not stay in the middle,” Ren told Les Echos.

Huawei has denied all espionage accusations, and a White House review reportedly backed up its assertions of innocence, finding no evidence that the company spied on the U.S.

Suspicions about Huawei stem in part from Ren’s background: before founding Huawei, he was a military technologist for the PLA. But Huawei’s problems underscore similar challenges for other Chinese companies. China’s tech industry already faces the stereotype that it is a knock-off factory, not a fount of innovation. Potentially even more problematic, however, is the way distrust of China’s government is reflected wariness toward both startups and well-established companies regardless of whether or not they have ties with the Chinese Communist Party or military.

Tencent, one of China’s largest Internet companies, was spotlighted in the U.S. media recently as an investor in Snapchat and “role model” for its founder Evan Spiegel. But before that, Tencent’s own popular messaging app, WeChat, encountered a slew of controversy during its global expansion. After WeChat was found to be blocking certain words and phrases, the company defended itself by stating that the situation was due to a “technical glitch” and not because of censorship.

Other issues WeChat faced included a less-than-warm welcome in countries the Chinese government has a stormy relationship with. In Taiwan, for example, legislators from the main opposition Democratic Progressive Party, voiced concerns that WeChat posed a security risk when it first launched there in October 2012. It also dealt with similar issues in India and Vietnam because of security concerns (though it is important to note that Vietnamese legislators have proposed banning all messaging apps, not just WeChat).

Younger Chinese tech companies have to tread carefully in order to avoid the problems faced by Tencent and Huawei.

So far smartphone maker Xiaomi has avoided controversy about potential security risks, but it will face other branding challenges as it prepares to scale up globally (including complaints its name, which means “little rice,” is hard to pronounce). Xiaomi rose very rapidly in China, where its market share in China passed Apple in the second quarter of 2013, just three years after it was founded in 2010. But Xiaomi first grabbed the attention of American consumers when Hugo Barra, Google’s former Android VP, joined it in a surprise announcement three months ago.

Barra will oversee Xiaomi’s international expansion and try to help it do what no other Chinese smartphone maker: achieve the name recognition of competing smartphone makers like Apple, Samsung, HTC and Sony. (In fact, Huawei is top third smartphone vendor in the world after Samsung and Apple, though its 5% market share lags behind those two companies by a wide margin.)

In China, Xiaomi’s growth was fueled in part by the high profile of co-founder and CEO Lei Jun, whose resume includes launching Joyo.com, which was purchased by Amazon in 2004 for $75 million and is now Amazon China, and chairing the board of UCWeb, the largest mobile Web browser in China. But in many U.S. media outlets, Lei has been presented as a Steve Jobs copycat. It’s a comparison that Lei has now started to protest. In September, he told CNN that “they [Apple] don’t really care about what the users want. They imagine what the users want.” Lei’s remarks may indicate that Xiaomi wants to begin aggressively combating Apple comparisons in order to avoid being branded a “knock-off” when it enters the U.S.

At the TechNode/TechCrunch Shanghai event two weeks ago, Bowie Gai, the founder of World Startup Report, asked panelists if they felt a bias against China-based companies in a discussion about how Chinese startups can build their brand in international markets.

David Chen, founder of Web site builder Strikingly, the first Chinese company in Y Combinator, said that though his company doesn’t emphasis that it is headquartered in Shanghai, the fact sometimes comes in handy. “It’s a weapon that you can use at certain stages, but you can’t use it to associate with innovation unfortunately,” said Chen.

But Chinese tech companies are already making an impact on tech innovation — and not just by providing cheap outsourced labor. For example, Tencent’s monetization model influenced Zynga in addition to Snapchat. (Zynga partnered with Tencent in 2011 when it launched a localized Chinese version of Cityville.)

During the TechNode/TechCrunch Shanghai event, Glow co-founder and CEO Mike Huang said that all of the fertility app’s product development and speccing is done in Shanghai. Huang, who said Glow sees itself as a data science company, added that the startup doesn’t treat China as an “outsourcing firm.”

“Chinese product engineers are very impressive. What they need is more exposure to innovative thinking,” Huang said. “But it will grow very, very fast.”

Edith Yeung, the head of strategy for Sequoia-backed browser maker Dolphin, told the audience that Chinese startups wishing to combat negative perceptions should focus on the benefits of their product.

“Don’t say that you are building the Dropbox of this or that,” said Yeung. “What people care about is what problem you are solving, why you care about it so much and why are you in the U.S. or China market.”