After Years Of Government Scrutiny Over Security Concerns, Huawei Says It’s Quitting The U.S. [UPDATE]

Huawei, the world’s second-largest supplier of network gear by revenue, is pulling out of the U.S. after it sales efforts have been repeatedly stymied due to concerns over national security. According to a report in the Financial Times, executive vice president Eric Xu said at the company’s annual analyst summit yesterday that Huawei “is not interested in the U.S. market any more.” He added that the company has been gradually shifting its focus away from the U.S. over the last year as it seeks to expand in other global markets.

Huawei’s decision to pull out of the U.S. market is not a complete surprise. Earlier this month, Bob Cai, Huawei’s vice president in charge of wireless-network marketing, admitted the company’s U.S. growth will be hindered this year by security concerns, and that it’s looking toward Europe and Asia to grow its key wireless-network business.

But the decision still represents a represents a major setback for Huawei, which had been trying build up its U.S. business despite repeated efforts by politicians and security officials to label the Chinese company a threat to national security interests.

Huawei has revised its long-term outlook for its enterprise business and now says that its goal of generating $15 billion in revenue from the business by 2017 is “too optimistic.” That target has been shaved down to $10 billion. The unit’s chief executive William Zu still expects revenues to grow 45 percent this year, up from 25 percent growth in 2012.

Xu’s vow to back away from the U.S. comes after the company suffered two major setbacks. Last October, a U.S. congressional report fingered Huawei and Chinese rival ZTE as a threat to national security, calling on U.S. government and private sector companies to avoid buying equipment from both. At the end of March, Sprint Nextel and Japanese telecom SoftBank promised the House intelligence committee not to use equipment from Huawei if they merge.

Despite a major lobbying campaign by Huawei, as well as an appeal by senior executive Ken Hu for the U.S. government to launch a formal investigation, which Hu said would clear his company, the U.S. congressional report hurt Huawei’s presence in the U.S. According to the Financial Times, Huawei has halted its U.S expansion, and its R&D staff has dropped from 800 to 500.

The U.S. congressional report was not the first blow dealt to Huawei by the U.S. government. Back in 2008, Huawei had to retract a bid for 3Com after finding out that the deal would not gain regulatory approval from D.C. In 2010, it lost a bid for a multibillion-dollar contract to supply network infrastructure to Sprint Nextel after the U.S. government intervened.

The U.S. government’s suspicious attitude toward Huawei stems in part from the military background of its founder Ren Zhengfei, who served as an engineer in the People’s Liberation Army. Huawei’s detractors worry that Ren still maintains close ties with the Chinese government.

Huawei has had more luck building out its global presence in Britain, where BT, Vodafone, and EE are its major customers, but its still faced a fair amount of scrutiny in Europe. Earlier this month, it was reported that the European Commission is seeking to investigate Huawei and ZTE for undercutting domestic firms by receiving state subsidies, a charge Huawei denied. An internal EU report last year also recommended that the EU take steps to limit the growth of Chinese telecoms equipment makers, citing domestic competition as well as threats to security.

UPDATE: Huawei says that it does not plan to pull out of the U.S. market completely and will continue to do business there.