- The Washington Times - Monday, August 8, 2005

BEIJING (AP) — After computers, cars and oil, will the next target for China’s foreign acquisition binge be telephones?

British press reports say Huawei Technologies Inc., China’s biggest maker of telecommunications equipment, is in talks with Marconi Corp. PLC on a takeover of the struggling British firm.

The news suggests that corporate China hasn’t lost its appetite for foreign assets despite the acrimonious withdrawal last week of CNOOC Ltd.’s $18.5 billion bid for U.S. oil and gas producer Unocal Corp.

A Huawei-Marconi deal would be symbolic. The British industrial landmark traces its roots to the inventor of radio, and the 17-year-old Huawei represents China’s economic vigor and high-tech ambitions.

Huawei didn’t respond yesterday to requests for comment. Marconi issued a statement in London saying it was exploring “all strategic options” with other firms. It didn’t confirm whether its options meant Huawei and warned that there was no assurance it could make a deal.

Huawei and Marconi make telecom switching equipment, the guts of a phone system that is critically important in the age of cell phones and the Internet.

The deal could be worth $1 billion, London’s Sunday Times reported.

It would add Marconi’s customer network — a key asset in an industry where vendors work closely with buyers — to Huawei’s booming international business and strength in research and development, said Duncan Clark, a telecommunications consultant in Beijing.

“This is not a deal to show how international they are. It’s something that’s logical for the business,” Mr. Clark said. “Huawei’s been plugging away at this for years, since before it was fashionable to do so.”

A Huawei-Marconi merger would add to an unprecedented series of high-profile acquisitions by Chinese companies over the past year as they try to establish a place on the global stage.

Computer maker Lenovo Group Ltd. bought IBM Corp.’s PC business in an amicable deal. Nanjing Automobile Group Co. Ltd. bought MG Rover out of bankruptcy after the British automaker pursued Nanjing and another Chinese company as potential buyers.

Other acquisitions went less smoothly: CNOOC complained about political criticism in Washington when it called off its Unocal bid. Haier dropped out of the bidding for Maytag after rival appliance maker Whirlpool Corp. launched a competing bid.

Huawei America and Marconi already have corporate ties, having signed a deal earlier this year to sell each other’s equipment in their home markets.

Marconi is a British institution that traces its roots in part to the company founded in 1897 by Guglielmo Marconi, the Italian inventor of radio. The firm is part of the FTSE 100 — the main index of the London Stock Exchange. After reports of Huawei’s interest, its shares rose 39.25 pence, or 14.7 percent, to close at 306.25 pence yesterday on the London Stock Exchange.

By contrast, Huawei is a newcomer. Founded in 1988 by a former People’s Liberation Army officer named Ren Zhengfei, it is one of China’s two leading makers of telecom gear, along with rival Zhongxing Telecom Equipment Corp.

Huawei’s early sales were to China’s military. That, along with Mr. Ren’s background, has led some outsiders to suggest that the firm is controlled by the military. The company denies that, saying it is owned by its employees and that less than 1 percent of its sales go to the People’s Liberation Army, though it has never disclosed its ownership structure.

The company says it made a profit of $625 million last year on sales of $3.8 billion, and more than half of those sales were made outside China. It has 55 branch offices abroad, in places as far-flung as Peru, Ukraine and Zimbabwe.

The company prides itself on creating its own technology, boasting that 14,500 of its 30,000 employees are in research and development, and that 90 percent have a bachelor’s degree or higher — an impressive figure in China, where only a tiny fraction of the population makes it to college. Its headquarters in the southern city of Shenzhen is a California-style enclave of green lawns and glassy modern buildings.

The company enjoys an equally impressive degree of support from the communist government, which has made foreign expansion by Chinese firms a key element in its five-year economic plan.

Huawei has a $10 billion line of credit from a bank attached to the Chinese Cabinet, Mr. Clark said.

Huawei broke into international markets by targeting developing countries with its low-cost equipment, but has begun to move into developed countries with sales in Europe and the United States.

“They have raw talent and the ability to throw people at a problem,” said Mr. Clark. “It’s hard to match.”

Huawei has struggled to gain a foothold in the U.S. market, where it is best known for an embarrassing lawsuit by Cisco Systems Inc., which accused the Chinese firm of copying its technology. Cisco agreed to drop the lawsuit after Huawei agreed to change its products.

For both Huawei and Marconi, the turning point came when British Telecom awarded a $5.7 billion contract to build a new network.

Huawei was among the winning bidders, while Marconi, a longtime BT supplier, lost out. The British firm cut 800 of its 10,000 jobs and, according to news reports, effectively put itself up for sale.

“The BT deal was a rite of passage” for Huawei, said Mr. Clark. “It shows they can compete with more established companies.”

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