In 2012, Chinese companies ran into plenty of turbulence as they flew in the face of mounting U.S. anxiety over their global aspirations. Early in the year, Chinese solar and wind energy firms found themselves in the crosshairs of U.S. trade complaints. This summer, President Obama barred a Chinese company from buying a wind energy business located next to a U.S. military installation, citing national security concerns. Then in October, the House Select Committee on Intelligence released an unusually strongly-worded report, recommending that the U.S. government and companies fight the incursion of leading Chinese telecommunications company Huawei Technologies Corp. into U.S. markets.

Perennially in Washington's bulls-eye, Huawei serves as a litmus test for Chinese companies' ability to build global brands across the board. For now, the congressional report appears to seal the deal for Huawei in the U.S. In no uncertain terms, the House committee warned: "The United States should view with suspicion the continued penetration of the U.S. telecommunications market by Chinese telecommunications companies." Furthermore, the report recommended: "U.S. network providers and systems developers are strongly encouraged to seek other vendors for their projects…. Huawei … cannot be trusted to be free of foreign state influence and thus pose[s] a security threat to the United States and to our systems."

With the door to the U.S. slammed in its face, Huawei, the world's second biggest telecommunications equipment provider, is confronting new hurdles to growing into the $100 billion global company that it aspires to become by 2020. "Any country [like the U.S.] that sees itself challenged economically and militarily takes on a certain amount of xenophobia," says Ken Hyers, senior analyst of networking and mobility practice, who covers Huawei at Technology Business Research Inc. (TBRI), a market research company based in New Hampshire."I don't see this situation changing appreciably for Huawei in the near- or even medium-term."

As China encourages its companies to expand abroad, the clash between U.S. and Chinese national and commercial interests is likely to continue for some time. Meanwhile, how does a Chinese company with global ambitions steer through such resistance? For Huawei, like many Chinese firms, the short-term solution is likely to come from emerging markets. Longer term prospects will depend in part on China's ability to navigate U.S. and other political environments, to move closer to Western norms or to convince the West to accept Chinese ones. But as long as other countries cannot sort out whether Chinese companies are serving state or commercial interests, the process is likely to be drawn out. The real question, according to Wharton School management professor Marshall Meyer, is: "What is the [Chinese Communist] Party interested in more — profits or intelligence?"

Huawei has long labored under U.S. scrutiny because of founder Ren Zhengfei's military past. Ren established the company in 1987 after retiring from a decade working in the People's Liberation Army's Engineering Corps. In 2008, Huawei withdrew its offer to buy U.S. telecom equipment maker 3Com amid U.S. Congressional opposition, and Hewlett-Packard Co. ended up buying the company. In 2010, Sprint Nextel's plans to buy Huawei equipment cratered due to Congressional security concerns.Last year, Huawei folded plans to buy 3Leaf Technologies after the U.S. government raised national security worries. This year, Symantec ended a joint venture it had with Huawei for fear that it would not be able to work with the U.S. government on cyber threats, according to The New York Times

Clearly, Huawei's efforts so far to allay U.S. concerns have not succeeded. But perhaps this latest bout with the U.S. will spark some needed changes. The silver lining may come if "the Party sees it in their and China's interest to be much more open about their role in firms," Meyer notes. "At some point, the Party might say, just as Obama found with GM and Chrysler, that there is a national interest in any firm, whether state-owned or not. We're representing the state, just as any other constituency, like labor unions or the public." 

Jerry Caron, London-based senior vice president of analysis at U.S. technology market research firm Current Analysis, agrees that the report could be an impetus for progress. "One outcome is Huawei … moves to be more transparent about operations and financial models," he says. "If they want to do an IPO [as has long been rumored], they have to move in that direction." Meanwhile, Huawei executives have to "become more skillful and learn what works," in terms of their level of transparency, Meyer adds. Instead of clamming up when asked how many Communists work at Huawei, for instance, "they should ask whether U.S. CEOs know how many Democrats and Republicans work at their companies." 

For the moment, Huawei executives have a business to run and commercial plans to fulfill.  Last year, the Shenzhen-based company announced a transitional strategy to achieve its 2020 goal of becoming a $100 billion company. As the firm's core telecommunications equipment market matures, Huawei is opening up two more fronts to fuel growth — an enterprise solutions and a consumer mobile handset business, respectively. 

Fallout from the latest U.S. Congressional report could hamper its progress, however. Huawei, which doesn't sell to any major U.S. telecom operator today, is unlikely to nab any big customers that do business with the U.S. any time soon — much less the federal government itself, one of the world's largest enterprise customers, notes Caron of Current Analysis. What's more, says TBRI analyst Hyers,global Fortune 500 enterprises "will not take the risk of bringing in Huawei equipment" because most of them also do work with the U.S. federal government. Meanwhile, U.S. national security concerns may spark contagion in other countries. In March, as the House Intelligence Committee was investigating Huawei, for example, Australia banned the company from bidding on its National Broadband Network.

Tapping Emerging Markets

But luckily for Huawei, the world is a big place. Even in the U.S., "small- to medium-sized enterprises and telecommunications network operators that don't have substantial business from the U.S. government will still be customers because the price is exceptional," notes Hyers. Western Europe, too, has been more receptive to the company's products and services. Huawei is helping to help build France's broadband network, for example. In addition, the United Kingdom allowed the company into its market as long as it agreed to open up its equipment to third-party inspection. Price talks, says Meyer: "If you're running a telecom network in any number of countries on a constrained budget, in most cases, people say this [national security] risk is hypothetical against the immediate cost savings." Indeed, "what spoke loudest to operators in Europe is price," notes Hyers. "Huawei offers good value. Equipment costs are fairly similar across vendors, since it's all made in China now. Vendors now focus on bundling services along with the infrastructure, occasionally with handsets as a sweetener." 

The biggest salvation for Huawei is likely to come from emerging markets, where Huawei's price point fits local needs, according to Chris Hartshorn, vice president of research at Lux Research, a market research firm in Boston specializing in studying Chinese innovation Soon after its launch last year, Huawei'sIDEOS handset became the biggest selling smartphone in Kenya overnight and quickly took a 50% to 60% market share in developing nations that have not made the transition from traditional cell phones to smartphones. At $80 to $100 apiece, the high-functioning device provides a 2.8 inch screen, a camera, decent battery life, touch screen, and other smart phone functions, Hartshorn says.

Indeed, emerging markets will help Huawei achieve its goal to become the world's third largest Android handset provider after Samsung and HTC in five years, Hyers predicts. In the U.S. and developed countries, Huawei has little brand name in handsets. It doesn't even enjoy an advantage in China, where Samsung, Lenovo and the iPhone dominate the high end, and other Chinese-made phones with similar cost advantages dominate the low end, Hyers says. Still, longer-term, Huawei could succeed even in those markets. "It will be a multiyear process," Hyers notes. "Ten years ago, Samsung wasrelatively unknown as a handset maker, and it's now a global leader." And, he adds, national security concerns are less likely to stop consumers from buying Huawei handsets, "unless they are the ones who watch 60 Minutes."

In Huawei's traditional telecom network equipment business, Asia and Africa, where nations are leapfrogging over copper networks straight to wireless networks, are filling Huawei's pipeline, says Hyers. Huawei's advantage over Western vendors: It can deploy its large staff tohelp train local operators to run the networks. "Because its cost per employee is lower, Huawei can deploy platoons to each operator for six months at a time," he notes.

The enterprise and cloud services business may present the biggest challenges to Huawei, say experts. Large enterprise customers that do business with the U.S. government will think twice before using Huawei equipment and services. Moreover, while the capabilities of producing consumer handsets exist in China already, enterprise solutions are more complex, according to Hartshorn of Lux Research. Indeed, it's difficult for Huawei to provide much differentiation in its enterprise offerings, compared with Cisco and HP, adds Caron.

Even in China, Huawei is number six in the server market after HP, Dell, Cisco and others, says Christian Perry, senior analyst for data centers at TBRI. Huawei must attempt to gain share from its ability to sell low-priced product without sacrificing quality, he notes. In addition, Huawei can leverage its existing relationships with emerging market telecom providers to sell to those operators' enterprise customers.

Meanwhile, as Huawei endeavors to broaden its portfolio of businesses, it is also paying heed to China's efforts to migrate from commodity to value-added businesses. The company is plowing 10% of revenues into R&D to change its image "from low cost provider to innovator," says Caron. And it's making progress in some more advanced wireless technologies, such as 4G and LTE, deploying thousands of research scientists in these areas, adds Hartshorn of Lux Research.

That will probably add up to time and resources well spent during a period where Huawei cannot make much headway in major U.S. markets, experts note. After all, as it sorts out its political headaches, Huawei still needs to move ahead to grow as a company. But in the end, no matter how hard it tries, it won't be able to enjoy the same freedom to operate as its international peers without solving those nagging questions.