BW: Huawei vs. Cisco Just Got Nastier

3Com CEO Bruce Claflin defends his outfit's new Chinese partner, deriding charges of intellectual-property theft as "interesting theatrics"

Bruce Claflin, CEO of struggling networking company 3Com Corp., caused a furor in March by announcing a sweeping joint venture with China's Huawei Technologies -- just weeks after Huawei had been sued on a range of intellectual-property violations by 3Com's (COMS ) Silicon Valley neighbor, Cisco Systems (CSCO ). The suit claims that Huawei's products include some of Cisco's carefully guarded source code and that Huawei infringes on copyrights related to Cisco's computer commands and such (see BW, 5/19/03, "Cisco: In Hot Pursuit of a Chinese Rival").

A federal judge in East Texas is considering Cisco's motion for a preliminary injunction to prevent Huawei from selling many of its products in the U.S. market. Industry observers predict Cisco may also go after the joint venture once it begins selling products this fall.

Claflin sat down for two extended interviews with BusinessWeek's Computing Editor Peter Burrows in April and early May. The CEO gave his perspective on his company's new partner and the "irrelevant" lawsuit, and he made no secret of his annoyance at how Huawei CEO Ren Zhengfei is portrayed in the U.S. press. Edited excerpts of their conversation follow:

Q: Cisco Executive Vice-President Charlie Giancarlo says he couldn't speak for three days after finding out that 3Com -- a longtime respected rival -- had done a joint venture with a company Cisco had accused of stealing. Are you surprised to hear that he said that?
A: It's interesting theatrics. They want to portray this as good guys vs. bad guys. But it's not that simple.

Q: You've said that your negotiations with Huawei began in mid-2002, long before Cisco filed suit in January. But even then there were rampant rumors that Cisco might sue Huawei because of the similarities of its routers to Cisco's products. Had you heard these rumors?
A: By that time, Cisco executives were already firing shots across Huawei's bow, making comments in public and such. Huawei knew it would get sued by Cisco and that it would get sued in the U.S.

Q: What were your impressions of Huawei when you first visited the company in August, 2002?
A: They were shrouded in mystery, but it was amazing. There are all these talented engineers, sitting in ample offices with all the latest computers and software. And they have the most advanced robotic [parts warehousing] facility I've ever seen.

Let's face it, people have the perception of China as a low-tech, low-cost kind of place. But my first impression was that this was truly a great technology company. It blows your mind when everyone thinks China is all about exploiting low-cost labor.

Q: In the course of reviewing Huawei's products while negotiating the joint venture, were you concerned about some of the similarities to Cisco's products -- such as the model numbers, the packaging and such?
A: I asked 3Com's lawyers, and they said [the appearance, names and operating commands] probably didn't infringe [in these areas]. But my judgement was: Why risk it? Why get that close? Huawei agreed to change these things.

Q: What about Cisco's claims that Huawei stole its source code, a much more serious allegation?
A: We looked into Huawei's entire software-development process. We found one case that made us nervous. One engineer said he had seen a CD from a third-party consultant [that seemed to contain Cisco source code related to a little-known networking protocol called EIGRP]. The 3Com side said, let's just ship the [joint-venture] products without EIGRP, since it's not very popular anyway. Huawei agreed to 3Com's proposal.

Q: Why do you think Cisco sued when and were it did? Why the U.S., and not China? And why in Texas rather than in Silicon Valley?
A: Listen, they aren't dummies. I do believe Cisco feels its intellectual property was infringed, but it's not the whole story. There are two courts they care about: the court of law and the court of public opinion. I bet there's not one company out there that doesn't somehow infringe on Cisco in some way.

Why did Cisco sue this particular company, at this particular time, in this particular place? I think it's because they view Huawei as a very dangerous competitor. Cisco wanted to do something to get in their way -- it wants to cast doubt in the minds of customers.

Q: Huawei and 3Com spent nine months in negotiations leading up to the joint venture. What did you learn about Chinese views on IP in that time?
A: The cultural standard in China's business culture is that IP has to be significant to be worth protecting. They will respect IP if it creates material and has significant impact. Culturally, any Chinese business has difficulty understanding U.S. intellectual-property law. Their idea is that you only protect real innovation.

Q: What do you make of that view? Is that better than our system?
A: Five years ago, I would have said no. But now, I think the U.S. has a problem. We're running around registering patents on innovations that hardly matter.

Q: What did you learn about Ren Zhengfei, Huawei's CEO?
A: If I was to tell you his story and he was an American, we would call it an incredible American success story. Yet instead, all the papers say he's "a former People's Republic of China army official." I find that personally repugnant. Let me be blunt. Mr. Ren, like almost every other able-bodied man of his generation in China, served in the army. My son is a pilot in the U.S. Marine Corps. I'd hate to think that someone years from now would say he's not fit to run a company just because he served his country.

Q: Has anyone questioned your ethics for having done a joint venture with a company that had been accused of crimes by a respected U.S. company?
A: I haven't had anyone question my ethics directly. But one analyst did start attacking Huawei as if they were guilty of the crimes Cisco alleged. I said, "I don't want to be rude, but you have very firmly held opinions on this. Where does that come from? Just because someone tells you something, do you believe it? Is that how you do your research?" His preconceived notion was guilty until proven innocent.

Q: Cisco says it respects 3Com as a rival, and respects 3Com's promise that products sold by the Huawei-3Com joint venture won't infringe Cisco's patents. Still, it's certainly possible that Cisco will sue the joint venture. What would happen then?
A: If Cisco were to sue the joint venture, it's 100% certain that we would countersue. It would be very different than just suing Huawei [which, unlike 3Com, has no U.S. patents with which to negotiate a settlement].

Q: So what's the importance of the lawsuit, from your perspective?
A: The dispute is irrelevant, because we've already addressed all of Cisco's concerns.

Edited by Patricia O'Connell

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