Amid Competition, India Cools To Expansion by Chinese Firms

BANGALORE, India – Some of the world's best-known technology companies are investing billions of dollars to build modern campuses in this traffic-choked city. China's Huawei Technologies Co. wanted to join the rush.

Instead, the Chinese telecommunications-equipment maker is stalled in efforts to spend $164 million on new facilities here and has been forced to stuff 750 staffers into a hotel annex with a worn carpet and uneven light. India's government has rebuffed its efforts to obtain a trading license needed to sell directly to the booming domestic market – rejecting its application at least nine times since early 2003, according to one senior sales executive briefed on the matter. The given reason: national-security concerns.

"We have encountered some problems in India," admits George Huang, who runs Huawei's research facility in Bangalore. India's Foreign Investment Promotion Board, which reviews applications for trade licenses, did not respond to requests for comment.

Just as they have in the U.S. and Europe, some of China's big companies have run smack into security concerns and other delays, say industry executives and lawyers. Protracted government reviews have tripped up Chinese forays in telecommunications and infrastructure – sectors where India generally welcomes foreign capital and expertise.

In part, India's concerns mirror fears in the U.S. and Europe about China's corporate ambitions in the West and Africa, and its growing influence overseas. A year ago, an $18.5 billion bid for Unocal Corp. by China National Offshore Oil Corp., or Cnooc, stoked a political backlash in the U.S. that helped prompt the Chinese to back down. In Europe, China Mobile Communications Corp. is near a $5.3 billion deal to buy Millicom International Cellular SA of Luxembourg in what would be China's biggest-ever corporate acquisition.

But the delays also reflect continuing unease between India and its fast-growing neighbor, as both nations emerge as new economic powers wooing capital and pursuing rapid development. The two have talked of trying to forge a new economic partnership as a counterweight to ties with the U.S., but bitter feelings linger in India from its humiliating defeat in a 1962 border war with China. That past is part of a sharp debate within India's bureaucracy between those who advocate embracing China and those who remain wary of its involvement in strategic industries.

Moreover, after decades of relative separation, India is experiencing China's economic might firsthand, as Chinese goods from refrigerators to Hindu statues flood the nation's markets. "These two countries are trying to figure out how to deal with each other," says Ashok Gurung, director of the India China Institute at the The New School in New York. "It's going to take a while."

Among other companies facing delays, China's ZTE Corp.'s drive to expand its telecom business in India has run into security roadblocks, say industry executives. The Hong Kong port-operating unit of Hutchison Whampoa Ltd., a conglomerate run by pro-Beijing billionaire Li Ka-shing, also has been unable to win security clearance for investments, according to contents of a closed-door cabinet meeting reported in an Indian newspaper.

Another Chinese company, Shenzhen CIMC-Tianda Airport Support Ltd., was turned away from installing air bridges in several Indian airports because of security concerns, despite an offer that was at least 40% lower than the only other bid, which was from a Spanish company, says a CIMC-Tianda lawyer.

"The Indian government is asking China to come and join hands with us," says Sudhir Sajwan, part of a legal team preparing CIMC-Tianda's case for a hearing before India's Supreme Court. "Then the Chinese companies come and they face these kinds of problems."

CIMC-Tianda executives declined to comment on its case. ZTE executives in India acknowledged delays in obtaining government approvals, but refused to elaborate. A spokesman for Hutchison Port Holdings said the company "has not been rejected from participating in any port projects in India for any reason, and we have in fact taken part in previous bids." The spokesman declined to comment on reports of multiple delays in obtaining a security clearance for a recent bid to modernize the Mumbai port.

The Foreign Investment Promotion Board, the Indian agency under the Ministry of Finance that typically reviews applications for trading licenses, was set up in 1991 to pave the way for capital coming into the country. The board also refers some cases to a cabinet-level committee on national security. Besides officials at the board, neither the National Security Advisor nor the Ministry of Finance responded to requests for interviews or to a list of questions about the reviews of Chinese companies.

The security reviews have begun to draw unusual public criticism from Beijing. In remarks to reporters last week, China's Ministry of Commerce warned India not to freeze out the country's low-cost competitors. A spokesman asked why CIMC-Tianda had been allowed to install air bridges at other Indian airports only to encounter security concerns in subsequent bids.

"We couldn't understand the relevant departments of India who set a ban on this company for security reasons," said the ministry's Chong Quan, according to the government-run Xinhua News Agency. "While India speeds up its infrastructure-facility development, Chinese companies experienced in the construction of airports, roads, bridges, power stations and telecommunications can provide services of better quality on a relatively lower price."

Ironically, Indian firms are expanding aggressively in China and apparently encountering few roadblocks. In June 2005, India's Tata Consultancy Services Ltd., or TCS, announced plans to team with Microsoft Corp. and the National Development and Reforms Commission, a powerful government agency, to help turn China into a major outsourcing hub. Drugmaker Ranbaxy Laboratories Ltd. has been adding to its factory in Guangzhou to sell more generic drugs in China.

Those moves are contributing to broader growth in economic ties. In 2007, two-way trade is expected to hit $20 billion, a year ahead of the original target date, said India's foreign-trade minister, Kamal Nath.

As for Huawei, in some ways the Chinese telecom-equipment maker has enjoyed a warm market reception in India. In 2005, it recorded $120 million in local sales, up about 80% from the year before.

Yet executives say the lack of a trading license has hamstrung its expansion, deterring fresh investment and barring its bids to supply government-backed projects. Lacking security clearance, it recently had to drop an effort to supply wireless network equipment to Bharat Sanchar Nigam Ltd.

Huawei executives say Indian suspicions are misplaced. Although founded by a former soldier of China's People's Liberation Army, Huawei doesn't maintain links to China's military, and today operates as a private company in more than 100 countries, according to Mr. Huang of Huawei Technologies India, its Bangalore-based research arm.

Mr. Huang says he would like to double the 1,500 software engineers he has in India, combining them in a single corporate campus now split between two locations in Bangalore. Instead, he is watching rivals roll out their plans.

In October, Cisco Systems Inc. announced it was investing more than $1 billion in India. The same month, it broke ground for a new research lab here just 10 kilometers from where Huawei wants to build its facility.