ZTE and Huawei have been fast up-and-comers in the global mobile device, networking and data center markets. However, a report released Oct. 8 by the U.S. House Intelligence Committee is likely to hurt revenue for the Shenzhen, China-based brands, as well as U.S-China relations.
After a nearly year-long investigation into the "national security dangers posed by ZTE and Huawei, the two largest Chinese telecommunications companies doing business in the United States," the Committee recommended that U.S. companies looking to do business with telecommunications companies not choose ZTE or Huawei, which they said provided "incomplete, contradictory and evasive responses" to the Committee's core concerns.
In short, the Committee fears that the brands answer to the Chinese government and so pose a risk to U.S. security.
Sensitive U.S. government systems, the Committee also warned, should abstain from using equipment or components from Huawei or ZTE.
"Modern critical infrastructure is incredibly connected, everything from electric power grids to banking and finance systems to natural gas, oil, and water systems to rail and shipping channels," the Committee said in a statement. "All of these entities depend on computerized control systems. The risk is high that a failure or disruption in one system could have a devastating ripple effect throughout many aspects of modern American living."
Mike Rogers (R-Mich.), chairman and ranking member of the Committee, added:
Any bug, beacon, or backdoor put into our critical systems could allow for a catastrophic and devastating domino effect of failures throughout our networks. As this report shows, we have serious concerns about Huawei and ZTE, and their connection to the communist government of China. China is known to be the major perpetrator of cyber-espionage, and Huawei and ZTE failed to alleviate serious concerns throughout this important investigation.
William Plummer, a spokesperson for Huwei, said in a statement that suggestions that "Huawei is somehow uniquely vulnerable to cyber-mischief ignore technical and commercial realities, recklessly threaten American jobs and innovation, do nothing to protect national security and should be exposed as dangerous political distractions from legitimate public-private initiatives to address what are global and industry-wide cyber challenges."
Huawei was founded by Ren Zhengfei in 1987, after he left the Chinese army, Bloomberg reported Oct. 8, saying that his military ties have been a focus for U.S. lawmakers.
The committee launched the investigation in the companies in 2011, and in September 2012 held a rare open hearing in which officials from Huawei and ZTE testified before Congress—a first for any Chinese executives.
"Huawei has not and will not jeopardize our global commercial success nor the integrity of our customers' networks for any third-party, government or otherwise, Charles Ding, a Huawei senior vice president, testified, according to Reuters.
During the second quarter of this year, ZTE posted a 300 percent year-over-year growth in smartphone sales, managing to more than double Samsung's astonishing 173 percent growth, according to data from IDC. The research firm noted that ZTE's success came from China, where it primarily ships entry-level smartphones, Latin America and the United States, "where its smartphones can be found under other brands."
Huawei, meanwhile, is shooting to ship 100 million mobile phones this year—60 million of them smartphones—in a bid for a top-five position in the global rankings.
The committee's report made five recommendations: that U.S. government systems and contractors exclude parts from Huawei and ZTE; that network providers and systems developers choose to instead work with other companies; that Congress investigate "unfair trade practices of the Chinese telecommunications sector" and pay particular attention to key companies that receive financial support from China; that Chinese companies become more transparent and responsive; and that Congress propose legislation to address the risk posed by telecoms that aren't trusted to build critical infrastructure.
The committee added that Huawei and ZTE aren't the only companies that present a risk to the United States, but the committee "decided to focus first on the largest perceived vulnerabilities, with an expectation that the conclusion of this investigation would inform how to view the potential threat to the supply chain from ... [others] in China and other countries."