Huawei, ZTE, China Strike Back at US Spying Claims

The companies and government officials are angered by a House report recommending that U.S. vendors do not do businesses with Huawei and ZTE.

Huawei Technologies, ZTE and Chinese officials are pushing back at a U.S. House committee report that said Huawei and ZTE pose risks to U.S. national security due to their close ties to the Chinese government.

The report from the House Intelligence Committee, issued Oct. 8, said that products from the two Chinese telecommunications equipment vendors could be leveraged by the Chinese government for espionage in the United States. The report noted the number of cyber-attacks in recent years that the Chinese government has been rumored to have been behind, even if no direct ties had been found.

“Finally, complicating this problem is the fact that Chinese telecommunications firms, such as Huawei and ZTE, are rapidly becoming dominant global players in the telecommunications market,” committee members said in the report. “In another industry, this development might not be particularly concerning. When those companies seek to control the market for sensitive equipment and infrastructure that could be used for spying and other malicious purposes, the lack of market diversity becomes a national concern for the United States and other countries.”

The report drew a sharp rebuke from the Chinese government, which called the comments regarding the two companies “based on subjective conjecture and untrue foundations” and accusations against the country “groundless."

According to the Wall Street Journal, Shen Danyang, a spokesman for the Chinese government, said the report went against the United States’ “long-held free-market principles and would undermine cooperation and development between the two countries. … We hope the U.S. can make concrete efforts to create a just and fair market environment for the two countries and promote sound development of bilateral economic and trade ties.”

Huawei officials also were angered by the report. In a statement, they said that the 11-month investigation by the House committee did not provide any evidence to back up its concerns, and that the company had cooperated throughout the investigation.

“However, despite our best effort, the Committee appears to have been committed to a predetermined outcome,” Huawei officials said in a statement. “The report released by the Committee today employs many rumors and speculations to prove non-existent accusations. This report does not address the challenges faced by the ICT [information and communications technology] industry. Almost every ICT firm is conducting R&D, software coding and production activities globally; they share the same supply chain, and the challenges on network security is beyond a company or a country. The Committee's report completely ignored this fact. We have to suspect that the only purpose of such a report is to impede competition and obstruct Chinese ICT companies from entering the US market.”

David Dai Shu, ZTE’s director of global public affairs, said in a statement that the House committee’s concern that his company may be influenced by the Chinese government could be extended to any company in that country, and that the House’s recommendations were not based on illegal or unethical conduct by the company.

“Particularly given the severity of the Committee’s recommendations, ZTE recommends that the Committee’s investigation be extended to include every company making equipment in China, including the Western vendors,” he said. “That is the only way to truly protect U.S. equipment and U.S. national security.”

Questions surrounding Huawei and ZTE have been around for years, in the United States and elsewhere. Other countries, including Australia and India, have had similar security concerns about Huawei.

The House report also came in the middle of the U.S. presidential election, in which trade with China has become an issue between the two candidates.

Analysts with IHS iSuppli said that while the House’s warning to U.S. telecommunications companies about doing business with Huawei and ZTE may have raised eyebrows, most U.S. vendors were wary about dealing with the two companies, so the actual impact on Huawei’s and ZTE’s business in the United States could be negligible.

“The U.S. government has blocked numerous contracts and acquisition deals between American companies and Chinese equipment makers, usually in an indirect manner,” Lee Ratliff, principal analyst for broadband and digital home research at IHS, said in a statement. “Because of this intense government scrutiny and the very high risk that a deal will ultimately be nixed after wasting months of time and millions of dollars, many U.S. companies are hesitant to work with Huawei or ZTE. The only difference now is the U.S. government has publicly issued its official findings regarding its investigation of the Chinese telecom equipment vendors.”

Giant networking vendor Cisco Systems, which had a reseller partnership with ZTE for seven years, is one of those U.S. vendors that has been vocal about its concerns regarding Huawei and ZTE. Cisco undertook its own investigation, and on Oct. 8 officially ended its relationship with ZTE after finding that that Chinese company had sold Cisco gear to Iran, violating a U.S. order banning U.S. companies from selling products to the controversial Middle East country.

However, while sales may not be impacted, hopes of Huawei and ZTE to expand farther in the U.S. market will be hindered, even after more than a decade of effort, Ratliff said. That said, both companies have been able to grow in Europe and elsewhere, which has helped increase sales and market share. According to IHS iSuppli, Huawei has become the world’s top seller of wireless communications infrastructure equipment, taking 28.7 percent of the market in 2011 to nudge out former top vendor Ericsson, which has 27.7 percent. ZTE is fifth, with 6.4 percent of the market. Nokia Siemens Networks and Alcatel-Lucent are third and fourth, respectively.

Overseas, a European Commission investigation into Huawei and ZTE—more over price than security—is expected to last into the middle of next year, according to Reuters. The investigation reportedly has hit a snag in that none of the larger European competitors, such as Ericsson and Alcatel-Lucent, have complained.

In the United States, a key concern of U.S. officials is the rapid transition toward 4G wireless networks, according to Jagdish Rebello, director for consumer and communications at IHS.

“This transition will bring an exponential increase in the complexity of the networks,” Rebello said in a statement. “Because of this, many carriers are now contracting with networking OEMs to not only supply the equipment but also to partner with carriers to build the networks. This makes the networking equipment makers, such as Huawei and ZTE, a critical part of the infrastructure deployments.”