Huawei, ZTE Inquiry by EU Delayed After U.S. Security Warning

Huawei and ZTE have been raising suspicions since long before a recent U.S. government report. The report, says Reuters, has caused the European Commission to delay its own case.

The European Commission was considering launching a case against China-based telecom suppliers ZTE and Huawei. But in light of an Oct. 8 report released by the U.S. House Intelligence Committee, advising U.S. companies involved in sensitive government systems not to do business with the pair, as they potentially represent a security threat, the EU has put the matter on hold, Reuters reported Oct. 9.

While the EU didn't want, as the U.S. has, to create tension with its second-largest trade partner—the United States is its largest partner—its issue with the companies isn't over security but pricing subsidies.

"The EU suspects that the Chinese producers are hurting European telecoms equipment suppliers through artificially low prices ... [and] a Reuters eyewitness," said the report, "has seen an offer from a Chinese gear maker to replace the whole network of a European carrier for nothing."

While wanting to pursue a complaint against ZTE and Huawei, no competitors had actually complained about them—market leader Ericsson even went so far as to say it didn't want a case to be brought against them. Given the strong demand for telecom equipment in China, no one wants to risk being left out, Reuters explained.

According to data from IHS iSuppli, Huawei led the market during the first three quarters of 2011, with a 28.7 percent share, followed by Ericsson with a 27.7 percent share and Nokia-Siemens Networks at 24.5 percent. Alcatel-Lucent held the fourth position, with 6.4 percent of the market, followed by ZTE, with a 6.4 percent share.

While the U.S. government warning created headlines, as well as tensions between the United States and China, IHS analysts say it isn't likely to have a negative impact on Huawei or ZTE's current sales, as there were few to begin with.

Prior to the warning, "U.S. telcos already were reticent to purchase equipment from the top Chinese firms [Huawei and ZTE] due to scrutiny from the American government," IHS said in an Oct. 8 report. "... Neither company has been able to crack the U.S. market for communications infrastructure equipment even after more than a decade of effort."

Still, the warning is likely to hurt the companies' abilities to gain footing in the U.S. market in the future, the analysts add.

IHS explains that while Huawei has helped build out many of many of Europe's networks, the move to 4G changes things.

The transition to 4G "will bring an exponential increase in the complexity of the networks," Jagdish Rebello, with IHS, 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."

The U.S. Committee's report stated that, after a nearly year-long investigation, it concluded that the companies had "potential ties" to the Chinese government, which they said was "already known to be a major perpetrator of cyber-espionage."

After the report was released, a member of the Committee said the panel received "dozens and dozens" of calls, most of them regarding Huawei, about suspicious equipment behavior, Reuters reported in a follow-up.

The U.S. isn't the only country to have expressed such concerns. In 2010, the government of India began blocking orders placed with ZTE and Huawei due to fears regarding security.

Diplomats and trade experts, says Reuters, don't expect the EU to proceed with its case until around the middle of 2013.