More Obstacles for Chinese Telecom Firms
    2012-10-09 16:01:56      Web Editor: Zhang
A Congressional panel has stated that Chinese telecom firms Huawei and ZTE pose a threat to U.S. national security. CRI's Stuart Wiggin looks at the wider impacts of the report for the Chinese companies involved.
A Congressional panel has stated that Chinese telecom firms Huawei and ZTE pose a threat to U.S. national security. CRI's Stuart Wiggin looks at the wider impacts of the report for the Chinese companies involved.

By Stuart Wiggin

A recent report released by the U.S. House Intelligence Committee, branding Chinese telecoms Huawei and ZTE as national security threats, is a public relations disaster for those involved. The immediate growth potential for both Huawei and ZTE will no doubt suffer and may continue to do so for a number of years despite public relations campaigns designed to ensure the safety of equipment provided by the two companies to the U.S. market. According to the full report, issued on Monday, "China has the means, opportunity and motive to use telecommunications companies for malicious purposes." The report goes on to state that, "Based on available classified and unclassified information, Huawei and ZTE cannot be trusted to be free of foreign state influence and thus pose a security threat to the U.S. and to our systems."

Alongside the suggestion that U.S. telecom operators and companies refrain from buying products from the two Chinese companies, the Committee has also accused Huawei of a number of legal violations. There is a strong Washington aspect to these assertions and accusations, and the issue of Chinese companies posing a security threat via technological means has clearly emerged to be a bipartisan one at a time when China has provided ample material for presidential campaign rhetoric with regards to trade between the two countries. It is likely that these findings will provide further sound bytes as the presidential campaign reaches its conclusion. The impact for the companies, however, is likely to extend long after the selection of the next President of the United States of America.

William Plummer, Huawei's VP for external affairs, has alluded to the political motivations behind the report. Regardless of the political aspect, neither company will be able to completely dispel the uncertainty which has now been cast on their business operations in the States. Huawei, which received the brunt of the report, is no stranger to suggestions of posing a security threat to U.S. internal security. In 2008, the company gave up a joint bid for 3Com Corp after a government panel cited national security concerns. Last year, the Committee on Foreign Investment in the U.S. ordered that Huawei divulge information regarding a deal to purchase assets from a U.S. server firm; thus leading to the deal falling through. In the same year, Huawei was prevented from competing for a national wireless emergency network due to further national-security concerns.

The rejections have been damaging but this latest report is a direct statement of concern from Congress and is likely to do far more damage than previous instances. The focus of the report concerns networking equipment, yet the allegations will no doubt have a knock-on effect with regards to other products sold by Huawei and ZTE; not least their mobile phone handsets. While both companies are relative newcomers to the U.S. smartphone market, the negative publicity created by the Committee's report is likely to make the task of market penetration all the more difficult, despite the fact that Rep. Mike Rogers, chair of the House Intelligence Committee, has stated that the concerns outlined in the report do not relate to mobile handsets.

On top of this potential hurdle, any future listing of Huawei's stock in the U.S. has also probably hit a roadblock. A U.S. initial public offering would boost the company's credibility and conceivably boost business as it would lead to more transparent business operations. The House Intelligence Committee has backed an IPO on the basis of improved transparency under U.S. law. Nonetheless, the report will likely further hinder Huawei's attempts to gain big contracts in the U.S. and lead to regulatory concerns from investors, meaning that a listing on the Hong Kong stock exchange, where ZTE is already listed, might prove to be a more hassle-free route. An additional impact of the report could also include greater scrutiny from other markets, including Australia, Europe and India, which could hamper the global growth of both companies.

ZTE had previously written to the Committee stating that the company "should not be a focus of this investigation to the exclusion of the much larger Western vendors." Echoing this sentiment, in an official and compelling response to the report, Huawei notes that despite their best efforts in cooperating with the investigation, "the Committee appears to have been committed to a predetermined outcome." The response went on to note that the report "employs many rumors and speculations to prove non-existent accusations. This report does not address the challenges faced by the ICT industry. Almost every ICT firm is conducting research and development, 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."

And yet, Huawei remains bullish on their U.S. prospects, citing the trust and respect that the company has already gained across 150 markets. Advertisement campaigns and political lobbying have been part of an ongoing progress, as the company braced itself for the report's findings. However, it has been noted that Huawei lacks much of a brand image in the States, especially with regards to its smartphone products; hence why it chose to pursue a 'get to know us' campaign. Huawei, unlike ZTE, is keen to build up its own brand rather than continue to build relationships with its carrier partners, as ZTE has set out to do. In this regard, the Committee's report will be doubly damaging towards Huawei as they seek to establish a unique brand in a competitive smartphone market.

One of the major concerns outlined in the Committee report stemmed from the fact if the Chinese government requested access to the company's systems and data, both Huawei and ZTE would be required to comply. Huawei officials were keen to point out that overlapping supply chains between companies meant that addressing the situation of two Chinese companies would do nothing to address industry-wide security threats. Furthermore, ZTE Senior Vice President Zhu Jinyun told the committee that if ZTE were ever to receive such a request from the Chinese government, they would ultimately be bound by U.S. law. Last month, Huawei's Vice President Charles Ding testified that his company was "fully aware that, in a high-end market like the US, we can only win customers' trust and sustain our development by providing high-quality products and services." Despite both companies' continued pursuit for the trust of their customers, it's safe to say that they will have to rein in their sights for the foreseeable future, at least until the Government Accountability Office issues its own report about China and telecommunications at the start of next year.

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