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Huawei and ZTE under threat after U.S. government espionage claims

Last week a report from the U.S. House Intelligence Committee accused Chinese manufacturers Huawei and ZTE of being a threat to national security. Both companies were quick to deny the claims, but a number of complaints have emerged in the days following the report and suspicions of Chinese espionage will be investigated further.
October 10, 2012

Last week a report from the U.S. House Intelligence Committee accused Chinese manufacturers Huawei and ZTE of being a threat to national security. Both companies were quick to deny the claims, but a number of complaints have emerged in the days following the report and on Tuesday Canada indicated it would exclude Huawei from the construction of a secure Canadian government network.

The claims

The original report stated:

“China has the means, opportunity and motive to use telecommunications companies for malicious purposes. 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 United States and to our systems.”

Republican committee chairman Mike Rogers later said, in an interview with CBS on the 60 Minutes show:

“If I were an American company today… and you are looking at Huawei, I would find another vendor if you care about your intellectual property, if you care about your consumers’ privacy, and you care about the national security of the United States of America,”

This is pretty damning stuff and is thought to be the reason that Canada has invoked a national security exception to prevent Huawei involvement in the government network construction project without violating international trade agreements. Australia also prevented Huawei from bidding for any contracts related to its National Broadband Network back in March because of security concerns.

The issue is essentially about China using the companies to spy on communications. It doesn’t relate to consumer smartphones or tablets, but rather to devices that involve the processing of data on a large scale.

The response

Huawei released a statement saying the report “failed to provide clear information or evidence to substantiate the legitimacy of the Committee’s concerns” and that it was based on a “misperception of Huawei.”

ZTE also released a statement pointing out that “Virtually all of the telecom infrastructure equipment now sold in the US and throughout the world contains components made, in whole or in part, in China.”

zte logo

David Dai Shu, ZTE’s director of global public affairs said:

“It is noteworthy that, after a year-long investigation, the Committee rests its conclusions on a finding that ZTE may not be ‘free of state influence.’  This finding would apply to any company operating in China. The Committee has not challenged ZTE’s fitness to serve the US market based on any pattern of unethical or illegal behavior.”

Any substance?

The UK uses Huawei equipment for its network after extensive testing found no problems. The European Commission has also delayed a trade case against Huawei and ZTE because of a lack of complaints. Trade links between the EU and China are strong, though there are concerns about China subsidizing its manufacturers to create artificially low prices which are pricing European telecoms equipment suppliers out of the market.

Fears about Chinese espionage via Huawei have been raised before. Founder of the company, Ren Zhengfei is a former member of the People’s Liberation Army. Huawei’s acquisition of American computer company 3Leaf systems was blocked last year. There were also claims that ZTE sold equipment to Iran in violation of US embargo which led to Cisco ending its relationship with ZTE.

Suggestions that Huawei and ZTE equipment was relaying sensitive information back to China were also raised earlier this year and denied by both companies.

It’s impossible to say whether there’s any real substance to the claims, but there certainly hasn’t been any concrete proof to show wrongdoing by either company thus far. You can see the political and economic purpose of such an attack on Huawei, the second largest manufacturer of wireless telecoms gear in the world, and ZTE, the fifth largest. However, it does seem perfectly plausible that the Chinese government would try to do this. After all, we know that the US government and the UK government, like many others around the world, are engaged in surveillance on a wide scale.

Potential damage

Huawei and ZTE have been growing fast and it remains to be seen what impact, if any, this will have on their bottom line. Cricket provider Leap Wireless and Clearwire in the U.S. currently use Huawei gear. The Chinese company also has a large existing business in Canada, including an office and an R&D facility that employ 430 people. Will American and Canadian firms take the committee’s advice and look to cut ties?

You also have to wonder about the potential negative impact on the consumer market. Despite the fact that the claims don’t relate to consumer handsets or tablets, you can imagine many people being turned off from buying Huawei or ZTE products.

A staff member of the House of Representatives Intelligence Committee has claimed that a number of fresh reports of suspicious equipment behavior have come in since the report was released and he told Reuters, “I don’t think the companies should expect our attention to stop.” Looks like this one could escalate further.

Weigh in with your opinions in the comments.