Huawei or No Way? Chinese Telecoms vs. The US Govt

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It is no secret that China is becoming a key player in the world economy, and the one sector that China is beginning to flex its muscle globally is telecommunications. Two companies, Huawei and ZTE, have been expanding their products and software across the world to eager customers and companies looking to cash in on the latest in advanced technology. Yet for these two companies, the toughest nut to crack may not be economic at all. It may be political.

After a yearlong investigation by the House Intelligence Committee,  Huawei and ZTE have been criticized by Congress for potentially being a conduit for the Chinese government to spy on American companies and steal their secrets. Furthermore, in the interests of national security, according to the report, US businesses are encouraged to stay well-away from these companies in any deals that may be made. As evidence, the committee introduced “numerous” reports of Huawei systems being used to steal company data and send it back to China, in violation of American intellectual property laws. Not only that, any US company that includes either Huawei or ZTE as a business partner may be left out of bidding in the government telecommunications market, a big source of business for the industry.

Yet there are few that say Congress’ concerns are more politically motivated than economic, which would fit an election year where being tough on China is a popular position politicians take, particularly President Obama and Mitt Romney. Huawei’s US representative, William Pullmer, thinks Huawei is being used as a “punching bag” by the government, and the investigation isn’t about economics as much as it is about an anti-China bias in Washington. Forbes contributor Dan Ikenson called the investigation full of “innuendo,” and claims there were no specific threats to national security mentioned in the review, just a vague generalization of anything the Chinese government may do through Chinese companies based in the US. Dexter Roberts of Bloomberg BusinessWeek has noticed that the recent Huawei and ZTE are the latest examples of anti-China bias from Washington, which is unprecedented for the two countries, with everything from WTO lawsuits to outright banning companies from competition in US markets.

For Huawei, a company that is owned by its employees, the concern seems to stem from the fact that the owner, Ren Zengfei, is a former soldier in the Chinese army. ZTE, though, is owned by a collection of state-owned enterprises, yet it has been open to investigations by any government that wishes to pursue them. Both companies have repeatedly claimed that the Chinese government can’t impose its will on company practices whenever it wants, even though business in China is monitored heavily by the government.

Even with these companies’ protests, the report has hurt the company’s image in the US, where it has created 1,700 jobs and $1.3 billion in revenue, according to the Wall Street Journal. Sprint Nextel (NYSE: S), one of America’s largest wireless companies, has just banned the two companies from bidding on a contract for its wireless services. Cisco Systems (NASDAQ: CSCO) has also severed relations with the company, claiming that one of its devices’ designs was copied by Huawei and passed off as its own. This case has since been settled out of court. ZTE has also come under fire for building a system for an Iranian telecommunications company that could be used to track political dissidents’ whereabouts. Growth projections have therefore slowed to 3% for Huawei, largely thanks to its international trade, specifically with Asia.

Even with the negative publicity, Huawei and ZTE have been partners with many US companies since they set up shop in the US. In 2009, they signed a deal with Comcast (NASDAQ: CSCO) to help build its IP multimedia system, along with US company Ericsson (NASDAQ: ERIC). Ericsson was picked for its experience in the trade, which make up a sizeable chunk of the company’s operations, but it was Huawei’s inclusion that caught many people off-guard, since it edged out established player Nokia (NYSE: NOK) from the bidding, who was assumed to be a slam dunk pick for Comcast in building its multimedia network before Huawei swooped in and grabbed the contract. It was this surprise scoop by Huawei that put them on the radar screens of every big player in the US telecommunications industry. Huawei has also partnered with MIT’s Communications Futures Program, to study the evolution of the telecommunications market.

ZTE has maintained its relations with American cell-carriers as well, such as AT&T and MetroPCS, with whom they make cell phones, specifically AT&T’s “Go Phone,” though there is no word yet on whether this deal will be affected by the recent government report. Cisco has already ended its relationship with ZTE over its deals with the Iranian government.

While these deals are expected to continue, depending on how much weight American companies put in Washington’s recommendations, it is becoming evident that the negative review is going to hurt Huawei and ZTE for investors, and may increase scrutiny over the American companies that deal with these two companies. Add to the general anti-Chinese rhetoric that has taken hold in political discourse and it makes China a difficult place to buy right now, though it may subside after the elections in November, but it’s difficult to know for sure.

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