ACG Research

ACG Research
We focus on the Why before the What

Wednesday, October 10, 2012

Dropping the Bomb on Huawei and ZTE

The “Investigative Report on the U.S. National Security Issues Posed by Chinese Telecommunications Companies Huawei and ZTE” report concludes that these two companies should be banned from doing business with the US government and recommends that private companies shun them as well.

The U.S. House of Representatives’ Permanent Select Committee on Intelligence just released its scathing report on Huawei and ZTE, two of the world’s largest and fastest growing telecom equipment vendor. The report emphatically concludes that both of these companies are a threat to U.S. national security interests and because of the vulnerabilities in the telecommunications supply chain pose a significant risk.  

During the investigation, Huawei and ZTE, instead of cooperating fully, obfuscated, provided unbelievable, unsubstantiated and contradictory answers. Their evasiveness led the committee to conclude that both companies are hiding “the influence of the foreign government in company activities and decision making process.” The committee also stated it has every reason to believe that Huawei and ZTE will continue to ignore US intellectual property (copying patented products with impunity) and business laws/practices.  To be fair, ZTE is a public company and is more transparent. 

Accordingly, the committee recommended excluding Huawei’s and ZTE’s equipment in government agencies and departments and urged that the private sector follow suit. They also called for the US government to investigate the unfair trade practices and intellectual property violations and proposed that Congress pass laws to address these risks.

A day late?

Although the U.S. House of Representatives’ Permanent Select Committee on Intelligence report banning Huawei and ZTE from the US market is reverberating throughout the telecom world, will it change the telecom landscape significantly in the long term or will it be just a temporary detour? 

In the short term, this report spotlights and temporarily deters China’s attempt to enter into the US. Carriers and enterprises, already cautious, will not want to jeopardize their government contracts. Outside of the US, it will somewhat slow China’s penetration in western markets in the short to medium term (in emerging markets, it will likely not have much effect). 

The long-term outlook is less clear and depends on how much China is willing to abide by western market standards and to what extent governments are willing to enforce market rules. To date, many customers and governments have benefited from the ethically challenged business practices and are willing to look the other way. At some point, there may be a backlash. Another key factor is their actual support and security track record. A major security incident related to these companies’ equipment that could have been avoided would bolster the US’ position. 

The bottom line? 

China is protesting that this report is politically motivated — that stands to reason given national security is at stake and laws are being broken — but given China’s lack of cooperation and transparency, the committee really had no other choice. It should come as no surprise that the committee had ample, credible evidence backing up the allegations. (Many of the allegations of misconduct, including bribery, espionage, and beaconing, have been verified to me privately by people with first-hand knowledge.) When China stonewalled the committee’s investigation, it is easy to see why they came to these conclusions and followed up with targeted and specific recommendations. Sorry, China, but lip service does not cut it.

The long-term solution for China is to actually disentangle the private sector from the government and military; show transparency about corporate ownership and decision making; and abide by the same rules of commercial engagement as its western counter parts.

David Dines

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