SAN FRANCISCO—A U.S. Congressional committee Monday (Oct. 8) warned American operators not to buy equipment from China's leading telecom equipment makers, Huawei Technologies Co. Ltd. and ZTE Corp., citing potential risk to U.S. national security interests.
In a report, the U.S. House of Representatives Intelligence Committee strongly encouraged U.S. telecom operators to seek other vendors for their projects. "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," the report stated.
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The committee began investigating the counterintelligence and security threat posed by Chinese telecommunications companies doing business in the U.S. in November 2011. According to the report, both Huawei and ZTE failed to provide sufficient evidence to alleviate the committee's concerns.
Other governments and organizations have previously expressed concerns about the potential security threat posed by Huawei and ZTE, the world's first and fifth largest suppliers of wireless communications infrastructure equipment, respectively. Both companies are suspected of having ties to the Chinese government, military and China's ruling communist party. The firms have been accused of designing communications equipment to allow unauthorized access by the Chinese government, a charge that has stoked fears over national security and the potential for corporate espionage.
The report recommended that the U.S. "view with suspicion the continued penetration of the U.S. telecommunications market by Chinese telecommunications companies." It further recommended that the U.S. block acquisitions, takeovers, or mergers involving Huawei and ZTE.
Both companies issued statements Monday criticizing the report's findings.
The committee's report was particularly critical of Huawei, saying that the investigation turned up evidence of bribery, copyright infringement, immigration violations and discriminatory practices by the firm. The committee said it would refer these allegations to the U.S. Justice Department for review and possible investigation.
Failure to penetrate U.S. market
According to market research firm IHS iSuppli, U.S. telecom operators were already wary of buying equipment from Huawei and ZTE because of the investigation and other scrutiny by the U.S. government. Despite their global sales growth, neither has been able to crack the U.S. market despite a decade of effort, IHS said.
"The U.S. government has blocked numerous contracts and acquisition deals between American companies and Chinese equipment makers, usually in an indirect manner," said Lee Ratliff, principal analyst for broadband & digital home research at IHS, in a statement.
Ratliff added that the committee's report could further hamper the ability of Huawei and ZTE to penetrate the U.S. market in the future.
Jagdish Rebello, director for consumer and communications at IHS, said the concern among U.S. lawmakers mostly centers on the transition to 4G wireless networks, which will bring an exponential increase in complexity.
"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," Rebello said. "This makes the networking equipment makers, such as Huawei and ZTE, a critical part of the infrastructure deployments."
According to IHS, became the world’s largest supplier, of wireless communications infrastructure equipment during the first nine months of 2011, with sales of $8.9 billion and market share of 29 percent. ZTE ranked fifth in the world over the same period, with revenue of $2 billion and market share of 6 percent, IHS said.
Huawei is regarded as a price and technology leader, according to IHS. The company has won contracts with many European carriers for 4G deployment and network management and with many carriers in the emerging markets for 3G deployment, IHS said.
The U.S. Department of Defense previously highlighted Huawei’s links to the Chinese government in a 2008 report to Congress. Huawei’s efforts to buy its way into the U.S. market through acquisitions of 3COM and 2Wire were scuttled due to concerns of a U.S. government veto, according to IHS.
IHS said Huawei and ZTE reported in 2010 that the Indian government started blocking purchase orders placed with them based on similar security concerns.
